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Africa: Debt Meeting Consensus
AfricaFocus Bulletin
Nov 25, 2003 (031125)
(Reposted from sources cited below)
Editor's Note
African experts meeting in Dakar under the auspices of the United
Nations Economic Commission for Africa (UNECA) deplored the lack of
a consolidated African position in response to global policy
proposals that have vast economic implications for Africa. They
agreed that current debt relief schemes are inadequate, that
increased debt relief is the most effective way to provide rapid
additional funding for development, and that additional measures
were also essential to advance the globally acknowledged goals of
ending proverty.
This issue of AfricaFocus Bulletin contains a UN news story and the
UNECA press release on the Dakar workshop, and excerpts from one of
the papers presented at the workshop.
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Experts Say African Debt Relief is Important Funding for
Development - UN
United Nations (New York)
http://www.un.org/News
November 21, 2003
Experts gathered in Dakar, Senegal, have concluded that the
international community's financing of African debt relief is an
important way of funding the Millennium Development Goals (MDGs)
designed to eliminate extreme poverty by 2015, the United Nations
Economic Commission for Africa (ECA) said today.
At the close of the two-day meeting on Tuesday, the 70 experts from
the ECA, the New Partnership for Africa's Development (NEPAD), the
United Nations system and regional and country authorities, said,
however, that debt relief on its own would be woefully insufficient
to allow African countries to finance the MDGs.
Since the 1999 Summit of the Group of Eight (G8) industrialized
countries in Cologne, Germany, at which the Jubilee 2000 Campaign
won a commitment to cancel $100 billion of debt for 42 of the
world's poorest nations, only eight African countries had reached
their completion points under the enhanced Heavily Indebted Poor
Countries (HIPC) initiative, the ECA said.
The Dakar meeting acknowledged that the HIPC initiative had helped
some countries, but urged the international community to consider
offering some debt relief to "semi-HIPC" countries, like Angola and
Kenya, as well as oil-exporting Nigeria and Gabon.
The experts cautioned African governments against getting into
further debt to achieve development goals.
As co-host, Senegalese President Abdoulaye Wade said, "It is only
through the strength of our arguments that we shall overcome
Africa's debt. We must fight an intellectual battle to that end."
Signalling the toughness of the battle, ECA Executive Secretary
K.Y. Amoako, in his opening speech on Monday, noted that between
1990 and 1999, the number of poor people in Africa increased by
over 6 million annually.
"At current trends, Africa will be the only region in the world
where the number of poor people in 2015 will be higher than in
1990," he said. "Indeed, in some areas, Africa will not meet the
MDGs for many, many years.
"Take the target of achieving universal primary education. At
current trends, only seven countries in Africa will meet this goal.
In fact, in over a third of our countries, every other child is out
of school. The stark fact is that, as things now stand, Africa will
not meet the universal primary education target until after 2100."
Economic Commision for Africa
Press Release No.21 For Immediate Release
Experts Group Meeting in Senegal Concludes That Africa's External
Debt Problem Be Put in Wider Context of Financing Development
Addis Ababa, 21 November 2003 (ECA) -- An Expert Group meeting
jointly organised by the Economic Commission for Africa (ECA) and
the Republic of Senegal on 17-18 November 2003 in Dakar gathered
about 70 experts from around the world, including the African
Union, New Partnership for Africa's Development (NEPAD), various
United Nations organizations, country authorities, the World Bank,
International Monetary Fund, Paris Club and NGOs.
They noted that debt relief is more predictable than bilateral aid;
has a longer-term horizon; reduces the transactions costs of
managing aid and acts as direct budget support therefore increasing
recipient ownership. They strongly encouraged the international
community to finance further debt relief as an important way to
finance the Millennium Development Goals (MDGs) in Africa.
However, the experts unanimously agreed that debt relief on its own
will be woefully insufficient to allow African countries to finance
the MDGs. They noted with deep concern that at current trends,
Africa will be the only region in the world where the number of
poor people in 2015 will be higher than in 1998.
The meeting acknowledged that while the enhanced Highly Indebted
Poor Country Initiative (HIPC) had delivered tangible benefits to
several African countries, much more remained to be done. For
instance, the international financial community was urged to
rapidly consider the debts of "semi-HIPC" countries like Angola and
Kenya, non-IDA countries like Nigeria and severely indebted
middle-income countries like Gabon.
A key recommendation of the meeting was that achieving Africa's
development goals should be realised without running into future
debt problems. This requires a prudent strategy for future
borrowing tailored to country specific circumstances, taking into
account the quality of its institutions, and its vulnerability to
shocks. Experts urged that resource transfers beyond countries'
sustainable debt-serving capacities should be in the form of
grants, not debt flows that could lead to future debt problems.
The meeting emphasized that a lasting solution to Africa's external
debt problem will require good economic governance and management
on the part of African countries. In that respect experts commended
the efforts of NEPAD and its African Peer Review Mechanism to
encourage each African country to enhance and consolidate progress
in that regard.
