The magnitude of the external debt problem is limiting the capacity of the region to develop. An assessment of some proposals to help reduce this burden
During the last few years, the external debt problem facing the Sub-Saharan African countries has received increasing attention. Most of the external debt of these countries is owed to governments and international organizations (see table) rather than commercial banks, and thus does not pose a major threat to the world financial system. Nevertheless, rising debt service obligations have severely limited the ability of the region’s countries to finance critical imports and development projects. Moreover, arrears on debt service have already interrupted some aid flows, and widespread default could hamper the activities of many international organizations, which often depend on repayments of existing loans to finance new projects. This article reviews the debt situation and economic performance of Sub-Saharan African countries and analyzes a number of proposals for reducing their debt-service obligations. Because of the predominance of debt to official creditors for these countries, developments and proposals affecting their commercial bank debt are not discussed.
Dimensions of the problem
The aggregate medium- and long-term external debt of the countries of this region has grown from an estimated $6 billion in 1970 to more than $126 billion at end-1987, or more than 650 percent in constant dollar terms. Over the same period their real GDP per capita has fallen by about 11 percent. External debt as a percentage of GDP or of exports for these countries has risen more than three-fold since 1980, and now exceeds the comparable ratios both for the group of countries with recent debt-servicing problems (i.e., capital-importing developing countries that incurred external payments arrears in 1985 or that rescheduled their debt at any time during 1984-86) and for the group of 15 heavily-indebted countries (Chart 1). During the past five years, more than half the Sub-Saharan African countries have incurred arrears on debt-service obligations or sought debt rescheduling. In 1987, debt service payments by the region’s countries were 26 percent of exports of goods and services; after massive debt relief, the comparable ratio for debt service obligations probably exceeded 50 percent (Chart 2). This is a tremendous burden for countries whose development needs remain extensive and whose real per capita incomes have consistently averaged less than $600 a year.
Chart 1Ratio of total debt to exports
In percent of exports of goods and services
Source: IMF, staff estimates prepared for the October 1988 World Economic Outlook survey.
Chart 2Sub-Saharan Africa: per capita real GDP and debt service ratio
Source: IMF, Annual Report on Exchange Arrangements and Exchange Restrictions, 1987 and 1988 editions.
|(In billions of US dollars; end of year)|
|Total external debt, including IMF||6.0||15.8||54.0||97.2||112.7||126.5|
|Medium- and long-term, excluding IMF||5.8||14.7||45.1||80.8||98.9||113.3|
|To official creditors||3.8||9.4||26.9||53.8||69.0||81.2|
|To private creditors||1.6||4.4||15.0||20.8||23.2||25.1|
|Not publicly guaranteed||0.4||0.8||3.2||6.1||6.6||6.9|
|Estimated stock of arrears||—||0.5||0.6||14.3||16.6||18.0|
Defined as Africa excluding Algeria, Angola, Morocco, Namibia, South Africa, and Tunisia.
Defined as Africa excluding Algeria, Angola, Morocco, Namibia, South Africa, and Tunisia.
Origins of the debt problem
This region’s external debt problem has its origin in government actions, in particular external borrowing for development projects. Since independence, Sub-Saharan African countries have undertaken public projects to strengthen their economies, frequently with donor support and generally with heavy use of foreign loans. Many of these projects were designed to improve domestic industry and infrastructure rather than to boost export production directly. It was expected that as these economies developed, commensurate increases in export production and favorable trends in export prices would provide the foreign exchange needed to service these loans.
