Debt Growth and the Prospects for Debt Reduction;The Case of Sub-Saharan African Countries
Author: Joakim Stymne and Michael Edo
Publication Date:
01 Jan 1989
ISBN:
9781451959680
Language:
English
Keywords:
WP; debt service ratio; interest payment; payments problem; debt service payment; annual debt service; short-term debt; payments relationship; terms of trade; payments situation; debt service receipt
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This paper analyzes the causes of growth of Africa’s debt burden, and discusses the factors that induced African countries to seek external loans as well as the factors affecting the supply of external financing. The paper studies the development of some measures of debt burden for different categories of African debtors, and arrives at a hypothesis regarding feasible levels of debt and debt service ratios. In a final section, the paper discusses the options for debt relief using a simulation of payments ability.

Abstract

This paper analyzes the causes of growth of Africa’s debt burden, and discusses the factors that induced African countries to seek external loans as well as the factors affecting the supply of external financing. The paper studies the development of some measures of debt burden for different categories of African debtors, and arrives at a hypothesis regarding feasible levels of debt and debt service ratios. In a final section, the paper discusses the options for debt relief using a simulation of payments ability.

I. Introduction

The debt burden of the poor countries in sub-Saharan Africa is emerging as a concern of creditors and debtors alike. There is a growing consensus that Africa has been at least as affected by the global debt crisis as any other region. The gap between the scheduled debt payments of African debtors and the debt service actually paid shows no tendency to shrink. During the recent past, several observers have suggested that increased concessional support, or even outright debt forgiveness, is required to give a reasonable chance of success to the adjustment efforts of debtors in sub-Saharan Africa (see, for example, Feldstein et al. (1987); U.N. (1988)). The leaders of the seven largest western industrial nations agreed at their summit meeting in Toronto in June 1988 to take specific steps to provide debt relief. In September 1988, their finance ministers endorsed a plan, based on this agreement, that is expected to ease the payments requirements of the poorest debtor nations by up to $500 million a year.

The economic problems of most countries in sub-Saharan Africa are grave. The industrial output of sub-Saharan Africa has fallen on average by 2.4 percent a year since 1980, and annual growth in both agriculture and services has averaged less than 1 percent during the decade. Real income was no higher in 1980 than in 1970, and it has fallen by more than 5 percent since 1980 (Table 1), resulting in a nominal GDP per capita of $307 in 1987 (World Bank (1988a)). The prices of Africa’s exports have remained on a downward trend since 1980, with the terms of trade dropping by more than 20 percent in just the two years 1986-87. 2/

Table 1.

Sub-Saharan Africa: Macroeconomic Indicators, 1970-87 1/

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Source: IMF, Research Department.

Sub-Saharan Africa here excludes Nigeria, Angola, Namibia, and South Africa.

In the past decade, the deterioration in the external debt position of African countries was “without parallel relative to other country groups experiencing debt service problems” (IMF Survey, June 1988). Total debt outstanding more than doubled from $47.6 billion in 1980 to $114.3 billion in 1987. The ratio of debt to exports increased from 85 percent to 330 percent during that period, while the debt service ratio (ratio of interest and amortization payments to exports) rose from 11 percent to 27 percent (Table 2). Although increasing debt obligations caused most of this deterioration, falling nominal export earnings also played a role.

Table 2.

Sub-Saharan Africa: Composition of Debt by Creditor, 1970-87 1/

(In billions of U.S. dollars)

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Source: IMF, Research Department.

Sub-Saharan Africa includes Nigeria but excludes Angola, Nimibla, arid South Africa.

The data on debt service refer to interest and amortizations actually paid, rather than originally contracted.

The data on Impact of rescheduling are based on (from 1980), Table IV-3 of World Bark (1988), with the timing of the Impact allocated according to length of consolidation period; and (before L980) on data from IMF, Research Department.

Percentage of exports of goods and nonfactor services.

This paper analyses the causes of growth of the African debt burden, and alternatives for reducing it. The first section analyzes the historical background to the borrowing of sub-Saharan Africa. It emphasizes the demand side of external borrowing: the reasons why these countries found it beneficial or even necessary to supplement domestic resources with external financing. It suggests that unsustainable policies were factors behind the debt growth in the 1970s, and that external shocks, a large debt overhang, and slowness of adjustmentwere reasons for the continued rapid debt growth in the 1980s.

