Chapter

Discussants

Editor(s):
I. Patel
Published Date:
December 1992
Share
  • ShareShare
Show Summary Details

Africa’s Adjustment and the External Debt Problem

A View of African Adjustment and Development as a Point of Departure

Judging by the volume of literature from various sources on the subject, it is clear that few endeavors in modern development economics have attracted as much effort on the part of (recipient and donor) governments, central banks, multilateral financial institutions, and academia, as comprehending the experience of structural adjustment programs in sub-Saharan Africa. It was recognized from the outset that the structure and characteristics of the region’s low-income economies posed special challenges: how to formulate policy prescriptions and recommendations on structural measures that would revive development and growth after nearly two decades of sustained retrogression in per capita incomes. That has not, however, prevented a “sameness” in analysis and approach to adjustment prescriptions and the design of programs that belies the differences these economies are acknowledged to have.

Structural adjustment programs for Africa have clearly had their theoretical roots in stabilization prescriptions evolved over time by the International Monetary Fund (IMF). Invariably, they have emphasized (a) the management of demand, usually through austerity, by means of tightly controlled fiscal and monetary policies; (b) economic, financial, and trade liberalization measures; and (c) decontrolled pricing aimed at reflecting market-clearing outcomes. Specific conceptual attention to reconstructing and diversifying the fragile supply side of low-income African economies has, until very recently, been lacking in the institutional thinking of the Bretton Woods twins (the IMF and the World Bank); although the United Nation’ s Economic Commission for Africa (ECA) has pointed out that shortcoming on different occasions. A study by the World Bank,1 which appeared toward the end of 1989, represents perhaps the most thoughtful (though belated) attempt so far to recognize and correct that deficiency. Until then, the assumption on the part of the IMF and the World Bank seems to have been that, if correct macroeconomic and pricing policies were pursued, the supply side would automatically take care of itself. That this assumption has not been borne out after a decade of adjustment experience underlines the difference between low-income African economies, whose switching responses are extremely weak, and other developing economies whose characteristics might make that assumption more tenable.

Quite understandably, strenuous efforts continue to be made by the World Bank and the IMF to look for conclusive signs of adjustment success.2 Those signs remain ephemeral. The more realistic conclusion from a survey of the available evidence might be that some African economies have succeeded in achieving macroeconomic stabilization at a low level of output. Between 1987 and 1990, agricultural production certainly seems to have revived, but for reasons in which variables (especially the weather) other than price reforms may have played a significant part. Genuine “structural” adjustment—that is, resulting in (a) more efficient, diverse, and flexible structures of production, which would induce desired supply responses across all sectors of economic activity in response to appropriate market-price signals, and (b) a revival of domestic savings and investment, which would permit a degree of self-sustainability of the adjustment effort and the growth process—does not yet appear to have taken place anywhere in Africa. At the end of a decade of adjustment, African economies have become more burdened with debt, more dependent on continuing flows of official aid resources at unsustainable levels, and less attractive as long-term investment propositions for the private sector. Many are trapped in a devaluation-inflation vortex from which they find it difficult to exit.

It is not even clear that the more cautious assessments of recent months, that is, that adjustment in Africa will take much more time than earlier thought, is the right one.3 Such a view implies that the adjustment prescriptions made are basically correct and that efforts of the past decade have resulted in laying the proper foundations for a period of renewed and sustainable growth based increasingly on internal resource generation. The evidence in support of that view is not conclusive. It may well be that the macroeconomic policy reforms that have been undertaken have been necessary for future progress. It is quite clear, however, that they have by no means been sufficient. The unfortunate reality seems to be that neither the World Bank nor the IMF (nor indeed the African governments concerned or the academic and UN communities) as yet have a coherent conception of an exhaustive set of interventions, policies, programs, or investments that might represent sufficiency in this context. Obviously, none of the evidence suggests that countries should be encouraged to persist with the wrong policies on exchange rates, interest rates, price controls, support for loss-making parastatals, and loose monetary and fiscal policies. But neither does it suggest that simply correcting these policies provides a panacea for achieving a quick turnaround and sustained growth thereafter.

