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Note: This document is from the archive of the Africa Policy E-Journal, published
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Africa: Debt Update
Africa: Debt Update
Date distributed (ymd): 981213
Document reposted by APIC
+++++++++++++++++++++Document Profile+++++++++++++++++++++
Region: Continent-Wide
Issue Areas: +economy/development+
Summary Contents:
This posting contains an article from the November 1998 issue of the UN's
Africa Recovery magazine, noting the failure in 1998 to achieve faster
and deeper debt relief for African countries, and reviewing the continent's
current economic status. Other articles in the same issue (available at
http://www.un.org/ecosocdev/geninfo/afrec)
cover, among other subjects, a new UN Conference on Trade and Development
(UNCTAD) report on "least developed countries," the most recent
high-level panel meeting on African development, the impact of HIV/AIDS
on African development, and the impact of the Asian financial crisis on
African economies.
+++++++++++++++++end profile++++++++++++++++++++++++++++++
African debt hopes disappointed
World Bank and IMF annual meetings focus on Asia
By Patrick Smith in Washington, DC
From November 1998 issue of
Africa Recovery
Room S-931, United Nations
New York, NY 10017 USA
Tel: 212-963-6857; Fax: 212-963-4556
e-mail: [email protected]
web: http://www.un.org/ecosocdev/geninfo/afrec
Special Notice: Selected back issues of Africa Recovery, in English
and French, are available free of charge (while supplies last). For details
of which issues are available and to order individual copies see the Africa
Recovery web site (http://www.un.org/ecosocdev/geninfo/afrec/freepub2.htm).
Multiple copies are available to schools, libraries and organizations.
Fax request to 1-212-963-4556.
Donor countries' failure to agree on a reformed multilateral debt strategy
blocked African calls for faster and deeper debt relief at the 8-10 October
annual meeting of the International Monetary Fund and World Bank in Washington.
Amid growing fears of a global financial meltdown, African finance ministers
and central bankers had to struggle to get their concerns heard. Alongside
such core issues as economic reform strategy, African ministers argued
for more attention to be paid to the effects on their economies of Asia's
financial crisis.
For many African countries, debt relief and post-war reconstruction
credits were priority issues. African governments, along with anti-debt
campaigners such as the Jubilee 2000 group, Oxfam and the European Network
on Debt and Development (Eurodad), argue that the Heavily Indebted Poor
Countries Initiative (HIPC) is too slow and limited in scope. Under normal
HIPC terms, debts may be cancelled only after a six-year (or more) qualification
period.
Regarded by many as groundbreaking when it was introduced two years
ago, HIPC has not lived up to the expectations of many African governments.
Five African countries are among the total of seven countries that have
qualified for HIPC debt relief, out of 41 potential candidates. Calls for
reform made by the African caucus of IMF and World Bank governors, along
with a communique from the Commonwealth Finance Ministers issued just before
the Bank/Fund meetings focused on the following areas:
- Eligibility criteria should be liberalized; the debt-to-export ratios
(between 200 and 250 per cent) above which debts are deemed "unsustainable"
are too high;
- The time frame is too long; debtor countries must adhere to IMF programmes
for a minimum of six years (three years before the "decision point"
and another three years to reach "completion point," after which
actual debt relief occurs). Only Uganda and Bolivia have so far reached
completion point;
- Eligibility is too rigidly linked to an IMF track record; after Ethiopia
was declared "off-track" by the Fund in 1997, its debt relief
was delayed and the same criteria now threaten Tanzania's chances of debt
relief, given its uneven performance under IMF and World Bank programmes;
- Debt relief should be closely linked with poverty reduction. Poverty
levels should help determine how much debt relief a country requires. The
Bank and the Fund should do more to promote schemes such as Uganda's "poverty
action fund," which channels the savings from debt relief into publicly
monitored and audited social programmes;
- More flexibility for post-war countries: the Bank and the Fund now
allow non-IMF reforms to be counted as part of a country's initial three-year
track record, but war-ravaged countries still face long waits for debt
relief; Rwanda would not be eligible to enter the HIPC initiative until
2000, and would then wait until 2003 for any debt relief.