The second section examines the sources of financing of the external current account deficits of sub-Saharan Africa, especially during the 1980s. It thus emphasizes the supply side of external borrowing. It notes the large involvement of official lenders, especially during the past decade, the declining activity of commercial creditors, and the increasing importance of reschedulings and other types of exceptional financing. It is argued that during 1984-87 the African countries’ current account deficits during 1984-87 were in net terms financed entirely through the rescheduling of debt payments due.

The third section studies the development of some measures of debt burden for different categories of African debtors: sub-Saharan Africa as a whole; the countries that are eligible for loans under the Fund’s structural adjustment facility compared with the countries that are not; the countries that have experienced payments problems in the 1930s compared with the countries that have not; countries grouped according to main type of borrowing (official, market, or diversified); and countries grouped according to main type of exports (agricultural, mineral, or fuel). Based on comparisons of experiences of various debtor categories, and based on the discussion in Appendix I concerning the interpretation of various measures of debt burden, it is concluded that as a group, the maximum sustainable debt service ratio of the African countries is 25-30 percent, which implies a ceiling on the debt ratio of 150-180 percent. The debt burdens of many African countries are already well in excess of these levels.

The fourth section explores some aspects of debt relief for sub-Saharan African countries. It outlines potential sources of relief. It also indicates potential problems with the implementation of debt relief schemes, once the creditors decide on providing such support. Finally, with the help of a simulation, it raises issues concerning the feasibility of reforming the economies at the same time as external payments relationships are normalized. It concludes that both debt relief and a rapid recovery of exports are prerequisites for reducing the debt burden to a sustainable level.

II. The Causes of Africa’s Debt Growth

1. Before 1980: consuming and investing

Up to the Second World War, nonsubsistence economic initiatives primarily consisted of production of cash crops and extraction of mineral resources. Investments in these sectors were mostly financed from abroad with private credits, often with the administrative and financial involvement of colonial governments. Significant investment activity in infrastructure, education, and health took place beginning in the 1950s when export earnings, which were buoyant as a result of the prolonged commodity price boom after the Korean War, contributed to the financing of the investment expansion. 3/

Government participation and intervention in the economy was substantial at independence and remained so thereafter, since the prevailing view was that the investments necessary for long-term growth and development would not materialize through private initiative alone. During the 1960s, the resulting public expansion was financed chiefly through a widening of the revenue base. Parastatals functioned as effective mechanisms for taxation of the rurally based export sector. Most countries in sub-Saharán Africa experienced generally positive export growth-up to 1970 (Svedberg (1988)). In addition, foreign aid receipts rose rapidly during the period, while the African countries had relatively little access to international capital markets until the 1970s. As a result of these factors, the countries generally avoided significant external borrowing in the pursuit of their growth objectives. 4/

The 1973 oil shock, followed by a boom in non-oil commodities, reversed this trend. The prices of many important African commodity exports rose with oil prices, and in the late 1970s, reached record nominal levels (Table 3; Figures 1 and 2). Non-oil commodity prices rose on average by 10.2 percent a year during 1970-80, with particularly strong gains in 1973-74 and 1976-77 (Table 1).

Table 3.

Prices of Some Major African Export Commodities, 1970-87 1/

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Source: International Financial Statistics (1988).

Coffee, cocoa, copper, and cotton are the most important non-oil exports of sub-Saharan Africa, accounting for 54 percent of the value of the non-oil primary commodity exports of the region in 1983/84 (Svedberg (1988)).

Figure 1:
Figure 1:

Commodity Prices, 1970-88

(Index 1973=100)

Citation: IMF Working Papers 1989, 071; 10.5089/9781451959680.001.A001

Figure 2:
Figure 2:

Commodity Prices, 1970-88

(Index 1979=100)

Citation: IMF Working Papers 1989, 071; 10.5089/9781451959680.001.A001

With generally rising export levels, commercial credit was readily available after the first oil shock in 1973, as oil money was recycled. External debt increased almost tenfold between 1970 and 1980, from $5.5 billion to $47.6 billion (Table 2), and the share of outstanding debt owed to commercial creditors rose from about 25 percent in 1970 to 40 percent in 1978.