The debate about whether the right kind of structural adjustment for low-income Africa is indeed likely to be achieved with neo-liberal prescriptions has been continuing for some time. Essential arguments on each side have been made in various documents issued by the World Bank and the IMF, on one side, and by the ECA, the United Nations Conference on Trade and Development (UNCTAD), and large parts of the African and international academic communities, on the other (footnoted below). Those arguments leave much to be desired from both empirical and conceptual perspectives. What is now perceptible is that the conceptual underpinning for structural adjustment in Africa seems to be shifting toward precepts concerned more with long-term development and away from those aimed at immediate stabilization. The notion (which has taken hold with confusing repetitiveness in obscure World Bank-IMF jargon)—that structural adjustment is a unique medium-term “in-between” phenomenon marking a sort of chronological midpoint between short-term stabilization and long-term development—is a peculiarly untidy, if all too convenient, one. It now needs to be abandoned.

In substance, where low-income Africa is concerned, there seems to be no conceptual, practical, or programmatic difference between what the Bank and Fund now refer to as “adjustment over the long term” and what previously used to be known more simply as “development.” It may well be that a long, roundabout route has been taken to recognizing an elementary point—that is, that the process of development involves more than making a series of efficient investments to improve physical and social infrastructure and to expand and diversify productive capacity for increasing output, employment, and incomes. It also involves making continual policy and institutional adaptations to changes in internal and external circumstances, which are now occurring at a much faster pace than before. That is what adjustment quite literally means. It is, in that sense, a process without end, not one that has some finite temporal dimension that can be stretched like elastic to suit the convenience of either the World Bank or the IMF when it comes to fund-raising (or one’ s intellectual shortcomings when one is pressed to prove that what one is doing is working!). Continuous adjustment is inescapably an integral part of long-term development; it does not end when macroeconomic stability is achieved.

Low-income Africa may have the capacity to make physical and social investments in a static environment, if development were that easy. It lacks the capacity to make such investments in a dynamic environment because its weak structural endowments—which have been further eroded throughout the 1970s and 1980s—render it incapable of adapting as readily as external circumstances warrant. That rather simple view, though made in a painfully laborious way, provides the point of departure for assessing the implications of the way in which Africa’s external finance and debt relief needs have been managed over the last decade.

Debt Management and Its Implications for Adjustment

The view taken here is that the annual financial programming exercises that form the basis for financial gap plugging and for consequent debt relief—which today constitutes by far the largest component of external “financing” for Africa—are fundamentally flawed in two ways. First, they have an inherent bias toward underestimating the extent of transitional financing that is really needed for successful adjustment to occur and take hold in any given time period. Second, because these exercises are excessively sensitive to the practices and protocols of institutions offering debt relief—in particular, the Paris Club—they are biased toward providing finance on the wrong terms, for too short a time.4 If one accepts the view expressed earlier—that structural adjustment and development in Africa are, for all intents and purposes, synonymous—then it becomes immediately obvious that focusing on new financing and debt relief on a short-leash basis for 18 months at a time is entirely inappropriate. Apart from making the trajectory of long-term resource flows for development financing highly uncertain, such an approach has resulted in the embedding of a mentality of continuing crisis management in African governments. Apex level policymakers have become so absorbed with allocating the next week’ s foreign exchange availabilities that they have little time to focus on or manage the execution of programs intended to address intermediate and longer-term priorities. Moreover, the rituals and procedures involved in negotiating debt relief, again especially with the Paris Club,5 have become so involved, arduous, and repetitive that they absorb far more time, energy, and are far more wasteful of scarce administrative resources than can possibly be justified by the gains that have so far accrued.

The Record of Debt Management in Africa

What is the record of debt management in low-income Africa between 1980–90? On the evidence, fairly dismal. Table 1 provides a summary view of what has happened over that period of time.

Table 1.Evolution of the Debt Situation in Sub-Saharan Africa, 1980–90(In billions of U.S. dollars, except where otherwise specified)
19801982198919901
Total debt stocks outstanding56.2070.25146.99160.79
Of which
Bilateral creditors16.4919.7956.0964.04
Multilateral creditors7.5510.3931.3136.41
Use of IMF credit3.034.936.386.42
Total official debt27.0735.1193.78106.87
As percent of total debt48.1749.9863.8066.47
Private long-term19.4225.8837.1938.63
Private short-term9.709.2616.0115.30
Debt stocks as percent of GNP27.437.498.3111.9
Actual annual debt service6.307.448.8211.18
Debt service as percent of exports10.919.322.224.4
Debt service as percent of GNP3.14.05.97.8
Interest arrears0.220.637.236.67
Actual debt service as percent of scheduled debt service89.072.039.037.02
Total debt service between 1982–9084.55
Of which
Interest29.28
Principal55.27
Source: World Bank, World Debt Tables, 1990–91 (Washington, 1991).