While few officials at the annual meetings disputed Africa's moral case
over debt, the major arguments were over the cost and structure of the
relief mechanism. The IMF Interim Committee and the World Bank Development
Committee agreed to extend HIPC until 2000 but did not approve any general
liberalization of the eligibility criteria. These latest revisions to HIPC
raise its cost by $2.4 bn to a total of $8.2 bn. Such figures are dwarfed
by the more than $50 bn of rescue credits the Bank and the Fund have disbursed
to East Asian countries this year, or the $4.5 bn disbursed to Russia in
July alone.
African Finance Ministers on the Development Committee -- Lesotho's
Leketeke Victor Ketso, Cote d'Ivoire's N'Goran Niamien, and Morocco's Fatahallah
Oualalou -- all pressed strongly for HIPC reform but met major resistance
on the issue of cost. Finance ministers from middle-income countries backed
calls for liberalizing HIPC but did not want the Bank and Fund to pay for
it from their general resources. Instead, they argued that the Paris Club
of rich bilateral creditors should contribute most of the financing.
Rich countries are split about the future of HIPC. The most generous
creditors have been the Nordic countries, the Netherlands and Switzerland,
all of which have been pushing their fellow OECD members to contribute
more to the HIPC Trust Fund to enable a widening of the initiative. Only
three of the Group of Seven countries (Japan, Canada and Britain) have
contributed to the Trust Fund at all. Japan, however, has since made encouraging
noises concerning debt cancellation through grants to African least developed
countries. But others (namely Italy, France, Germany and the US) have been
reluctant to finance HIPC directly.
Despite these differences, the Bank was able to win enough backing at
the meeting to launch another initiative for Africa's most fragile economies:
a trust fund -- similar to the HIPC fund -- to help finance reconstruction
in post-conflict countries. Current rules prevent the Bank and the Fund
from lending to countries in arrears (which most post-conflict countries
are).
The Bank's Post-Conflict Research Unit, under Mr. Nat Colletta, reports
that six African countries in (or just out of) conflict -- Central African
Republic, Republic of Congo, Democratic Republic of Congo, Liberia, Somalia,
and Sudan -- were $4.3 bn in arrears to the multilateral financial institutions.
In cases where the post-war government had demonstrated a "commitment
to reform" without necessarily going through a formal IMF programme,
the Bank proposes that the country's reconstruction efforts should be supported
by grants from its net income and its soft-loan affiliate, the International
Development Association.
In an internal paper on the initiative, the Bank suggests that the IMF
could allow higher levels of emergency assistance than currently permitted.
The Bank also asks the African Development Bank to help support the initiative,
which would have to be approved at board level in all three institutions.
While Bank officials say such approval would probably be obtained, the
bigger difficulty would be to raise finance to implement it from bilateral
and multilateral donors.
Echoes of the Asian crisis
Views differed on the impact of the Asian crisis on Africa. While several
African ministers said that lower commodity prices would severely damage
Africa's growth prospects, World Bank President James Wolfensohn said on
1 October that the direct effects would be limited because: "...you
don't have huge amounts of capital flowing in and flowing out of Africa."
The IMF World Economic Outlook argues that the restricted access of most
African countries to international financial markets "has in turn
limited the impact of the past year's market turbulence: the crisis in
emerging markets has affected Africa mainly through commodity prices and
trade." While some African countries will benefit more from lower
oil prices than they lose from lower commodity prices, the Fund expects
Africa as a whole, and about one-third of the countries "to be net
losers." one-third of the countries "to be net losers."
However, some Fund and Bank officials worry that Asia's financial crisis
will make economic nationalist arguments look more attractive in Africa,
adding that although South Africa is the only African country to abandon
capital controls, the Asian crisis could disrupt financial liberalization
in Africa. But so far the policy reaction has been muted.