The rapid growth in debt was nevertheless mainly demand driven. The public expansion that had begun before independence continued on the expenditure side throughout the 1970s, but revenues did not keep pace, and external borrowing was required to fill the gap. Borrowing was facilitated by the low level of real interest rates throughout the decade! the average real interest rate on new commitments was minus 21.8 percent in 1973 and rose to only minus 4.6 percent by 1979 (Table 4; Figure 3). 5/ After 1973, “oil importers initially increased external borrowing to compensate for oil price increases, and oil exporters borrowed for large investment programs. By the second half of the decade, African countries of all categories had embarked on ambitious public sector programs. Investments often took the form of development projects with active lender input into design and implementation. Imports demanded by urban consumers were subsidized by the governments, sometimes directly, sometimes through overvalued currencies. In addition, external borrowing to some extent paid for imports for private investments either directly through private borrowing or indirectly through the foreign exchange made available from public external borrowing related to the balance of payments. 6/ In years of falling export prices, countries borrowed to maintain consumption. In years of rising prices, with improved creditworthiness, these countries tended to borrow even more in order to expand development programs (Krumm (1985)).

Table 4.

Sub-Saharan Africa: Measures of Interest on External Debt, 1970-87 1/

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Sources: IMF, Research Department, International Financial Statistics; and World Bank (1988).

Sub-Saharan Africa includes Nigeria but excludes Angola, Namibia, and South Africa.

Average interest on new commitments is equal to what is stated in the World Debt Tables.

The export unit value is based on the price development of a representative basket of African exports, as defined in the World Economic Outlook.

LIBOR is equal to the average return in percent per arsiun on six-month U.S. dollar deposits.

Average interest on all debt is based on interest paid by the countries without payments problem as a share of their outstanding debt, which is the only group for which interest paid is equal to interest scheduled. This average interest rate gives a good indication of interest requirements on outstanding debt, to the extent that the terns of these are representative for all debt of sub-Saharan Africa.

Figure 3:
Figure 3:

Real Interest Rates in Sub-Saharan African Countries, 1970-87

(In percent)

Citation: IMF Working Papers 1989, 071; 10.5089/9781451959680.001.A001

One reason revenues did not keep pace with the expansion of public spending was that regulated, low producer prices discouraged the production of export crops in spite of world price increases, and made it difficult to extract additional revenue from the rural sector. At the same time, the urban sector tended to be a major recipient of open or implicit subsidies rather than a source of revenue.

Gross capital formation as a share of GDP was well over 20 percent throughout most of the decade, but the returns on investment were poor. Import volume grew at an annual average rate of almost 3 percent during the 1970s, while export volume rose by less than an average 1 percent a year (Table I); sub-Saharan Africa’s contribution to the total value of exports from all less developed countries fell from 13.5 percent in 1970 to 8.4 percent in 1980 (Svedberg (1983)), indicating that the yield on the investment, in terms of potential foreign exchange earnings or savings, was low. In retrospect, it would seem that an unsustainable policy environment was maintained during the 1970s with the help of foreign credits. 7/

2. External Shocks in the 1980s

The 1980s ushered in a new phase in African economic performance in general, and external economic relations in particular. Two related developments at the start-of the decade highlighted the vulnerability of the African economies: the beginning of a protracted fall in terms of trade and a large jump in real interest rates. 8/ Commodity prices, some of which had already started to decline in 1978, fell on average by 3.4 percent annually during 1980-87. Oil prices, after large gains in 1979 and 1980, later fell sharply and by 1987 were lower than they had been since 1978, even in nominal terms (Table 3; Figure 2). Terms of trade initially deteriorated less rapidly than export prices, as African import prices also declined during the early years of the 1980s; however, import costs have increased substantially since 1986, leading to a fall in terms of trade of 20 percent in 1986-87 (Table 1).

The decline in export prices has not only reduced the purchasing power of African exports, but has also made the servicing of outstanding debt more costly in terms of domestic resources. The global economic contraction of 1981 affected Africa differently than it did Latin America, where the increase in commercial bank lending rates immediately translated into higher nominal interest payments on outstanding debt. Since a much Larger fraction of sub-Saharan Africa’s debt was extended on fixed-rate terms [80 percent of total debt in 1981 (World Bank (1988b)), compared with 38 percent for Latin America], nominal interest payments on outstanding debt did not increase significantly. Neither did average terms on new commitments, the interest rates for which rose from 7.0 percent in 1980 to 8.1 percent in 1981.