The picture that emerges is clear. On an outstanding debt stock of just over $70 billion at the end of 1982, sub-Saharan Africa serviced nearly $85 billion in principal and interest payments between then and December 31, 1990, Official grant flows to the region increased from around $5 billion in 1982 to over $12 billion in 1990. Yet, its debt burden is estimated to exceed $160 billion in 1990 after eight years of crisis “management.” Worst of all, Africa’s debt profile has changed, with a larger proportion of debt due to preferred multilateral creditors (up from 18 percent in 1980 to 27 percent in 1990) to whom service obligations are nearly impossible to reschedule, and the costs of running arrears are far higher, than in the case of official bilateral or private creditors.

It is also clear that despite repeated bilateral reschedulings for almost all severely indebted countries in Africa, Africa’s ability to meet its rescheduled payment obligations (after adjustment measures have been instituted) continues to deteriorate, not improve. And this is after significant amounts of official development assistance (ODA) debt cancellations (amounting to over $6 billion by the end of 1989) and attempts at other forms of commercial debt reduction, such as buy-backs and swaps, The export of real resources from Africa by way of debt service has increased from about 3 percent in 1980 to 6 percent in 1989 and a projected 8 percent in 1990. That is indefensible in a continent where per capita incomes are still declining from levels that are already abysmally low.

These aggregates—which although they must be broken down by country for appropriately sensitive treatment of the debt problem—suggest quite clearly that, despite repeated measures to liberalize the terms of official debt relief and the efforts being exerted to reduce the burdens of private debt service, something is still wrong with the present debt management approach and its results. Those directly involved in the progressive softening of Paris Club rescheduling terms with the Venice Agreement in 1988, the Toronto Terms in 1989, and the wider application of Trinidad (or even better Pronk) Terms in 19916 have applauded themselves for the “progress” made, pointing to seemingly insuperable technical difficulties and political objections that have finally been surmounted. And perhaps they are to be congratulated for their Herculean efforts. But the stark reality remains that for Africa, and particularly for its poor, what has been achieved still amounts to marginal trimming of the remote outer branches of the problem and not hacking away at its roots. Debt relief, though much to be appreciated and further encouraged, is still being provided to Africa on a “too-little, too-late” basis. It is not sufficient to help the adjustment efforts being made to take hold, nor to ameliorate Africa’s trade credit problems, or the related 30–40 percent premiums in import prices that Africa has to pay on the open market. The economic instability created in large part by the debt overhang also continues to pose a continuing threat of interminable devaluations and accompanying inflations. Together, these make it nearly impossible to regenerate domestic or foreign private investment to any significant degree. That, however, is not the only pernicious effect being experienced.

Research being done at Oxford University on domestic resource mobilization difficulties7 in Africa suggests that the effects of adjustment failure are resulting in significant financial dissavings and disintermediation by households that are now exercising their preference to hold net wealth in nonmoney forms. Paradoxically, this phenomenon is accompanied by an illusory liquidity balloon in many African economies caused by the buildup of effectively unusable parastatal deposits in the commercial banking system. Overall, the signals being sent by the joint, but related, failure of both debt management and adjustment efforts are feeding back to discourage rather than encourage domestic savings and investments—two forces that must be revived if Africa is to have any serious hope for climbing out of its predicament.

Where Does Africa Go from Here?

Many gatherings (such as this symposium) have been held over the past four years on the subjects of structural adjustment, debt, and growth in Africa. At those meetings, much the same things seem to have been said and much the same reactions elicited. Proponents of radical change have been tarred as unrealistic academics who have little appreciation of how the real world works. The only gratification that experience provides is that radical changes have indeed occurred in the system; unfortunately, they have not been radical enough! Hence, the effort to achieve further change must be renewed vigorously.

On the bilateral debt front, it is now quite clear that Toronto terms, generous though they seem in relation to the past, are not sufficient for the future. The proposals for more generous rescheduling treatment, involving the entire stock of official bilateral debt, made by (now) British Prime Minister John Major at the meeting of Commonwealth finance ministers in Trinidad (in September 1990) seem more realistic. But even they can only be a way station to the ultimate goal enunciated by Minister (for Development Cooperation) Jan Pronk of the Netherlands—the cancellation of all official outstanding bilateral claims for all debt-distressed, low-income African countries. If it is indeed necessary to go through the intermediate step offered by the Major proposal, and it may be, then consensus should be reached sooner rather than later on universal adoption of these proposals by the Organization for Economic Cooperation and Development (OECD), the Organization of Petroleum Exporting Countries (OPEC), and former Council for Mutual Economic Assistance (CMEA) creditors.