Ms. Maria Ramos, South Africa's Director-General at the finance ministry,
told the Bank and Fund meeting that the country would continue with its
programme of gradual financial liberalization. "We are getting confirmation
that our policy course is on track," Ms. Ramos said after announcing
that two rating agencies -- Moody's Investors Service, and Duff & Phelps
-- had confirmed South Africa's rating as triple B and that Moody's had
withdrawn its "negative outlook" caution on the country.
The government is on track for its target of cutting the fiscal deficit
to 3.5 per cent of gross domestic product, despite the inflationary effects
of the 20 per cent depreciation of the rand this year. While consumer price
inflation may rise slightly to 7.5 per cent from the government's 5 per
cent target, reserves have increased sharply to $9 bn, or 4 months' import
cover.
Better news from South Africa and hopes that Africa's second biggest
economy, Nigeria, would grow faster under the government of General Abdulsalami
Abubakar have steadied some nerves in Africa. Both the South African and
the Nigerian delegations arrived in Washington with substantial teams of
commercial bankers and business executives banging the drum for foreign
investment in the face of market jitters about Asia, and most other emerging
markets.
Africa the fastest growing world region, IMF says
Amid the stampede of bankers and investors fleeing emerging markets
in Asia and Latin America, Africa's economies were generally cushioned
from the early effects of the international economic slowdown and credit
crunch. But the current global financial crisis, widely considered as the
worst in 50 years, is cutting more deeply into projected demand for commodities
and hopes of African growth.
The International Monetary Fund's World Economic Outlook projects African
gross domestic product (GDP) growth at 3.7 per cent this year, making Africa
the fastest growing region in the world. The IMF projects growth in Asia
at 1.8 per cent this year, while the Americas are forecast to grow at 2.8
per cent.
The Fund's downward revision of earlier projections suggests that commodity
price increases, rather than successful changes in economic policy powered
much of Africa's higher growth performance over the past five years. Nevertheless,
IMF and World Bank economists insist that the growth has been stronger
in "reforming" countries than "non-reform" countries
and that the subsequent dips in GDP growth will be less severe among the
reformers.
Overall, the IMF projects average consumer price inflation in Africa
at 7.7 per cent this year, less than a fifth of the rate in 1994. Reflecting
the global credit crunch, the IMF projects that net private capital flows
to Africa this year will slump from last year's recorded level of $14 bn
to $6.4 bn, before bouncing back to a projected $13.4 bn in 1999. This
would push Africa's share of private capital flows to all developing regions
from 9.7 per cent this year to 11.5 per cent in 1999. Bank and Fund officials
say this reflects perceptions that compared to other emerging markets,
Africa has become "relatively less risky."
The Fund's aggregate statistics emphasize a few major areas of concern,
including the need for Africa's two largest economies, Nigeria and South
Africa, to grow faster. Both of them face formidable obstacles: Nigeria
has to counter the downward pressure of weaker oil prices and South Africa
has to combat the effects of capital outflows, currency depreciation and
lower commodity demand.
Another key concern is the African franc zone, where growth remains
robust. After 1 January 1999, the CFA franc will be pegged to the single
European currency -- the Euro -- rather than just the French franc. While
IMF economists are still upbeat about franc zone countries maintaining
their current pace of GDP growth under the new arrangements, several commercial
banks forecast difficulties resulting from the CFA link to a "hard"
Euro.
With France's GDP growth projected at 4 per cent and the French franc
appreciating against the dollar in the current business cycle, some banks
think the CFA franc may be linked at too high an exchange rate with the
new Euro. The effects of this could put a brake on growth in Africa, as
rival commodity producers in Asia benefit from more flexible exchange rate
policies. While the CFA's linkage to the Euro may promote low inflation
and fiscal rectitude in the zone's countries, this cannot compensate for
the lack of exchange rate flexibility and constraints on economic growth,
as world commodity demand remains weak.
This material is being reposted for wider distribution by the Africa
Policy Information Center (APIC). APIC's primary objective is to widen
the policy debate in the United States around African issues and the U.S.
role in Africa, by concentrating on providing accessible policy-relevant
information and analysis usable by a wide range of groups and individuals.
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