Nevertheless, real interest on the debt of sub-Saharan Africa rose sharply in 1981. The real, interest rate increased from large negative values in the 1970s to large positive values at the end of 1988, according to any of several possible deflato-s. After being negative up to 1980, the real rate (average interest on new commitments deflated by a three-year moving average of the change in the export unit value) jumped to positive 9.5 percent in 1981, rose further to 14.5 percent in 1982, and was still 7.8 percent by 1986 (Table 4; Figure 3). It may be noted that real rates were higher than nominal rat s in 1987, reflecting the downward trend in export prices.

Falling nominal interest rates during recent years have also conferred smaller benefits on sub-Saharan Africa than on other borrowers. While the six-month LIBOR (London Interbank Offered Rate) rose from 6.1 percent in 1976 to 16.7 percent in 1981 and then fell to 6.9 percent in 1986, average interest on new commitments of sub-Saharan Africa changed from 5.4 percent to 8.3 percent to 5.3 percent, and average nominal interest on total outstanding debt rose from 3.3 percent to 5.9 percent to 6.2 percent (Table 4). As is borne out in Figure 4, the high market interest rates of the first half of the decade were only gradually translated into harder nominal terms for the African debtors. Similarly, it takes time for the average terms for Africa to decline, and in 1987 the African debtors paid close to market rates on their external debt.

Figure 4:
Figure 4:

Nominal Interest Rates in Sub-Saharan African Countries, 1970-87

(In percent)

Citation: IMF Working Papers 1989, 071; 10.5089/9781451959680.001.A001

Exchange rate fluctuations also added to the debt burden. The dollar depreciation of the last few years increased the dollar value of outstanding debt even where there was no net borrowing, since the African debt is denominated in a variety of currencies. It is difficult to calculate the effect of this factor on the entire stock of debt, but according to the World Bank (1988b), the dollar value in 1987 of principal repayments of sub-Saharan Africa on World Bank loans was equal to 124 percent of book value (i.e., the dollar value at the time of borrowing). This varied between 92 percent for Madagascar and 215 percent for Guinea.

3. The weak policy response

In the African countries, the response to these changing circumstances was weak. In the early part of the decade, levels of consumption were maintained through increased external borrowing, reduced domestic saving, and eventually, reduced levels of investment. External debt rose from $47.6 billion in 1980 to $/0.3 billion in 1983, and to $114.3 billion in 1987. Saving as a share of GDP fell from 16.7 percent in 1980 to as little as 8.5 percent in 1983, and was an estimated 10.9 percent in 1987 (World Bank (1988a)). Gross capital formation as a share of GDP fell from 20.5 percent in 1981 to 16.1 percent in 1983 (Table 1). Consumption increased from 80.3 percent of GDP in 1980 to 88.3 percent in 1983, and was still 84.8 percent in 1987 (World Bank (1988a)). The external balance deterioration occurred even though the volume of imports had actually been compressed continuously during the period: import volume fell by 12 percent between 1981 and 1983 and by’ an additional 5 percent by 1987 (Table 1). This reduction in import volume led to low capacity utilization and a reduction, of domestic production.

It is only in recent years that some countries have made strong efforts to implement effective adjustment programs. In a comparison of African countries implementing strong reform programs with countries that had weak or no programs, the World Bank (1988a) noted that the average fiscal deficit of the former group fell by several percentage points during the period 1980-87 while it increased for the latter. Moreover, the countries with/strong programs managed both to reduce real exchange rates more and to improve agricultural incentives further than did those with weak programs. They reduced inflation somewhat, and achieved positive domestic real interest rates. GDP growth in the reforming countries rose from 1 percent annually in 1980-85 to almost 4 percent in 1986-87, while growth in the countries with weak programs remained at about 1 percent. However, although the outlook is better for the reforming countries, no country in sub-Saharan Africa that has experienced payments problems in this decade can be regarded as having solved its debt problem.

III. The Search for External Financing

During the period 1980-87, when sub-Saharan Africa’s debt more than doubled, there was a shift in the sources of financing, relative to the experience of the 1970s. Table 5 provides a breakdown by lender group of the financing of total outstanding debt in 1980 and 1987, and the flow of new lending between those two years. There is also a very rough estimate (based on World Bank (1988b)) of the share of the 1987 debt service of $9.2 billion that was paid to each creditor category. Three points that stand out are the crucial role of official lenders, the retreat from the continent by commercial lenders, and the rise of exceptional financing.

