Africa: UNCTAD advocates bold measures on debt crisis

by Chakravarthi Raghavan

Geneva, 11 May -- Need for bold international measures to deal with African debt crisis has been underscored by UNCTAD Secretary-General Rubens Ricupero at a meeting last week of African Ministers of Finance and Planning at Addis Ababa.

Explaining proposals advanced by UNCTAD, which he hoped could become a common position for debt policy advocacy by the UN as a whole, Ricupero among other measures called for review of list of Highly Indebted Poor Countries (HIPC) and including all poor countries facing debt service difficulties, shortening the time frame for implementation, apply less restrictive eligibility criteria, set a ceiling on fiscal revenue to be used for debt service in indebted countries.

In their communique, the African ministers took note of the idea of referring the issue of sustainability of Africa's debt to an independent body composed of eminent persons, selected by mutual agreement between debtors and creditors, and the latter committing themselves to considering debt cancellation where debt is deemed unpayable.

The Ministers welcomed the new international climate for addressing Africa's debt crisis, and said the proposals from UNCTAD and other high-level UN groupings, as well as recent reviews by the Bretton Woods Institutions showed a new realism "that much of the debt is unpayable, that it is a significant impediment to Africa's growth," and that current initiatives, particularly the HIPC, were "far too slow, far too selective in coverage and too conditional."

A major paradox, and contradictory reality of the times, Ricupero said was the recent reminder from the World Bank of official development assistance being at its lowest levels since 1981, allegedly because of budgetary constraints, while at the same time, the war on Yugoslavia (according to some estimates) might well end up costing $22 billion or more, including the resettlement of refugees, but without considering the cost of reconstruction of destroyed infrastructure. The total cost of the Gulf war, he noted, was $102 billion.

So, once more, although there are no resources to build, to develop, there is apparently no scarcity of money for war, and for destruction. "When and where are we going to find the "moral equivalent of war" in terms of mobilizing people's energies and resources for debt relief and for growth and investment in Africa?"

In terms of the current framework, a comprehensive review of the African debt situation would have to go beyond the HIPCs initiative as can be shown by the case of Uganda, "one of the very few countries that have benefited so far but is now back in a difficult debt situation."

It would be useful to remember that over 93% of African debt is public or publicly guaranteed, 80 percent is owed to official creditors and over 40 percent to multilateral financial institutions. There was a continuous growth of arrears "perhaps the best indicator of the extent of debt overhang in Africa."

Accumulated arrears of interest and principal payments reached $64 billion in 1996 -- some 27 per cent of total debt. More worrying was the fact that two-thirds of the increase in debt since 1988 has been due to arrears. Despite the HIPCs initiative, outstanding long-term debt rose by $4.8 billion to $169.5 billion for the HIPCs countries as a whole last year. With commodities prices in decline, a further accumulation of arrears seems probable.

The debt-servicing for HIPC eligible countries now absorbed on average 40 per cent of revenues. Tanzania, for example, spent 9 times as much on debt payment as on health care (despite the AIDS pandemic), and 4 times more than on education.

"In short, debt servicing is crowding out national investment in human and capital infrastructure."

UNCTAD, Ricupero said, has recently put forth a set of proposals that could become the basis for a common position for debt policy advocacy by the United Nations as a whole.

These seven point proposals are:

* Reviewing the list of HIPCs in order to ensure that all poor countries facing debt servicing difficulties would be considered under the initiative. About half a dozen LDCs were not currently covered. The sunset clause of the initiative extended to the end of the year 2000 must be open for review. Although the initiative should not be considered a permanent mechanism it should not be closed before all poor countries with debt servicing difficulties are given a chance to be included. Other debtor countries, such as low-income countries which have not been granted Paris Club concessional re-schedulings or are assumed to have exited from such re-schedulings, could eventually also need HIPC assistance.

* Shorten the time frame for implementation to 3 years, so that final debt relief can be provided after the first track record of a single instead of two ESAF programmes, which would be sufficient to ensure that relief goes to countries with reasonably sound macroeconomic policies.

And while there was much merit in establishing a link between debt relief and poverty reduction, any such link should not take the form of additional conditionality, even of a benign nature that could have the effect of further slowing down the HIPC process. Social policies are already monitored under ESAF programmes, and further actions to reduce poverty should perhaps be left to the initiative of debtor countries themselves, in order to ensure that such actions are demand-driven and correspond to national priorities.