The lack of a consolidated African position and an effective and
unified voice to engage in constructive dialogue with Africa's
development partners with regard to debt relief was identified as
one of the factors delaying an early resolution to Africa's debt
problems. The experts expressed a sense of urgency to end the time
when African countries reacted too late to global policy proposals
that have vast economic implications for Africa.
To address the present void it was recommended that an ad hoc
Technical Committee be established to facilitate timely and
competent African responses to emerging global policy proposals on
debt relief and financing for development. The recommendations of
the proposed Technical Committee should be presented to the African
Ministers of Finance, Planning and Economic Development at their
next meeting in May 2004 and thereafter to the African Union Heads
of State Summit in July 2004.
The President of Senegal, His Excellency Abdoulaye Wade commended
the experts for their bold and creative proposals to resolve
Africa's debt problem and declared that "it is only through the
strength of our arguments that we shall overcome Africa's debt. We
must fight an intellectual battle to that end."
For more information, please contact: Essodeina Petchezi, tel.:
251-1 44 32 41, email: [email protected]
More information about the meeting is available at
http://www.uneca.org/debtforum
Issued by the ECA Communication Team P.O. Box 3001 Addis Ababa
Tel: +251-1-51 58 26 Fax: +251-1-51 03 65
E-mail: [email protected] Web: http://www.uneca.org
An Alternative Approach to Debt Cancellation and New Borrowing for
Africa
Paper for Expert Group Meeting on External Debt
Dakar Senegal November 17-18 2003
Henry Northover, CAFOD [http://www.cafod.org.uk]
October 2003
[Abstract and brief excerpts only. For this full paper and other
resources see the workshop website at
http://www.uneca.org/debtforum]
Abstract
The World Bank and IMF's debt relief framework, the Heavily
Indebted Poor Country (HIPC) Initiative is increasingly criticised
for not providing sufficient debt relief to enable low-income
countries to achieve short term, let alone medium term, debt
sustainability. This paper argues that the key weaknesses of the
HIPC Initiative stem from its use of an inappropriate analytical
criterion when making debt sustainability analyses. The paper,
therefore, proposes an alternative approach more suited to
countries that are highly vulnerable to economic shocks and beset
by widespread and deeply entrenched levels of poverty.
This alternative human development approach should be used not only
for determining appropriate levels of debt service, but also as the
basis for a comprehensive financing strategy for low-income
countries that encompasses aid and new borrowing. It argues that
debt relief in support of domestically-owned poverty reduction
strategies is the most efficient and effective form of resource
transfer. In the last section, the paper responds to creditors'
resistance to going further with debt relief by addressing creditor
objections and urging the wider adoption of some existing African
proposals as a way forward.
1. The HIPC Initiative a flawed approach to debt relief ...
We argue here that there is one overriding flaw in the HIPC
framework that gives rise to its failure to meet its objectives on
debt sustainability and poverty reduction. The central weakness of
the HIPC Initiative stems from its over-reliance on the export
criterion (150% NPV-to-exports) used to make assessments of debt
sustainability.
The experience of Uganda, as the first graduate of the HIPC
Initiative, is evidence of this difficulty. Uganda currently has
debts that take it over 200% of the debts-to- exports ratio. This
will be the third time that Uganda has exceeded its debt
sustainability threshold after reaching completion point. Its
status as a debt sustainability "drop-out" has been reinforced by
plunging coffee prices that have dramatically reduced its foreign
exchange earnings.
Clearly the export criterion is an unreliable predictor and measure
of debt sustainability for a group of countries characterised by an
extreme vulnerability to shock and steep fluctuations in export
earnings. HIPCs are characterised by a high concentration of
exports in one or two commodities. As a result, they are highly
vulnerable to the vagaries of rain-fed agricultural production and
slumps in commodity prices.
For Africa in 2001, after adjustments for inflation, prices of
non-fuel commodities are one half their annual average value for
the period 1979-81. The World Bank and IMF estimate that by
completion point 8-10 of the HIPC countries most affected by the
slump in commodity prices will have debt-to-export ratios higher
than the 150% target set by HIPC itself. ...
2 Alternative human development approach to debt sustainability
We argue here that debt sustainability analyses for LICs require
the integration of a wider set of human development indicators. It
is, however, important for any country servicing its debts
denominated in foreign currencies that debt sustainability analyses
should some measure of its capacity to earn foreign exchange
through its exports. But for low-income countries' (LICs')
challenged by widespread and deep levels of poverty, a crucial part
of the analytical framework must be the feasible revenue available
to governments and the trade-off between maintaining their
debt-servicing obligations and financing their poverty reduction
goals ...
The argument runs like this: if human development imperatives and
the achievement of the MDGs (millennium development goals) are
accorded the priority they deserve; if, as is the case, LICs do not
have the fiscal revenue principally income from taxes needed to
make the necessary poverty reducing expenditures and investments;
and if they cannot count on sufficient foreign aid to fill their
revenue gap, then the only available source of finance is further
debt reduction.