For multilateral bank debt, the steps being taken by the World Bank to cover interest payments on outstanding World Bank debt through its interest subsidy facility extended on International Development Association (IDA) terms is a step in the right direction, but it does not go far enough. To begin with, the facility is not large enough to cover all interest obligations for all low-income African countries with such debt stocks outstanding. At present, it only covers 60 percent of annual interest obligations due to the World Bank, although in recent months steps have been taken to expand coverage to 90 percent of interest due. Second, it still leaves the residual obligation of clearing about $2 billion in outstanding principal, most of which will fall due for amortization within the next five years. Refinancing at the outset those residual principal obligations on IDA or grant terms (if bilateral donors were to contribute) would be a far superior option to exercise at the present time. For countries that have ongoing programs financed by the Bank, this is in effect what happens as the Bank attempts to maintain positive net transfers with IDA financing taking into account repayments of interest and principal on World Bank loans. But the way in which it is done still imposes larger debt-service obligations over time than would arise if there was a clean-out up front. Moreover, similar treatment needs to be extended to the African Development Bank (AfDB) loans, which continue to be disbursed to low-income recipients who are patently uncreditworthy to receive funding on such terms. The same applies to other multilaterals (such as those in the Arab-OPEC world), which have extended hard-window facilities. Though outstanding debt stocks due to multilateral banks accounted for about 20—22 percent of total African debt stocks, debt-service payments to these creditors at present account for 30—35 percent of total debt-service payments.

Debt to the IMF poses a similar problem to that of the multilateral banks. And the steps that the IMF has taken to refinance upper tranche obligations on concessional terms through use of its structural adjustment and enhanced structural adjustment facilities have not been effective enough to significantly reduce debt-service obligations to the IMF. Though outstanding obligations to the IMF amount to less than 4 percent of total outstanding debt stocks, debt service to the IMF in 1989 and 1990 by low-income African countries accounted for nearly 20 percent of total debt service. The IMF is now a significant net taker of resources from Africa at a time when the opposite should clearly be the case. Much more needs to be done by the IMF to contribute to more equitable sharing of the debt relief burden, although that is not an argument that the IMF has ever been prepared to accept. However, in Africa, as a large part of the problem of very rapid debt accretion between 1982–90 has been due, directly or indirectly, to the Fund’ s previous actions, there is a powerful case to be made that the Fund ought to be doing much more to alleviate the present burden.

Yet as Volume 1 of the World Debt Tables for 1990–91 reports,

{t}he total resources available to all eligible countries under these two facilities [SAF and ESAF] amount to SDR 8.7 billion.… After four years of SAF operation, by the end of July 1990, SAF arrangements had been approved for 20 countries in sub-Saharan Africa. The total amount committed for these countries was SDR 1.1 billion of which SDR 661 million was disbursed. As of the end of September 1990, 11 ESAF arrangements had been approved for African countries. The total ESAF resources committed to these countries for the three-year period amounted to SDR 1.3 billion, of which SDR 770 million has so far been disbursed {page 92}.

The arguments that the IMF would make to defend such performance are well known by now; but the fact remains that the IMF is not doing enough to contribute to the relief burden. It is undoubtedly true that many constraints operate on the IMF that do not afflict other Creditors. But these constraints are not as absolutely binding as one is often led to believe. In that connection, it should also be said that the maturities and grace periods of the structural adjustment and enhanced structural adjustment facilities, while generous in comparison with the IMF’ s nonconcessional facilities, are inappropriate for African countries. Refinancing of upper tranche Fund obligations should be done on IDA terms, or at the very least, on the terms proposed by Mr. Major in Trinidad for the uncancelled portion of official bilateral debt.

In 1990, a mechanism was created to deal with the problem of a few countries (such as Zambia, Sierra Leone, Sudan) that had built up large and chronic arrears in their payments to the IMF. This has commonly come to be known as the “rights approach” and involves freezing IMF arrears as of a certain date while reinstituting normal operational relationships between the IMF and the country concerned but without the IMF disbursing any new money. During a three- to four-year period of time the country services all current obligations to the IMF (including the interest payments on frozen arrears) and adheres to a Fund-monitored program. Each year the country builds up “rights” to accessing the IMF’ s concessional facilities until at the end of the period the IMF disburses a sufficient quantum of funds from the enhanced structural adjustment facility to clear the frozen arrears. This approach has broken the impasse that formerly existed in the IMF’ s dealings with deeply debt-distressed countries, such as Zambia, which were in large arrears. But it has the major disadvantage of such countries bearing the burden of unaffordable annual interest service charges to the IMF on large arrears balances. It results in other financiers effectively financing the IMF’ s debt service rather than in increasing net resource flows to the country. To make the rights approach more effective something more needs to be done about the interest on arrears that involves both a reduction in the amount of interest charged on arrears and its capitalization.

