{UAH} Background to the African Debt Crisis

Afuwa Kasule,

You may find this article instructive.

Cheers,

Bobby

Background to the African Debt Crisis

1.01 The debt crisis, or perhaps more accurately, debt cancer 1 that has

spread across Africa in the last decade, needs little introduction. Much has

already been said about the causes, consequences and costs - economic,

social, human and ecological - of that affliction and about the structural

adjustment and economic reform measures which have been taken to cope

with it on a continental scale. The reasons which gave rise to excessive

African indebtedness in the 1970s and early 1980s, and which caused it to

balloon from $140 billion when the crisis emerged in 1982 to over $270

billion in 1990, have been amply documented elsewhere.2 It would be

redundant to go into them at length again here.

1.02 Suffice it to say that Africa's over-indebtedness is not attributable, as

many creditors would have it, merely to poor governance, rapacious and

corrupt leaderships, protracted civil wars in too many countries on the

continent; no democratic checks and balances on government borrowing

and spending, excessive population growth, and the stubborn pursuit of

economic policies which contributed to the relentless impoverishment of a

rich continent for over two decades. All of these factors have indubitably

1 It is odd to continue referring to a phenomenon which has lasted for over eight years as a

crisis. It is more like a cancer because the debt disease has spread to virtually every corner of

the continent; it has had a debilitating effect on the life of Africa's economies, and it is proving

singularly resistant to cure by the remedies which have been attempted thus far.

2 For a detailed account of how the African debt crisis arose and developed readers are

referred to: (1) "African Debt: The Case for Relief for sub-Saharan Africa" by Percy S.

Mistry, Oxford International Associates, 1988; (2) "The External Debt of sub-Saharan Africa:

Origins, Magnitude and Implications for Action" by Kathie L. Krumm, World Bank Staff

Working Papers #471, July 1985; (3) "African Debt: The Search for Solutions" by Tony Killick

& Matthew Martin, UNARP Briefing Paper no.l, June 1989. The causes, effects and possible

solutions to the African debt crisis were the subject of an earlier Conference on "The

Challenge to Recovery & Growth: Finding Solutions to Africa's External Debt" sponsored by

the African Development Bank and held in London on April 18-19, 1988. The Collected

Papers presented at that Conference provide useful source material, as do a host of country

economic reports, special reports and working papers published by the UN Economic

Commission for Africa, the World Bank and the International Monetary Fund. These are too

numerous to single out for special mention.

From: African Debt Revisited: Procrastination or Progress? 9

FONDAD, The Hague, 1992, www.fondad.org

played a major part. But Africa's crisis has been severely exacerbated by

several other reasons as well, including:

(a) thoughtless and irresponsible over-lending by private and official

creditors, during the commodity boom of the 1970s, without which

irresponsible over-borrowing by African governments on this scale

could not possibly have occurred;

(b) the persistence of negative real interest rates during most of the 1970s in

global financial markets caused by lax monetary and fiscal policies in

industrial countries which made it economically rational for developing

countries to borrow externally (rather than save or attract equity

investment) for development and consumption;

(c) the targetting of developing countries in general, and oil-exporting

countries in particular, as major export markets to be provided with

too-easy credit to facilitate the adjustment of industrial countries to the

two oil-shocks (of 1973 and 1979);

(d) the global monetary shock of1979-81, which aimed at ridding the world

of inflation but had the collateral impact of inducing a deep and long

recession, particularly in debt-ridden developing countries where the

recession lasted for 70 months instead of 16 in the OECD world, and

which caused commodity markets and prices to collapse;

(e) over-reliance on external savings between 1979-83 by African

governments' unwillingness to increase domestic savings and cut

domestic consumption in the erroneous belief [encouraged in some

instances (e.g. Zambia) by the international financial institutions - IFls]

that the commodity price collapse would be short-lived;

(f) a prolonged and devastating drought between 1981-84 which severely

impaired the continent's agricultural and cash crop production and

resulted in extensive damage to output and to the financial structure of

Africa's fragile economies;

(g) the emergence of high, positive real interest rates throughout the 1980s

which compounded Africa's debt servicing and debt accumulation burdens;