According to preliminary calculations, many HIPCs will require a
total cancellation, and some will require further aid flows on top
of this, if their revenues are realistically to be expected to meet
the objective of financing the MDGs. We propose that future
calculations of debt sustainability must include an assessment of
the feasible net revenue* available to recipient/debtor
governments. Feasible revenue is counted here as the maximum tax
income available to a given government given the poverty of the
majority of the population and capable of being raised without
giving rise to excessive distortions in the macroeconomy. ...
3 Debt relief as development finance
While the HIPC Initiative is clearly failing to deliver the
objective of providing a permanent exit from unsustainable debts,
preliminary analyses do show that debt relief, where it is
additional and not limited to clearing built up arrears, is an
efficient and effective form of delivering development finance.
Analysis of the HIPC Initiative's achievements shows that in some
eligible countries debt relief has resulted in demonstrable social
and economic gains. ...
Where countries have had resources freed up from debt servicing,
the proceeds have resulted in some new development programmes and
economic progress:
- Social spending has increased in Decision Point HIPCs by between
20 and 50 percent.
- Mozambique has introduced a free immunisation programme for
children;
- User fees for primary education have been abolished in Uganda,
Malawi and Tanzania, as have user fees in rural areas of Benin;
- Mali, Mozambique and Senegal are due to increase spending on
HIV/AIDS prevention;
- Uganda and Mozambique, among the early beneficiaries of debt
relief and enhanced aid flows, have consistently sustained annual
growth rates over 5%.
The requirement to engage in a consultation with civil society in
designing Poverty Reduction Strategies has helped to increase the
potential for poor people to influence national resource allocation
processes. But the advantages of debt relief go beyond the
additional finance it provides to thinly resourced low-income
country governments. Debt relief acting as de facto budget support
is an efficient and effective form of financial transfer with many
indirect benefits for the macro economy, growth prospects, the
prudential management of public resources, and development policy
as a whole.
- Debt relief minimises the unpredictability of aid flows. Many
bilateral aid programmes are still bedeviled by problems of low
stability and low predictability and high pro-cyclicality. Moreover
the granting or withholding of aid tends to aggravate economic
cycles. ...
- Debt relief is anti-inflationary. A recent IMF paper points to a
correlation between higher levels of indebtedness and increased
inflationary pressures.
- Debt relief spurs economic growth. There is a positive
correlation between debt relief and domestic private savings and
investment, as well as FDI.. ...
- Debt relief acts as de facto budget support. By enhancing central
government spending capacity, debt relief supports the development
of locally owned government expenditure priorities and monitoring
systems. ...
- Debt relief cuts down on transaction costs. Aid can tie up
recipient governments' meagre administrative staff in endless
negotiations, report writing and separate auditing procedures with
an array of official donors. ...
- Debt relief improves local accountability and good governance.
Debt relief within the context of locally developed and owned
Poverty Reduction Strategies has the added benefit of increasing,
and sometimes even kick- starting, political participation in
decision-making over the management and distribution of public
resources. ...
To sum up, the donor-recipient country relationship is
characterised by continued reliance on ear-marking finance for
projects and programmes, detailed conditionality and institutional
controls undermining the accountability of recipient governments to
their own public and civil society agents.
Conditional aid weakens incentives of recipient governments to be
transparent and accountable to their own citizens and undermines
their capacity to improve public resource allocation for the
intended beneficiaries poor people. Debt relief by contrast can
enhance ownership and accountability; it can improve the prudential
management of public resources, increase macroeconomic stability
and economic growth. The challenge is to transpose some of these
pro-development outcomes and principles on to new forward financing
or borrowing strategies. ...
This paper does not attempt to propose detailed measures of debt
sustainability for future borrowing. However, there are a number of
key human development principles that should form the basis of new
forward financing strategies. Principles for forward financing
strategies
1) There is the broad question of the analytical and
decision-making framework that would determine country-specific
debt sustainability thresholds. Who is making these analyses? To
whom are they accountable? Whose interests do they represent? How
are the results of their analyses to be monitored and assessed?
There is a prima facie conflict of interests when major creditors
such as the IMF and World Bank act as creditors and retain their
monopoly of analytical functions in assessments of country-specific
debt sustainability thresholds. We would argue that in the
interests of equity and transparency, a more independent
institutional arrangement is required....
2) Currently the IMF separates the HIPC initiative's debt
sustainability criterion, seen as a mechanism for clearing
unsustainable debts acquired in the past, from new sustainability
analyses that deal with forward financing strategies, that is,
future borrowing and aid flows. We argue that this is an artificial
distinction. The IMF and World Bank should be developing new
sustainability criteria for determining flows of new borrowing
based on the recognition that current debt stocks have an impact on
future external financing requirements. ...
3) The over-arching objective of debt relief and new financing must
be support for the global effort to mobilise the finances needed to
achieve the MDGs by means of costed poverty reduction strategies.
... all poverty reduction strategies to achieve the MDGs must be
financed, in HIPCs and non-HIPC low-income countries. All
countries, including all donor countries, have endorsed the
Millennium Declaration that launched the MDGs. As a result,
commensurate new aid flows must be offered to non-indebted LICs.
...
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