Table 5.

Sub-Saharan Africa: Typical Loans

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Very approximate.

Concessional and nonconcessional loans represented 37 percent and 63 percent, respectively, of total debt in 1986.

1. Developments in the 1970s

The 1970s were characterized by the ready availability of external finance. First, a significant amount of resources was provided through non-debt-creating flows. During an average year, the sum of direct foreign investment and official transfers tended to finance approximately half of the current account deficit (when the current account is calculated as excluding official transfers). These flows increased steadily, doubling from about $1.5 billion a year at the beginning of the decade to $3 billion annually at the end, although they remained relatively constant in real terms (Table 6). Official transfers (development aid in the form of grants) are typically more concentrated on the poorer countries, while direct investment takes place to a large extent in the countries that have more advanced economies.

Table 6.

Sub-Saharan Africa: Balance of Payments, 1970-87 1/

(In billions of U.S. dollars)

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Source: IMF, Research Department.

Sub-Saharan Africa Includes Nigeria, but excludes Angola, Namibia, and South Africa.

“Interest due” includes returns to foreign-held equity. This was a substantial fraction of the category at the beginning of the period, but is much less significant now. However, this means that the site of the category “current account net of interest payments on external debt” should be reduced by $1 billion to $1.5 billion per year throughout the period to be more accurate. Note that medium- and long-term liabilities and interest due are expressed on a contractual basis. Actual flows would also include rescheduled amounts. Discrepancies of rescheduled amounts between this table and Table 2 should mainly bo a consequence of allocation of timing of impact of rescheduling.

Current account, including transfers, as a percentage of exports of goods and nonfactor services.

Second, official long-term lending grew throughout the period, without large variability in the growth rate. Claims of official creditors (bilateral and multilateral) rose from $3.7 billion in 1970 to $28.8 billion in 1980 (Table 2). Such lending was mainly in the form of development projects and programs, on concessional as well as on market terms. Part of the increase in multilateral official lending was a result of the emergence during the late 1970s of new multilateral institutions (the OPEC-related funds), which contributed to the recycling of OPEC-member surpluses.

Third, commercial credits were available chiefly to the relatively better-off countries. The quantity of commercial lending jumped as commodity prices began to weaken some time after the first oil shock, causing commercial lending to grow more rapidly than other categories at the end of the 1970s. Significant borrowing took place on the Euromarkets, especially in the years after 1977. Outstanding debt to private creditors rose from $1.6 billion in 1970 to $18.8 billion in 1980. The commercial loans were more expensive than other types of credits, but they had the attraction of ready availability and the absence of requirements regarding the economic policies pursued by the borrower.

By 1980, the sub-Saharan African countries had incurred long-term debt (including both nonguaranteed private debt and debt to the Fund) of $47.6 billion in 1980, of which 38 percent was owed to bilateral official creditors, 23 percent to multilateral creditors, and 39 percent to commercial creditors. During the 1970s, most of the current account deficits were financed on the capital account as the impact of exceptional finance was still small. There were only a few reschedulings and the countries did not generally accumulate significant payments arrears. The situation changed during the following decade.

2. Tightened supply of credit and emerging payments problems: 1980-83

Developments during the 1980s can be divided into two phases: 1980-83 and 1984-87,. The access to external financing has been constrained throughout the decade, but there was a break between these two periods, as net financing on the capital account dropped sharply in 1984 and exceptional financing substituted for normal credits.

During the 1980-83 period, the payments situation of sub-Saharan Africa deteriorated sharply after the second oil shock. A majority of countries still expected that the deterioration of external circumstances would be temporary, and therefore attempted to maintain previous economic policies and consumption levels. With falling terms of trade and rising debt service requirements, the lack of response in the form of higher export volumes or lower import volumes resulted in rising current account deficits. The combined current account deficit (net of official transfers) of sub-Saharan African countries rose from $7.4 billion in 1980 to more than $18 billion in each of the following two years and to $13.9 billion in 1983 (Table 7). Many countries with serious payments problems, lacking access to adequate external financing sources, depleted foreign exchange reserves and accumulated payments arrears.

Table 7.

Sub-Saharan Africa: External Financing, 1980-87 1/

(In billions of U.S. dollars)

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Sources: IMF, Research Department; and World Bank (1988).