10 From: African Debt Revisited: Procrastination or Progress?

FONDAD, The Hague, 1992, www.fondad.org

(h) volatile exchange rate movements throughout the 1980s with US dollar

depreciation between 1985-90 resulting in increasing the dollar value of

Africa's outstanding debts, over a half of which were denominated in

currencies or composites which appreciated against the US dollar;

(i) repeated official and private reschedulings, often on punitive terms in

the early years of the debt crisis, which resulted in further increasing

the outstanding level of debt while providing temporary, but totally

insufficient, cash-flow relief;

(j) poor and impractical advice by IFls and official creditors on the extent

of debt relief African governments needed to negotiate and how they

might adjust, coupled with poor management by the same governments

of external debt records, policies and priorities resulting in several

missed opportunities to improve· their situations;

(k) the building up of egregious arrears which creditors have tolerated to a

point of doing more damage to restoring disciplined debtor-creditor

relationships than if more sensible action to reduce debt and debt

service burdens had been taken by them in the first place; and last, but

definitely not least,

(1) protectionism in the world's markets for agricultural products and lowtechnology

manufactures, which makes it particularly difficult for

African countries to diversify and increase exports to hard currency

markets, thus making it doubly difficult for them to earn their way out

of the debt trap.

1.03 Several attempts have been made to explore the impact of these and

other reasons more fully on the premise that unless the causes for Africa's

predicament are properly understood, appropriate solutions will be impossible

to design. It would be· unproductive to revisit here what has been covered

already elsewhere. There is now ample appreciation of the causes and the

implications of Africa's debt burdens among its creditors, in the international

community at large, and among quite a few (though unfortunately not yet all)

of its governments. Indeed that has been the principal reason for creditors and

donors having exerted considerable effort to deal with the problem much more

seriously and responsively at least since 1987-88.

From: African Debt Revisited: Procrastination or Progress? 11

FONDAD, The Hague, 1992, www.fondad.org

1.04 Success in achieving a durable solution has been elusive not because

Africa's situation is inadequately appreciated or because there is lack of

consensus on what the problems are and where the solutions lie. All

creditors, even the reluctant and occasionally obstructive private banks,

appear to agree that Africa's debt problem, and particularly that of the lowincome

countries south of the Sahara, needs special attention. It is generally

accepted that the sub-Saharan debt problem is different to those of middleincome

developing countries in North Africa, Latin America, Eastern

Europe and the Middle-East. It is comparatively small in absolute dollar

terms. Sub-Saharan debt is less than a ninth of the total external debt of all

developing countries. But, in relative terms it has crippled, and unless

tackled will continue impairing, the ability of African economies to reverse

steadily declining per capita incomes. It is not widely appreciated that

annual debt service burdens remain excessively onerous although actual

payments of principal and interest by low-income countries in sub-Saharan

Africa in 1990 were less than 37% of scheduled debt service (after repeated

rescheduling). Yet, even at that reduced level they accounted for over 80/0

of the region's estimated GNP in 1990 and 28% of export earnings;

implying that scheduled payments would have absorbed 22 % of total subSaharan

output and nearly 70% of its export earnings in thatyear!

1.05 If the causes and consequences of Africa's chronic over-indebtedness

are so widely understood, what then is the problem? Why has movement

towards a solution for reducing debt and debt servicing burdens to levels

which fall within Africa's capacity to repay, and still leave enough by way of

resources for investment and growth, been so slow and painful? Why have

African governments, their creditors and other external interlocutors not

been able to act in a more resolute and meaningful fashion to reduce debt,

as an essential precondition to achieving the modest 1% per capita income

growth target which has become the standard by which low-income Africa's

recovery efforts are now gauged? And why, after grant flows to Africa have

increased from $6 billion in 1982 to nearly $12 billion in 1990, after debts

totalling nearly $7 billion have been cancelled, and a further $1 billion

swapped or converted in one way or another, have Africa's outstanding

obligations continued to climb inexorably upwards?