However, the two oil price shocks of 1973-74 and 1979-80, and the subsequent depression in non-oil commodities markets during the 1980s, undermined these expectations. After the oil price shock in 1973, prices for a number of commodities produced by Sub-Saharan African countries (cocoa, coffee, tea, sugar, groundnuts, sisal, phosphate, and uranium) rose sharply and then dropped steeply. Many of the affected countries responded to the initial commodity price increases by expanding public expenditure. Revenues from commodity taxation did not rise as fast, and governments used foreign borrowing to meet the remaining costs of particular projects. When commodity prices subsequently fell, expenditures were not reduced commensurately, and previous borrowing was often supplemented with new loans to maintain expenditure levels. External debt also accumulated in several oil-producing countries during the mid-1970s, while Nigeria began to borrow heavily in commercial markets after 1977.
The trend toward rising debt burdens accelerated during the 1980s. In the wake of the second oil price shock, because of anti-inflationary policies, industrial country growth during the first half of the 1980s was considerably more sluggish than during the 1970s. This led to a sharp decline in prices of non-oil primary commodities. By 1987, aggregate export earnings for Sub-Saharan African countries excluding Nigeria were 10 percent below their nominal levels in 1980, despite a 16 percent rise in export volume. At the same time, debt-service obligations more than doubled between 1980 and 1987, reflecting both the debt incurred during the 1970s and continued borrowing since then.
The failure of many Sub-Saharan African countries to adapt their policies to the changed external environment tended to exacerbate the debt servicing problem. Besides expansionary fiscal policies and borrowing against exports to maintain consumption levels, many of these countries pursued other policies that weakened their external positions. Growing fiscal deficits and surging private credit demand led to massive monetary expansion and higher inflation in many countries. Since most of these countries did not depreciate their currencies to offset the rise in inflation, their currencies became overvalued, inhibiting exports and, along with exchange controls, encouraging the formation of parallel exchange markets. Also, limiting exports was the common practice of marketing crops through monopolistic public sector agencies that offered low producer prices as a way of meeting their own administrative costs and raising government revenues.
Overvalued exchange rates and government subsidies on imported food, fertilizer, and petroleum products, also promoted imports. Meanwhile the imposition of high tariff rates or quantitative restrictions on imports of finished goods, and minimal tariffs on imported raw materials and intermediate goods encouraged the growth of inefficient, import-intensive manufacturing enterprises. In addition, the failure to adjust domestic interest rates in line with rising inflation promoted capital flight, discouraged domestic saving, and encouraged private borrowing, thereby adding to monetary expansion and further inflation.
As a result of all these factors—external as well as domestic—by 1980, a significant number of this region’s countries found themselves increasingly unable to meet debt-service obligations, while maintaining existing trends in the growth of imported goods and services. Many countries responded with adjustment programs aimed at curbing domestic expenditure, reducing inflation, and boosting exports. In a number of cases, the Fund supported these programs through stand-by and extended arrangements. The World Bank, through its structural adjustment lending, initiated in 1980-81, also provided significant assistance to many countries, while bilateral donors agreed to reschedule debt for many countries in conjunction with Fund arrangements.
The net flow of Fund credit to Sub-Saharan Africa began to slow in 1984 and turned negative in 1986 and 1987, as repayments from earlier Fund arrangements fell due. However, the Fund continued to serve as a catalyst for debt rescheduling and for new commitments of donor assistance. At the same time, the Bank’s adjustment lending increased substantially. Despite the availability of debt relief and the continuing attention of donor countries and international organizations, the situation continued to deteriorate economically during the mid-1980s, and by 1987 the position of most of the region’s countries had become precarious. Average export earnings stood at barely 64 percent of their 1980 levels, real aid flows (in constant US dollars) were significantly lower than in the early 1980s, and real per capita GDP was estimated to have fallen below the level of 1970-71.
Partly in response to these developments, the Fund in 1986 established its Structural Adjustment Facility (SAF) to provide assistance on very concessional terms (one-half percent interest, with repayment over a five and one half to ten year period) to low-income countries undertaking programs of comprehensive macroeconomic and structural adjustment. In addition, major donor countries agreed to consider more generous terms for debt rescheduling. However, neither of these initiatives helped to reduce the debt burden of African countries with substantial obligations to international organizations. Moreover, the total funds available through external assistance left many countries with unmanageable balance of payments positions.