Sub-Saharan Africa includes Nigeria, excludes Angola, Namibia, and South Africa. This table is chiefly based on the same data as Table 6, but to some extent on Table 2. Here, the current account is taken to exclude official transfers, and the capital account to exclude direct investment and SDR allocations, etc. Amounts rescheduled are calculated from the same source as in Table 2. Since medium- and long-term liabilities are from the balance of payments data, they are on a contractual basis, and thus refer to new lending minus scheduled repayments. Actual flows from creditors to debtors in addition include rescheduled amounts. The residual is caused by the fact that the table is based on sources that are not always consistent. The estimate of arrears is particularly uncertain. Interest payments consist of interest actually paid. Net transfers are calculated by adding net medium- and long-term liabilities to obligations rescheduled and net use of IMF credits; and deducting interest paid.

World Debt Table definitions: net flows are disbursements of publicly guaranteed debt minus actual repayments, and are assumed to be equal to net medium-and long-term liabilities plus the impact of rescheduling in the WEO dat.1. Net transfers in the World Debt Table data are net flows minus Interest payments, and are assumed to be net medium- and long-term liabilities plus rescheduling minus interest payments in the WEO data.

Official transfers and direct investment remained more or less unchanged in nominal terms through these years. Thus, with growing current account deficits, the share of nondebt-creating flows in financing was reduced considerably from the previous decade. Moreover, official lenders, both multilateral and bilateral, just maintained their nominal levels of new lending, causing the flows both of grants and official development loans to decline in real terms during 1980-83. These donors and lenders were unwilling to increase flows partly as a result of the recession in the developed economies. With increases in debtor countries’ contracted repayments of principal, net borrowing from official sources declined, in nominal as well as real terms.

The case of commercial lenders was similar, as their nominal level of new lending was unchanged (at least initially), causing a fall in real net lending. Only four countries (Congo, Cote d’lvoire, Gabon, and Nigeria) obtained more than two thirds of their borrowing from commercial sources in 1978-82, and most African countries obtained much less than that.

With severe external payments pressures, many countries turned to the Fund for assistance beginning in 1980. The use of IMF credits increased from very low levels during most of the 1970s to an average $1.2 billion annually in 1981-83. The Fund programs provided financial relief and were intended to permit implementation of policies consistent with a sustainable external payments position. In addition, adjustment programs supported by the IMF have a catalytic effect on the availability of credits from other sources, not least because a Fund program is in practice a prerequisite for obtaining rescheduling of payments in the Paris Club. Almost $7 billion of payments due on both commercial and official debt were rescheduled during these four years.

The cumulative current account deficit during 1980-83 was $58.7 billion before non-debt-creating flows, with financing primarily in the form of medium- and Long-term borrowing. Net long-term borrowing was $23.1 billion. 9/ If rescheduled amounts are added, as well as net purchases from the Fund, net medium- and long-term flows were $33.7 billion. 10/ The remaining $10.6 billion of the cumulative current account deficit was accounted for by payments arrears, use of reserves, and a few other, smaller transactions (Table 7). 11/

3. Falling resource flows and rising debt stock: 1984-87

In 1984-87, as more countries initiated policy reform, rising export volumes and declining import volumes eliminated trade deficits. However, this was only partly reflected in the current account deficits as the service balance remained in deficit, with a rising share of interest payments in the service debits. As a consequence, the current account (net of official transfers) remained in deficit, ranging between $6.3 billion and $12.9 billion annually, and resulting in a cumulative deficit of $39.1 billion (Table 7).

In response to the payments problems of the debtors, some creditors attempted to reduce their exposure, while others increased flows. The net result was a reduction in resource flows to sub-Saharan Africa. On the one hand, after having been nominally unchanged at about $3 billion for several years, official transfers rose to $4.5 billion by 1987, representing an increase in total transfers from $12.8 billion during 1980-83 to $15.5 billion during 1984-87. On the other hand, net medium-and long-term lending declined sharply from $23.1 billion in 1980-83 to minus $1.0 billion in 1984-87 as new long-term lending was more than offset by planned repayment of principal (Table 7).