1.06 There are several answers to these questions. All of them shed some

light on reasons for the glacial pace of progress which leaves Africa

vulnerable to its immense potential remaining unrealized. But they leave a

12 From: African Debt Revisited: Procrastination or Progress?

FONDAD, The Hague, 1992, www.fondad.org

sense of dissatisfaction that the obstacles which remain cannot be overcome

more quickly and decisively. Taken together they reflect poorly on the

intentional, or inadvertent, inability of different "actors" in creditor

countries - politicians, academic economists, senior government policymakers,

aid officials, treasury officials, export credit agency (ECA) officials,

and so on - to exert the same enthusiasm and political will, as displayed in

other instances closer to home, in relegating the African debt crisis to

history; thus enabling countries on that benighted continent to get on with

confronting the future without being dragged down by the debilitating

encumbrances of the past. They also reflect the abject inapplicability and

failure of the Paris Club debt rescheduling exercise which, though intended

to help, may actually have seriously hurt Africa's debt situation and its

prospects for recovery.

1.07 It is not easy, for instance, to explain the contrast between the urgency

with which politicians and governments in the industrial world, and the Paris

Club, responded to the crisis of Eastern Europe in the last two years and their

negligent, almost desultory foot-dragging over the debt crises of Africa and

Latin America over the last eight. Having repeatedly said that there were no

public resources to devote to dealing with the debt problem, they found the

money - over $13 billion - almost instantly to capitalize a new European Bank

for the reconstruction of Eastern Europe; a bank whose raison d'etre remains

in doubt. Similarly the Paris Club, after repeatedly claiming that there was no

political inclination in GECD countries, to go beyond the Toronto terms

(explained later) applicable to Africa's low-income countries, turned around

and recently concluded far more generous agreements with Poland and Egypt.

1.08 The reasons for the slow rate of progress in coming to terms with the

clear need for rapid and large-scale debt reduction. programmes for Africa and

low-income Africa in particular - are many. They include, among others:

(a) perennial (and unjustified) concern on the part of creditors,

especially commercial banks, that debt reduction for Africa on the scale

necessary - no matter how justified it might be 3 - would serve as a precedent

3 This type of blanket concern about potential portfolio contamination contravenes the

bankers' own insistence that each debtor case be treated on its own merits (the case by case

approach). In Africa the case can clearly be made for most low-income countries that debt

reduction on a large scale, with the burden of such reduction being shared by both official as

well as commercial creditors, is absolutely necessary. That case has been made in all too many

instances not by the governments themselves but by agencies like the World Bank and IMF.

From: African Debt Revisited: Procrastination or Progress? 13

FONDAD, The Hague, 1992, www.fondad.org

for similar action to be taken elsewhere and thus weaken the bargaining

position of banks in exerting pressure to maintain debt service flows from the

developing world at unrealistically high levels; (b) the unfortunate reality that

Treasury and ECA officials in GECD countries continually ride roughshod

over the more intelligent, knowledgeable and sensitive views of their

counterparts in aid ministries; (c) concern on the part of creditor governments,

and of some people in the IFls, that debt reduction would further exacerbate

"moral hazard" by rewarding bad policies and behaviour on the part of

debtors;4 (d) the popular belief that debt reduction would release the pressure

on forcing a more disciplined approach to overall resource management in

African countries; (e) rather than helping disabled economies to recover debt

reduction would only serve to line, to an even greater extent than now, the

pockets of corrupt African leaders and civil servants in countries where graft

has now become endemic; and finally (e) African governments have been

insufficiently enthusiastic about embracing donor-advocated structural

adjustment and policy reform prescriptions to justify large scale debt reduction.5

4 A corollary of this belief (and one which is unproven in reality) is that a tight, short-leash

approach to debt relief, doled out grudgingly year by year in elaborate, expensive and tediously

repetitive Paris Club reschedulings, provides greater and more effective leverage to creditors and

IFIs in getting African governments to change the course of their economic policies and to endure

with the consequences of such change.

5 This reason needs to be examined more carefully and seriously. In several African countries

there is evidence emerging that governments have been cautious about proceeding with Bank and

Fund adjustment prescriptions NOT because they enjoy being recalcitrant, or because they find

such reforms to be politically difficult or administratively unworkable, but because the

prescriptions are not resulting in the advertised cures. Exchange rate changes are not inducing

switching effects at the pace anticipated. The lack of supply-side responses to changes in relative

prices are leading to unstoppable cycles of inflation and continuous devaluation. Similarly resort to

positive real interest rate policies in highly inflationary environments are causing a collapse in

investment without any evidence of reviving savings. Swift trade liberalization is resulting in

sharply widening current account deficits as imports race ahead of exports, and so on. Unless more

credible and workable prescriptions are developed and applied, creditors should take a more

realistic view about tying debt relief so closely to the speed of acceptance of untried and untested

reform packages monitored by the Bank or IMF which have unintended and deleterious economic

effects. A related point is the oft-repeated claim, particularly by the World Bank, that countries

which have adopted reform packages are now performing better than countries which have not.

