Article

Africa can reap major benefits from debt relief, new IMF tools

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2006
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Abdoulaye Bio-Tchané, Director of the IMF’s African Department, speaks with the IMF Survey about the likely impact ofdebt reliefon the African region.

IMF SURVEY: What does Africa stand to gain from the MDRI [Multilateral Debt Relief Initiative], the Exogenous Shocks Facility, and the Policy Support Instrument?

Bio-TchanÉ: These initiatives will enhance the IMF’s ability to meet the different needs of African countries. The MDRI is intended to increase the resources available to African and other countries to meet the Millennium Development Goals [MDGs]. Overall, the initiative is expected to write off over $40 billion of debt to the IMF, the World Bank’s International Development Association, and the African Development Fund. With the shocks facility, the IMF now has a new instrument to assist countries in dealing with external and domestic shocks, including natural disasters like droughts. And the Policy Support Instrument—which Nigeria has already used and which Uganda will apply for shortly—will also increase the range of instruments the IMF can use to address the needs of low-income countries.

IMF SURVEY: What will recipient countries need to do to make the most of the opportunities that debt forgiveness affords them?

Bio-TchanÉ: The MDRI is clearly linked with the MDGs. It’s not by accident that the Poverty Reduction Strategy Paper [PRSP] has been emphasized. Having the PRSP and an effective public expenditure management system in place will help to ensure that the resources freed by the MDRI are used to increase poverty-related expenditure and, in particular, improve health care, education, and rural development. At the same time, these countries will need to absorb debt relief—and higher aid flows—without damaging or destabilizing their macroeconomic environment and thus hampering prospects for growth and poverty reduction.

IMF SURVEY: How quickly can we expect to see changes in Africa, and what form will those changes take?

Bio-TchanÉ: Debt payments to the IMF from the countries that have qualified for the MDRI will be lower. Once their parliaments and governments give their approval, these countries can apply the resources to poverty-related expenditures. It is difficult to estimate precisely the impact of the debt relief, but experience with the HIPC Initiative shows that debt relief has indeed freed resources to fight poverty. For example, prior to the HIPC Initiative, eligible countries were, on average, spending slightly more on debt service than on health care and education combined. This is no longer the case. In these 28 countries, under their recent IMF- and World Bank-supported programs, spending on health care, education, and other social services is, on average, now almost four times the amount of debt-service payments. We expect that further debt relief and additional resources in line with G8 pledges would deepen these effects. But ultimately, the results of all these efforts are in the hands of African countries. It all depends on the policies they put in place.

IMF SURVEY: What’s next for the IMF’s work in Africa?

Bio-TchanÉ: What we’ve seen in Africa over the past couple of years has been very encouraging. Growth has picked up to an average of 5 percent across the continent, with some countries also doing very well in reducing inflation. This isn’t happening by accident, but because most countries are adopting policies to create an environment for the private sector to develop. We want to build on that. Low-income countries have been recognized as central to the IMF’s work, as articulated in the Fund’s Medium-Term Strategy, and we have expanded the tools available for our work with African countries.

A key policy challenge will be to assist countries in designing macroeconomic policies to facilitate the effective use of debt relief and higher inflows of aid. The recent pledges of the G8 countries to increase aid, particularly for Africa, are very welcome. But African countries can face significant challenges when aid rises. We are committed to playing our part in helping countries make progress toward the MDGs through policy advice to address these challenges.

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