Despite relief initiatives, nothing is being done to address the root cause of unsustainable debt.

Saddam Hussein and Mobutu Sese Seko, both discredited dictators, squandered and stole billions of dollars of loans made to their countries, Iraq and Zaire (now the Democratic Republic of Congo). Such similarities are not lost on African observers and it is not surprising that African leaders are looking to the US to campaign as vigorously for the cancellation of Africa’s debt as it did for Iraq’s. Most of Africa’s debt, they argue, was incurred by illegitimate regimes.

International creditors are due to forgive up to $90bn of Iraq’s $116bn debt. Africa’s total external debt is estimated to be more than $300bn, the bulk of which is public or publicly guaranteed debt that is owed to multilateral bodies, such as the World Bank and the International Monetary Fund (IMF).

But debt campaigners for Africa are not holding their collective breath. The US Treasury has made it clear that aggressive lobbying to lighten Iraq’s debt burden is key to putting that country on a secure footing and meeting its own national security goals. Africa is a much smaller blip on the US radar screen.

Low on the agenda

At the spring meetings of the World Bank and IMF in April, Africa’s debt barely featured on the agenda, despite the likelihood that existing debt relief initiatives will expire at the end of this year without meeting their stated objectives. A delegation of African finance ministers appealed to the developed world to do more but did not receive a sympathetic hearing.

In 1996, the World Bank and IMF launched the Heavily Indebted Poor Countries (HIPC) initiative, which was designed to provide a lasting solution to the debt crisis of the world’s poorest countries. To qualify for debt relief, poor countries had to commit to and show a track record of poverty reduction and economic reform. Of 37 countries considered to be in greatest need of relief – 31 in Africa – 27 qualified for a total of about $50bn in debt write-downs.

So far, 13 have completed the programme successfully, meaning in theory that debt has been reduced to a sustainable level. The latest additions are Ethiopia, which received $3.3bn in relief; Senegal, which received $850m; and Niger, which got $1.2bn. Others include Benin, Burkina Faso, Mali, Mauritania, Mozambique, Tanzania and Uganda.

Knock-on effects

In African countries that fall under the initiative, which have either benefited from or stand to benefit from debt forgiveness, debt service costs fell from 24.2% of government revenue in 1998 to 13.3% last year and are expected to shrink further to 9.8% by 2006. As a result, spending on poverty reduction programmes has increased by more than two thirds in the same period.

In Benin, debt relief meant that spending on healthcare could increase by 50%. In Uganda, primary school enrolment doubled and increased spending on healthcare helped to reverse HIV infection rates. And in Mozambique, debt relief enabled the government to immunise half a million children.

And yet the HIPC initiative has earned the ire of debt campaigners. The problems are numerous.

First, is the slow pace. The initiative was launched in 1996, “enhanced” in 1999 to improve delivery, and yet is still far from its objectives, with only 13 countries completing the programme in almost eight years. Even the World Bank and IMF concede that the process is mired in red tape.

Second, creditors are having difficulty matching promises with action. According to a recent report issued by the General Accounting Office of the US Congress, the HIPC initiative faces a funding shortfall of $7.8bn: the amount that the US and other advanced countries would need to contribute to multilateral lenders to provide relief under the programme’s current terms. The report also concluded that an additional $8.5bn to $19.8bn may be needed during the next 16 years to reduce debt burdens to truly sustainable levels.

Third, campaigners argue that the initiative does not lead to sustainable debt levels and that it was designed back to front. At its core, the initiative was designed to address a symptom, say researchers Nancy Birdsall of the Center for Global Development and Brian Deese, a senior policy analyst at the Center for American Progress. Yet it did little to address the root cause: too much lending by official donors, with a failure to use the resources to invest and grow, resulting in deeper unsustainable debt.

Lack of accountability

“Whether donors kept lending to refinance their own non-performing loans, out of fear of abandoning millions of poor people, or because they were ever-hopeful that the next loan to the next reforming government would work, is hard to know,” they say. “But the outcome is clear and remains little changed: the official creditors are not sufficiently accountable for the loans they make.

“Avoiding grappling with these underlying causes, the donors put together an initiative designed to maximise flexibility and minimise upfront costs. They developed rules and formulae to determine the amount of debt relief based in part on their own willingness to pay, rather than on poor countries’ long-term needs for health, education, roads, training and institution building. They combined these rules with overly optimistic projections about countries’ future growth paths.”

African governments and campaigners argue that the cancellation of Africa’s debt is both an economic precondition to development and a moral imperative – just as Germany’s debts were written off by the US after World War II to promote growth and stability. And they point to the positive impact that debt relief has already had.

Last year at a meeting of the United Nations Economic Commission for Africa and various debt stakeholders, including creditors, participants concluded that debt relief was preferable to bilateral aid. Debt relief offered predictability, a longer-term horizon, lower transaction costs and amounted to direct budget support, therefore increasing recipient ownership.

Solutions are not so simple, however. Some campaigners argue that the IMF could sell off some of its gold reserves while the International Bank for Reconstruction and Development could mobilise internal resources better. But many officials and some activists are uncomfortable with the idea of debt cancellation, saying that it would divert resources from other poor countries and reduce incentives for borrowers to clean up their finances.

Part of the solution is to increase grants that require no repayment, instead of extending new loans that perpetuate the cycle of indebtedness, a move that enjoys US backing. Ms Birdsall and Mr Deese suggest offering poor countries long-term “insurance” on their debt. Under such a plan, poor countries that demonstrated a commitment to sound economic policies and invested in health and education would be protected for as long as 10 years against shocks over which they have no control and which throw them into unsustainable debt situations.

Campaign for change

Activists are campaigning for a paradigm shift, arguing that debt sustainability measured against GDP and exports is arbitrary. If the world is serious about meeting the Millennium Development Goals, the level of debt forgiveness should be linked to the achievement of the goals in any given country, they say.

“[The World Bank and IMF] have made no commitment to link debt relief to the Millennium Development Goals,” says Max Lawson, a policy analyst at Oxfam. “Ministers are being utterly hypocritical. They sit down to discuss poverty reduction and the millennium goals, then proceed to decide how much debt poor countries can repay without any consideration of the same poverty goals.”

For Nigerian finance minister Ngozi N. Okonjo-Iweala, who chairs the World Bank’s development committee, there is a more immediate issue: extending the HIPC initiative beyond its December 31 deadline so that more countries can participate. “This is the most urgent problem,” she says.

At the root of the problem is an issue of priorities. World Bank president James Wolfensohn, speaking at the spring meetings of the World Bank and IMF, pointed out that global defence spending is worth about $900bn annually, farm subsidies in wealthy nations total $300bn, yet development assistance to poor countries amounts to just $60bn. “That seems to me to be the most nonsensical thing you could imagine,” said Mr Wolfensohn. “If we spent $900bn on development, we probably wouldn’t need to spend more than $50bn on defence.”

Indicative of this, Mr Wolfensohn hinted that it was tough enough ensuring that governments honoured their pledges, let alone getting them to increase their commitments.

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