The evidence, however, does not support such a clear cut conclusion. It is not clear whether these

countries are performing better because of the reforms themselves or whether because their

acceptance of reform has suddenly opened access to external financing which has enabled essential

imports to be financed thus triggering growth. Also, the indicators of relative performance show

such marginal improvements in the reforming vs non-reforming economies that they could easily

be shown to be swamped by the fundamental inaccuracies inherent in the basic data available on

African economies. Most of all this argument ignores the fact that reductions in actual (rather than

scheduled) debt service payments from present levels could, in several instances, go a long way to

improving economic performance even without significant policy change.

14 From: African Debt Revisited: Procrastination or Progress?

FONDAD, The Hague, 1992, www.fondad.org

1.09 None of these reasons ring true. Africa has, unfortunately, had to

unilaterally "take" debt relief that should have been, but was not, "given"

by running up levels of arrears which make a mockery of contractual

arrangements and of the rescheduling process. In doing so it has paid a

heavy price in terms of: a virtual cessation of normal trade credit; less

assistance from donors for urgently needed commodity import and

investment financing than it might otherwise have obtained; and a punitive

premium of 30-400/0 on the price of goods that Africa imports.6 As a

consequence, prospects for recovery and sustainable development have

been compromised even further. The shortage of imported inputs and

intermediates - caused by the unavailability of trade credit and the

absorption of scarce foreign exchange by exorbitant import price premia inhibits

better levels of agricultural output and of industrial capacity

utilization from being achieved. 7 In the face of evidence to the contrary,

the reasoning inherent in the reluctance of creditors to move expeditiously

with debt and debt service reduction invariably leads to the mindless

riposte that debt relief and reduction would not solve all the problems that

Africa confronts. Nobody has ever suggested that it would. But, it is evident

that if Africa's debt crisis were to be resolved once and for all, by reducing

debt service burdens to around half of their actual (not scheduled) levels,

the chances are now much greater than they have been for two decades that

African recovery and growth would occur and could be sustained.

Moreover, debt reduction on the scale necessary, would remove the last

excuse that recalcitrant African governments might make in not embracing

economic and political reforms more enthusiastically and speedily. The real

costs to creditors in providing such relief are relatively small, but the

potential gains to African debtors are so large as to make the risk worth

taking.

6 This fact was established in a recent study undertaken by the World Bank, the findings of

which were incorporated in a Working Paper entitled: "Does Africa pay more for its Imports Yes".

7 The relationship between imports and growth in the African context is the most easily

accepted, but the least understood, tenet of development faith. Evidence over the last 10 years

shows no particular link between the value or volume of aggregate imports and of growth.

Much more needs to be learnt about the structure and quality of imports relative to the

productive capacity characteristics of particular African economies in order to be more certain

about the link between increased import capacity, improved investment and growth

performance.

From: African Debt Revisited: Procrastination or Progress? 15

FONDAD, The Hague, 1992, www.fondad.org

1.10 With that introduction to a difficult and contentious subject the

remainder of this paper considers in the sections which follow: the broad

dimensions and characteristics of African debt and debt service; specific

problems related to official bilateral debt and its rescheduling; the growing

problems of meeting debt service obligations to multilateral institutions,

particularly the IMF and World Bank; and the implications of not being

able to clear the overhang of debt owed to private creditors. The paper

discusses the initiatives which have been taken and those which are

presently being considered, to reduce the African debt burden further in

each of these different types of debt categories and highlights areas where

more could be done. It concludes that just as war is too important to be left

only to generals, debt is too important to be left only to Treasury and ECA

officials from creditor countries, and to IFIs, to deal with. Its resolution

requires more consciousness and commitment on the part of politicians in

the developed world because the solutions now lie in the realm of politics

rather than that of economics and finance.

16 From: African Debt Revisited: Procrastination or Progress?

FONDAD, The Hague, 1992, www.fondad.org

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