Recent debt initiatives
During the latter half of 1987, the Fund and the Bank undertook further measures to address the debt problems of very low-income countries. The Fund obtained resources from a number of member countries to allow a substantial expansion of its adjustment lending through the Enhanced Structural Adjustment Facility (ESAF), which became effective in January 1988. The Bank also secured commitments from major donors to establish its Special Program for Africa, to help countries with debt difficulties. Moreover, in 1988, the Group of 7 (G-7) industrial countries agreed on measures to reduce further the bilateral debt-sevice obligations of very low-income countries.
Despite these initiatives, it is uncertain whether existing aid sources can provide sufficient relief for the debt problem of Sub-Saharan Africa. The total resources available to these facilities (about $12 billion for the SAF-ESAF fund and $6.4 billion for the Special Africa program) and the estimated additional relief arising from the G-7 proposal (perhaps less than $0.1 billion a year) are small compared to the yearly debt-service obligations of these countries (estimated at $21 billion), of which these countries are now paying less than half. Unless these programs are supplemented by additional resources in future years, the available funds may provide significant debt relief to this region for only a few years.
Alternative debt proposals
What more could be done to help debt-distressed Sub-Saharan African countries? To supplement these recent donor initiatives, a number of other debt relief proposals have been proposed, of which three types relating to debt from official creditors are considered here.
Help with debt-service obligations to international organizations. One idea that has been suggested is to provide assistance to low-income countries in meeting debt-service obligations to international organizations. This proposal would be of particular use to Sub-Saharan African countries where, as noted earlier, a large proportion of debt is owed to international organizations. One possibility would be for such organizations to raise additional funds from member countries for the purpose of replacing existing loans with loans carrying more concessional terms. As with more formal debt rescheduling, the replacement of outstanding loans would give borrowers more time to meet their debt-service obligations.
The most direct way to reduce debt burdens would be through formal rescheduling of these obligations. However, rescheduling would represent a major policy change for international organizations, and most lack the spare capital to provide substantial debt relief without curtailing their primary objective of offering new loans and programs. Obtaining new capital from major donors would seem essential for these organizations considering formal rescheduling. Whether such funding can be secured under the current economic environment facing most donor countries is highly uncertain.
Another option would be to create a new international facility charged with buying the outstanding debt owed to international organizations and then replacing existing debt-service obligations with new loans on more concessional terms. A facility of this sort would have the advantage of providing debt relief to low-income countries without requiring international organizations to provide new loans themselves. At a minimum, this would require a large initial capitalization from donor countries to cover the difference between obligations due to international organizations and payments received from outstanding borrowers. A new international facility would also face considerable start-up costs, including the need to screen and supervise new loans to debt-distressed countries. For these reasons, it seems unlikely that this approach to meeting debt-service obligations to international organizations would be followed.
A third option for relieving the debt-service obligations of low-income countries to international organizations would be for bilateral lenders to relax their normal rules linking aid to import payments, and provide funds on a country-by-country basis to repay international organizations. This could involve either a direct transfer to the indebted country or a payment made on that country’s behalf to an international organization. This approach would have the advantage of allowing donors to oversee the selection of countries and tailor the degree of assistance to each country’s apparent needs. One possible disadvantage of this scheme would be the need for donor countries to decide, in every case, how much financial support each donor should provide to qualifying debtors in meeting their obligations to international agencies. This could prove more difficult than the alternative of giving multilateral agencies the funding to arrange rescheduling or debt replacement themselves.
One major drawback to any proposal for debt relief on obligations to international organizations is that bilateral donors would inevitably need to increase their aid flows. The likelihood of a major increase in donor aid to support this type of activity seems uncertain, given the present budgetary positions of the leading donors. Any such program would probably thus displace at least some of the funding available for new aid programs to low-income countries. This would mean a reallocation of existing aid resources, not only among functions but also across countries in favor of those with large debt service problems.
