/DEVELOPMENT BULLETIN 3/ AFRICA: Commonwealth Economics Chief Urges Debt Relief For Africa

By Lahai J. Samboma Reprint | | Print |

LONDON, Mar 23 1996 (IPS) - The international financial institutions (IFIs) and the Paris Club of bilateral creditors must do more to help Africa out of its debilitating debt crisis, says a senior Commonwealth official.

Recent attempts by its creditors to address Africa’s 300 billion dollar debt — such as rescheduling and the refinancing of old loans with ‘softer’ credits — have been ineffectual at best, says Dinesh Dhodia, Commonwealth Secretariat chief economist.

“Though at times it may look as though progress is being made, the fact is that too little is being done — and it is being done too late,” he said.

Dhodia said that the cavalier way in which Africa’s debt crisis is being treated by the international community contrasts sharply with their attitude to the Latin American debt crisis in the 1980s.

Thanks to the U.S.-sponsored Brady Plan — funded by the World Bank, the IMF and Japan to the tune of over 50 billion dollars and including debt and debt service reductions of up to 50 percent — Latin America was pulled from the brink.

Since then, unlike Africa, creditor and investor confidence have returned to the region and modest growth rates are being recorded.

Why was Latin America rescued and Africa left to burn? “These different responses came about because Western governments were looking to their own self-interest,” said Dhodia. “The Latin American crisis was going to have repercussions on the global financial system.

“The ripple effects on Western economies would have been devastating, so they had to come to Latin America’s aid. But Africa’s debt, although unsustainable in the view of African countries, is very small in the global context. This is why the level of commitment, the urgency, is not the same.”

Another reason for these disparate responses to essentially identical problems, say economic observers, is that nearly 90 percent of the African debt is sovereign debt, owed to the IMF, the World Bank and to Western governments, while Latin America’s was almost exclusively private, commercial bank debt.

The IFIs past view that their debt cannot be rescheduled or substantially reduced precludes African countries from benefiting from the Brady strategy. Meanwhile global support for Latin America continues where global economies are threatened, most notably during the Mexican peso crisis two years ago.

Kenneth Kaunda, the former Zambian President and veteran critic of international financial orthodoxy, argues that Africa has been dealt a bad hand in a bent poker game.

“They say we are crying foul,” he said when recently in London, “but is it so easily forgotten that when Mexico was in trouble billions were poured into that country, both by the IMF and World Bank? And when the Soviet Union went out of existence, billions have been poured there by the West.”

Recent debt-reduction strategies, such as the Toronto and Naples terms aimed at addressing bilateral debt, were only “more of the same, no more than “stop-gap initiatives to shore up the problems till a later date”.

Thirty percent of Africa’s total debt stock is owed to the IMF, the World Bank and the African Development Bank. Just over 30 percent is owed to Western bilateral creditors, while about 15 percent is commercial debt. The rest, according to Dhodia, comprises of principal and interest arrears.

Since a major component of debt repayments and servicing is owed to IFIs, a framework for tackling multilateral debt will go a long way towards solving the debt crisis.

In the field of bilateral debt, Dhodia saw some evidence of flexibility. He cited the 1988 decision by the Paris Club to reduce by about one-third the debts owed to them and rescheduled the remainder over 23 years including a six-year maturity period after lobbying by Commonwealth countries.

In 1990 Commonwealth finance ministers meeting in Trinidad called on the Paris Club to further reduce the whole stock of debt owed to them by 67 percent — increasing to 80 percent for the poorest countries, to place a five-year moratorium on interest payments and reschedule the rest over a longer period.

However, it was only in 1994 that the Paris Club accepted the principle of a 67 percent stock reduction without an interest rate moratorium or rescheduling of the remainder of the debt — which they now refer to as the Naples Terms — and even then they have applied a highly strict and selective interpretation of them.

“What this amounts to is that since then only one country in Africa, Uganda, has benefited from the Naples Terms stock reduction, while the situation of other severely-indebted countries in the region remains the same,” says Dhodia.

“But, even in the case of Uganda, the Naples Terms were implemented in a legalistic way which saw post-1981 debt (Uganda first went to the Paris Club in 1981) excluded from the debt- reduction package, with the result that only a quarter of its Paris Club debt was reduced.”

The IFIs have so far remained adamant that they will neither reschedule nor reduce debts owed to them, despite the commitment of African states to socially divisive structural adjustment programmes (SAPs).

Instead of coming up with a comprehensive debt reduction strategy, they have resorted to refinancing old loans to severely- indebted countries with new and softer loans. This however fails to address the main problem.

The world is in the bizarre situation whereby up to eight billion dollars of bilateral credits is used each year by debtor countries to service multilateral debt. The net transfer of resources from “poor” Africa to the “rich” West topped 50 billion dollars between 1970 and 1994.

Africa’s debt overhang may not threaten international financial stability, but it is causing untold hardship and suffering in the region. NGOs link spiralling debt repayment obligations to a dramatic and continuing decline in public spending on education, health and other social welfare programmes.

“An unsustainable debt stock discourages domestic and foreign investment,” said Kevin Watkins, senior policy adviser at Oxfam, “and raises the risks of commercial transactions which commonly carry interest rates higher for Africa than, for example, South- East Asia.”

Some aid agency sources are optimistic that the IMF and World Bank could spring a surprise at their April meeting by unveiling a new multilateral debt-reduction strategy.

But both Kaunda and Watkins argue that economic growth can only be fostered in the region when a comprehensive debt reduction strategy comparable to the Brady Plan, or the Marshall Plan for post-World War II Europe, is implemented in Africa.

Watkins also says that any attempt to address the African debt crisis start by ditching the “defective and discredited” IMF and World Bank SAPs in favour of economic prescriptions shorn of arch- monetarist prescriptions.