Estimates from the World Debt Tables (WDT) (World Bank (1988b)) give some indication of the sources of the decline in net lending. While not entirely consistent with the numbers in the World Economic Outlook (WEO) data base, which are otherwise used in this paper, the WDT data provide a breakdown of the changes in disbursements by type of lender. Between 1983 and 1984, according to the WDT, disbursements of new loans from official bilateral creditors dropped from $3.1 billion to $2.1 billion, and with an increasing amount of principal actually repaid, net flows fell from $2.6 billion to $1.5 billion. Even including the impact of rescheduling, these flows fell slightly in the two following years. Net lending from multilateral creditors rose from 1984, however, particularly in the form of concessional loans to the poorest countries: IDA disbursements (World Bank loans on very concessional terms) more than doubled between 1983 and 1986, rising from $0.6 billion to $1.3 billion (World Bank (1988b)). At the same time, lending from private creditors dropped precipitously. New lending fell from $5.8 billion in 1983 to $2.6 billion in 1984, and net flows (new lending less actual repayments of principal) fell from $3.5 billion to minus $0.3 billion and remained negative after 1984. If interest payments are taken into account, there has been a substantial transfer of resources from sub-Saharan Africa to the banks. 12/

Thus, both the WEO and the WDT data confirm that there was a large decline in resource flows between 1983 and 1984. However, the WDT data reveal that although net borrowing from both official and commercial creditors fell, the reduction in commercial credits was particularly sharp. This, combined with the rise in concessional multilateral lending and official transfers, implied that the impact on the poorer countries of declining resource flows was probably relatively weak. Nevertheless, the fact that scneduled medium- and long-term lending was minus $1.0 billion in 1984-87, as reflected in the WEO data, and the fact that interest payments due on external debt stood at $20-$23 billion in 1984-87 indicate the difficult payments situation of African countries during this period.

The most notable development in the financing of these deficits was the continued rise in importance of rescheduling agreements as a response to the payments shortfalls of the African debtors. A debtor unable to meet its current payments obligations has the option of requesting postponement of payments at the Paris Club (official bilateral debt) and the London Club (commercial debt).

The first African country to reschedule debt in the Paris Club was Zaire, in 1976. Between 1976 and 1980, 10 such agreements involved African countries; in 1981 and 1982 there were 12, and since 1983 there have been on average 10 each year. Between 1976 and June 1986, 57 of 84 Paris Club agreements concerned Africa (Dillon and Oliveros (1987)). For some countries, there have been several rescheduling exercises. For example, by the end of 1987, Zaire’s obligations had been rescheduled nine times at the Paris Club. Between 1984 and 1987 obligations of approximately $23 billion were postponed as a result of reschedulings (Table 2). Of this, about $14 billion was bilateral official debt, while the rest was commercial debt.

The payments problems of a debtor wishing to reschedule are presumed to be of a temporary nature. The creditor community normally expects that the debtor will show its intentions to honor future obligations by agreeing to adhere to an appropriate adjustment program, in order to remove the causes of the imbalances, restore growth, and normalize payments relationships. The volume of debt service postponed is determined in relation to the size of the estimated financing gap. This gap consists of the difference between financing needs given a successfully implemented reform program on the one hand, and on the other, financing availability, given expected new landing from banks, governments, and international organizations. The rescheduling agreements provide lengthened maturities but are in theory not supposed to reduce the net present value of the debt payments to be made. Non-concessional loans tend to be rescheduled at slightly increased interest rates, and concessional loans are often rescheduled at market rates.

If the financing gap exceeds the debt relief provided for in the rescheduling agreement, it is difficult for the debtor to secure new sources of financing, especially in the short term. This may be a result of insufficiently strong adjustment efforts or of negative external developments. In response, the past few years have seen several innovations in the rescheduling negotiations: the length of consolidation periods has been increased, terms of rescheduling have been made concessional, and arrears and interest have increasingly been covered by the agreements. The June 1988 Toronto proposals for debt reduction provided for some forgiveness to be implemented under the auspices of the Paris Club. There are indications that at least in certain cases, the Paris Club negotiations are in effect being transformed from a procedure which provides temporary payments relief to one which allows a permanent reduction of obligations.

Multilateral institutions are by convention preferred creditors, which means that a significant share of African debt service cannot be relieved through rescheduling. These institutions (including the Fund) accounted in 1988 for about 28 percent of debt service paid. In some individual cases (such as Zambia) the multilateral share exceeded 40 percent. Some of the willingness in recent years of multilateral institutions to provide more new financing can be seen against this background.