Bilateral debt forgiveness. A second proposal for assisting Sub-Saharan African countries is to establish large-scale debt forgiveness programs among bilateral donors. This could be considered an extension of an earlier UNCTAD agreement negotiated in 1979 calling for retroactive adjustment of past official development lending to the least developed countries. A few donors have already forgiven certain debts owed by Sub-Saharan African countries, and partial debt forgiveness is among the options creditors may provide under the recent G-7 proposals. However, debt forgiveness of strictly government obligations may not provide large savings to some countries already receiving debt rescheduling, as many of these countries have already been granted full or nearly total debt relief on their current external obligations and arrears to national governments and export guarantee agencies. Savings could nevertheless arise from eliminating the moratorium interest obligations on rescheduled debt. This is particularly true for countries that have repeatedly undergone debt rescheduling, and thus accumulated a much larger stock of debt against which these interest payments are calculated.
Debt forgiveness would also eliminate the sizable administrative burdens associated with periodic debt reschedulings. In addition, it would stop the steady accumulation of bilateral debt that has come from repeated debt reschedulings and the resulting capitalization of interest and arrears. To succeed, debt forgiveness would have to be limited to very low-income countries and be conditional on pursuing appropriate economic adjustment programs, perhaps with a certain amount of forgiveness occurring each year after the successful completion of a Fund-supported economic adjustment program. These requirements are already accepted as conditions for receiving debt relief from Paris Club donor countries. To guard against future debt problems, new bilateral aid might also have to come in the form of grants, rather than loans. Donor countries might be less willing to accept this proposal, although in the last year many donors have been willing to increase the percentage of aid given as grants to some low-income countries that are undertaking major economic adjustment programs.
Eliminating Sub-Saharan African debt and providing only grants. Perhaps the most extreme debt relief proposal suggested is to forgive all external debts, including those to international organizations, and to restrict all future assistance to outright grants. This was also proposed in the 1979 UNCTAD agreement mentioned above. Such a strategy would, of course, eliminate the Sub-Saharan African debt problem. However, it raises difficult policy issues, including the possibility of a reduction in net flows to Sub-Saharan African countries. In addition, the resources required to forgive all outstanding external debt of this region far exceed the present or foreseeable aid budgets of industrial countries. Simply to repay the estimated end-1987 debt to international organizations would require more than $29 billion. As this is more than twice the annual sum of official grants and net official borrowing by these countries in 1987, this proposal appears financially infeasible.
In sum, some broadening of bilateral debt forgiveness seems the most likely new initiative to assist Sub-Saharan African countries. This might be accompanied by a small program of bilateral aid toward a portion of their debt-service obligations to multilateral agencies.
Chart 3Sub-Saharan Africa: import volume and debt service ratio
Source: IMF staff estimates prepared for the October 1988 World Economic Outlook survey.
New adjustment strategies
Along with the policy initiatives by the creditor countries, it is essential for Sub-Saharan African countries themselves to adjust their policies to the changed external situation to alleviate their debt burdens. One way is to increase domestic savings by encouraging private savings, as well as by increasing public savings through fiscal retrenchment. Since many of these countries have very high inflation rates and negative real interest rates, encouraging private savings may require substantial increases in nominal interest rates, so that real rates become positive. As for boosting public savings, this will require measures to decrease the government’s budget deficit, through revenue increases and appropriate expenditure cuts.
It is beyond the scope of this article to suggest strategies for diversifying the exports of Sub-Saharan African countries, promoting efficient industrialization schemes, or encouraging trade liberalization among the industrial countries. Without substantial new commitments of foreign assistance provided for longer time periods, however, it is difficult to foresee an end to this region’s debt problem, much less the underlying problems of poverty and stagnation that still continue to affect many of these countries.
A longer paper on this topic is available from the author.
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