Finally, the world community has eschewed, without sufficiently careful consideration, the prospect of a small, noninflationary special SDR emission for the specific purpose of writing off World Bank and IMF debts owed by low-income African countries. This is perhaps not the forum to go into all the pros and cons of this proposal, which has been made before (by the author and others), but the opportunity is taken of raising it again.

Progress in reducing obligations owed to private creditors on any significant scale has simply not been made. Private debt is priced in secondary markets at a substantial discount but progress toward executing officially supported debt buy-back schemes, or in executing debt-equity swaps, is abysmally slow. That reflects both the obduracy of commercial bankers who are in no hurry to negotiate appropriately priced debt-reduction deals and the bureaucratic incompetence of agencies entrusted with the task of designing and negotiating buy-backs. There is a strong case to be made for creditor governments, especially those that have provided tax relief to banks at the time of their making provisions, to consider drawing back such relief if provisions are not translated into write-offs within a conscionable time period (not more than two years from now). Except for Nigeria, most commercial bank assets representing claims on African countries have now been fully provided for. Write-offs would do no damage to the balance sheets of banks. The amounts involved are trivial from the banks’ point of view but not from the viewpoint of debtor countries. Arrears and reschedulings of commercial claims are raising the cost of trade credit and of import prices to Africa.

The specific suggestions embedded in the foregoing would, taken individually or as a whole, make a significant difference to providing further, and necessary, debt relief to Africa and facilitate prospects for returning to a trajectory of sustainable long-term development. It is often argued that even with greater debt relief, the development problems of Africa are not going to be solved. That counterargument to the case for debt relief misses the point and sidesteps the issue. No one has ever argued that debt relief is or can be a panacea for curing all of Africa’s ills. What is being argued is that, in most of the region’s low-income countries, significantly greater debt relief than has been offered in the past is crucial to (indeed may even be a sine qua non for) any accompanying attempts at successful adjustment and recovery in those countries.

World Bank, Sub-Saharan Africa: From Crisis to Sustainable Growth (Washington, 1989).

A particularly egregious example of overinterpreting the evidence available (which was itself thin and contentious) was a report entitled Africa’s Adjustment and Growth in the 1980s, by the World Bank and the United Nations Development Program (UNDP) (Washington, 1989). That report engendered considerable controversy in Africa and in the international academic community with the Bank being accused of intellectual legerdemain and attracting a particularly sharp rebuttal from the ECA (African Alternative to Structural Adjustment Programmes: A Framework for Transformation and Recovery). More neutral and sober reflections on the adjustment experience, (though still biased toward somewhat more adjustment success) are contained in the two successive reviews of “Adjustment Lending Policies for Sustainable Growth” carried out by the World Bank in 1988 and 1990 respectively and “The Macroeconomic Effects of Fund-Supported Adjustment Programs,” by Mohsin Khan in Staff Papers. International Monetary Fund (Washington), Vol. 37 (June 1990), pages 195–231.

For example, in The World Bank’ s long-term perspective study, Sub-Saharan Africa: From Crisis to Sustained Growth, and in various speeches made by senior World Bank representatives at several conferences on the region’s situation, most notable the one held in Maastricht, the Netherlands, in July 1990.

This hypothesis is being rigorously tested in a research project being undertaken by Percy S. Mistry and Mathew Martin (with the full involvement of research teams from Ghana, Mozambique, Senegal, Tanzania, and Zambia) on “External Finance for Structural Adjustment in Africa” at the International Development Center, Queen Elizabeth House, University of Oxford. The preliminary findings of that research support the view expressed above. The findings of the research project are expected to be published in mid-1992,

See the companion paper in this volume by Mathew Martin.

For explanations and elaborations of these progressively liberalized terms and their application in particular cases, see the introductory text chapters in the summary volumes of the World Debt Tables (particularly for 1988–89, 1989–90, and 1990–91), which are published annually by the World Bank.

Under a research project entitled “Domestic Resource Mobilization in Africa: Examination of the Effects of Adjustment Policies,” by Percy S. Mistry and Machiko Nissanke (with the involvement of local research teams from Ghana, Kenya, Malawi, Tanzania, and Zambia) at the International Development Center, Queen Elizabeth House, University of Oxford, Preliminary findings are available and a final report is due to be published.

    Other Resources Citing This Publication