* Apply less restrictive eligibility criteria, notably by reducing the sustainability thresholds of debt and debt service- to export ratios. For countries facing very severe foreign exchange constraints, the thresholds could be lower than the general eligibility level. The additional two criteria on export- to-GDP and fiscal revenue-to-GDP ratios should be dropped. "The aim should be to provide a real exit from debt re-scheduling."

* Set a ceiling for the share of fiscal revenue allocated to external debt service, and provide additional debt reduction if necessary to meet this benchmark; the 25% of fiscal revenue allocated to external debt service is an excessive burden for HIPCs.

* Cancel ODA debts of HIPCs, and extend at least 90% reduction on other official bilateral debts to all HIPCs. Full cancellation of bilateral official debts for post-conflict countries, countries affected by serious natural disasters and countries with very low social and human development indicators, should also be considered.

The Paris Club debt eligible for reduction should also include post cut off date debt.

* Raise funds for debt relief through partial sales of IMF gold and a prompt and substantial general allocation of SDRs, with industrialized countries and others in a position to do so being invited to earmark their allocations for relief to the HIPCs.

* Debt relief should be financed by resources that are additional to previously envisaged budgetary allocations. It is imperative to avoid any trade-off between debt relief and new ODA. Resources earmarked to reduce the debt burden of HIPCs should not come from the aid budget, since it would make debt reduction a sheer accounting exercise and result in a net loss of new aid to poor countries.

These proposals, Ricupero said, went beyond what has been suggested by G-7 countries and could eventually become a more or less common denominator, if one wished to stay within the context of the current framework.

But would it be sufficient to eliminate the adverse effects of the debt overhang on investment and growth in Africa? Ricupero was not so sure. Boldness or a fresh approach would require a new way of evaluating whether the debt was sustainable, payable or not.

In UNCTAD's opinion, this was a question that should be considered by an independent body composed of high-level personalities, knowledgeable with regard to financial, development and social questions, chosen in agreement among creditors and debtors with an undertaking by creditors to write off debt found to be unpayable. "This proposal would eliminate a conflict of interest, as it would not be solely the creditors who would be deciding the criteria to be applied - and we know that all these criteria are very much open to scrutiny and debate."

The proposal was also very much in line with chapter II of the US Bankruptcy Code (chapters II on private debt and IX on public debt). Under the notion of insolvency, debtors are able to benefit from arrangements such as debt standstill, debtor-in- possession financing and debt reduction and minority of creditors not blocking a deal.

Despite its central importance, debt relief fell short of providing a full picture on how to mobilize domestic resources.

The main problem in Africa was the fact that the savings rate - around 16 to 17 per cent of GDP, only half of the more than 33 percent in Asia - was extremely insufficient to generate the necessary resources for investment at a self-sustaining pace.

Besides debt reduction, this problem could only be solved by what the Prime Minister of Ethiopia had suggested to the conference, namely through self-reliant development, and sound, stable political and economic policies supplemented by a large array of mutually-reinforcing means from abroad and encompassing: official aid (in 1998 concessional official finance represented about two thirds of total net resource flows to Sub-Saharan Africa); foreign direct investment where the current unjustifiable low levels provide substantial room for improvement; Capital market Development as a relevant medium and long-term goal to create a diversity of financial instruments and tap the potential for venture capital funds, bond markets and other possibilities.

Given the relatively small economic size of many African countries, the promotion of capital market development on a regional or sub-regional basis may represent a realistic option. There is no reason here to adopt an attitude of passivity or excessive pessimism.

The African Ministers, in their communique, welcomed the consensus now forming on African debt and said it should include:

* restructuring the HIPC to provide broader and faster relief, with greatly relaxed eligibility criteria;

* G-7 donors should agree to complete cancellation of debts arising from bilateral aid for the poorest countries, and raise reduction of other bilateral debt by atleast 90 percent;

* leading countries in the World Bank and IMF should raise substantially the resources for HIPC through gold sales, but without hurting interests of African gold mining nations, issuance of SDRs and other means;

* debt relief should not be at the expense of ODA, but additional.

And while debt relief for the poorest countries are a priority, the problems of middle income indebted countries should also be addressed.

In a reference to the financial crisis, the African ministers said a lesson for Africa was to have appropriate supervisory regulations within national financial settings. The Ministers also recognized the need for both liberalization and institutional strengthening of capital markets, with the pace and content of liberalization being aligned with ongoing process of strengthening prudential supervisory regulations, and proper sequencing of capital account liberalization. (SUNS4434)

* Chakravarthi Raghavan is the Chief Editor of the South-North Development Monitor (SUNS) in which the above article first appeared.

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