The cumulative current account deficit of sub-Saharan African countries during 1984-87 was $39.1 billion before and $19.9 billion after non-debt-creating flows. Net long-term borrowing was equal to minus $1.0 billion (i.e., scheduled repayments exceeded new lending) but with rescheduling of contractual obligations (and subtracting repurchases from the Fund) net flows were $21.7 billion. 13/ Finally, the cumulative net effect of the use of reserves, arrears, and the other categories of external financing was minus $1.8 billion (Table 7), with the result that the entire current account deficit after non-debt-creating flows was financed through reschedulings. There was no net financing on the capital account, which on average had been in a small deficit since 1984. On a net transfer basis, the creditors as a group provided sub-Saharan Africa with only $3.9 billion in 1984-87, while their claims rose by $44.1 billion. In effect, external borrowing has since 1984 chiefly financed interest payments. 14/

IV. Africa’s Excessive Debt Burden

The long-term external debt of sub-Saharan Africa more than doubled during 1980-87, and the decade has been characterized by economic decline. Meanwhile, to take one example, Korea’s debt increased from $19.2 billion in 1980 to $35.8 billion in 1986 without long-term external payments disturbances and without raising serious questions about the fundamental viability of the economy. The main difference lies in the fact that Korea’s ability to service its debts has improved at the same pace as the growth of the debt, whereas the African debtors’ ability co pay their debt has not. In the Korean case, a sound economic base and appropriate macroeconomic management made it possible to avoid a deterioration of the external position in the early 1980s (Collins and Park (1987)).

Korea’s debt ratio (defined as the ratio of total outstanding external debt to exports of goods and nonfactor services) fell from 132 percent in 1980 to 108 percent in 1986 (World Bank (1988)), while Africa’s grew from 85 to 331 percent between 1980 and 1987 (Table 2). Korea’s debt service ratio (defined as the ratio of actual interest and amortization payments on external debt to exports of goods and nonfactor services) rose from 12.2 percent to 16.7 percent, while that of sub-Saharan Africa rose from 11.0 to 26.7 percent. The scheduled debt service ratio of Korea was the same as what was actually paid, while the scheduled debt service ratio of sub-Saharan Africa was about 60 percent.

These two measures are convenient indicators of a debtor’s capacity to service its debts. The debt ratio refers to the long-term ability to service debts (the debtor’s solvency), while the debt service ratio refers to the ability to meet current payments (the debtor’s liquidity). 15/ It is not possible to identify unambiguously a certain debt ratio as a “point of insolvency,” or a particular debt service ratio as a “point of illiquidity.” But there is cause for concern if either measure deteriorates substantially over time, and an attempt can be made to derive rules of thumb for determining the level at which a debt ratio or a debt service ratio may predict imminent payments problems. The following sections discuss the development of these measures of debt burden for various categories of countries in sub-Saharan Africa.

1. Sub-Saharan Africa as a whole

The increasing burden of African debt as expressed through the measures of liquidity and solvency for various debtor categories are summarized in Table 8 and displayed in Figures 5 through 12. After a slow deterioration in the 1970s, the magnitude of the burden has grown rapidly since 1981, when export prices stagnated and a larger share of export earnings was required for debt service payments. At the same time, the share of debt to be amortized started to rise for many debtors. Subsequently, weak expert prices and only small gains in export volumes, in conjunction with further debt accumulation, caused an accelerated deterioration in liquidity and solvency.

Table 8.

Sub-Saharan Africa: Measures of Debt Burden by Country Category, 1970-87 1/

(In percent)

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Sources: IMF. Research Department: and World Bank (1988).

Sub-Saharan Africa includes Nigeria, but excludes Angola, Namibia, and South Africa. See Table 9 for definition of country categories.

The debt ratio is the ratio between outstanding debt and export earnings. Export earnings consist of experts of goods and nonfactor services.

The debt service ratio la the ratio between debt service payments and export earnings.

The “scheduled” debt service ratio Is the ratio between actual debt service plus rescheduled amounts and export earnings. Note that it does not include unscheduled arrears. Also, the timing of rescheduled amounts may not always be correct. Debt service/total debt Is the ratio between debt service payments and total outstanding debt. Outstanding debt includes long- and medium -term guaranteed and unguaranteed debt, and debt cued to the Fund.

Debt service payments consist of actual amortization and interest payments; including Fund obligations.