From Africa Recovery, Vol.11#2 (October 1997), page 1

Sharp fall in resource flows to Africa

Concessional loans from IMF and World Bank also plunge

By Christina Katsouris, Washington, DC

Net capital flows to African countries, including concessional aid, fell sharply last year although the continent recorded its strongest economic growth rate this decade. And with many African countries over-burdened by debt, progress has been slow in implementing the complicated relief package known as the Heavily Indebted Poor Countries (HIPC) initiative. Uganda got the first debt deal in April, to take effect next year, while Burkina Faso, Côte d'Ivoire and Mozambique could get deals before the end of this year. Most of the 19 countries now considered as candidates for HIPC deals are African.

Despite the known dependence of many African countries on development aid, net official flows to Africa plunged by 48 per cent in 1996 to $3.2 bn, the lowest level for a decade, the International Monetary Fund (IMF) reports in its latest World Economic Outlook. These flows are made up of all lending from official bilateral and multilateral sources, minus repayments. There was also a 43 per cent fall in the IMF's soft loan approvals to Africa through its enhanced structural adjustment facility (ESAF). Similarly, sub-Saharan Africa saw a 38 per cent drop in its primary source of World Bank lending -- soft loans from the International Development Association (IDA).

While the total decline in net capital flows to Africa was a somewhat less dramatic 17 per cent (to $13.9 bn) in 1996, this was still the second annual decline in a row. Net private flows, which rose by $0.1 bn to $10.7 bn failed to counter the decline. The good news was that within the private flows, net direct investment rose by over 78 per cent to $5 bn, the highest for at least a decade, and more than offset a 68 per cent plunge in volatile portfolio investment from $1.9 bn to $0.6 bn. As the IMF publication does not provide a breakdown of the distribution of these flows, it is unclear whether there has been any change since the 1985-95 period when Africa's nine oil-exporting countries took 73 per cent of foreign direct investment (FDI).

Plunge in multilateral lending

IMF loan approvals to sub-Saharan Africa fell substantially, with ESAF loans -- the main vehicle for IMF lending to the region -- down by 43 per cent to $672 mn from $1.19 bn in 1995/96. Total ESAF approvals in turn fell from $1.47 bn to $911 mn.

New loan commitments by the World Bank to sub-Saharan Africa for the fiscal year to June 1997 in turn dropped 36 per cent to $1.73 bn -- their lowest levels this decade, and well below the average annual $3.2 bn of the 1987-91 period -- while disbursements fell by 17 per cent to $2.47 bn. The 38 per cent fall in IDA soft loans -- the largest source of Bank lending to Africa -- from $2.74 bn to $1.68 bn, reflected the drop in IDA's total lending to developing countries, which fell 33 per cent to $4.6 bn. The causes include a reorganization of Bank staffing, and temporary funding arrangements under IDA's 11th replenishment covering 1996-1999 lending operations, pending the clearance of US arrears to the 10th IDA replenishment.

The Bank also attributes the drop in loan approvals to Africa to greater selectivity in lending, and the greater priority being given to countries showing "firm commitment" to better economic management, strongly focused on poverty issues and able to use resources efficiently. The fall is also due to cancellation of failed projects, and more rigorous preparation for new loans.

Bucking the downtrend, lending to Africa through the Bank's private sector affiliate, the International Finance Corporation (IFC), rose from $191 mn through 71 investments in fiscal 1996 to $385 mn in 1997 through 73 investments. The IFC lent some $285 mn on its own account and syndicated another $100 mn.

The queue for HIPC deals

Burkina Faso should be next in line for an HIPC debt reduction deal before the end of 1997, followed by Côte d'Ivoire and Mozambique. The World Bank and IMF have already approved relief for Burkina Faso in principle, and are now ironing out small differences over just how close its target debt-to-exports ratio should be to the lower end of the 200-250 per cent range. Some say 205 per cent would best help the country achieve a sustainable level of debt -- defined as a level at which it could service reduced debt while continuing to invest in development.

Technical work and verification of Côte d'Ivoire's debt is now in the final stages. The only remaining hurdle now to a HIPC deal is IMF approval of an ESAF, and agreement could be reached by November. Officials indicate that Côte d'Ivoire could achieve debt sustainability with a target debt-to-export ratio of 145 per cent. This reflects new criteria approved in April to cater for such countries as Côte d'Ivoire with "open trading economies" facing severe budgetary problems due to heavy debt obligations.

Creditors are also aiming for a December decision on Mozambique, a country with an especially complex debt structure and creditor profile. Its nominal debt at end-1996 was $7.5 bn (or a staggering 1,358 per cent of export revenue), or $5.6 bn in net present value (NPV; defined as the sum of all future debt-service obligations on current debt, discounted at market interest rates). And unlike most other HIPCs, Mozambique's bilateral debt is a relatively high 73 per cent of total debt, while multilateral debt is unusually low at 14 per cent.

Presentation of Mozambique's preliminary document to the IMF and World Bank Boards was delayed until April 1997 by problems with its bilateral debt to Russia -- some $2.3 bn in nominal terms, incurred during the Soviet era at an artificially high exchange rate. Russia's formal entry into the Paris Club in September means there is now an agreement in principle on applying Paris Club terms to Mozambican debt. What remains to be done is reconciliation of the actual figures for all creditors, including Russia, and an IMF team was in Mozambique in late October helping prepare the data for this exercise. With Russia now on board, at least in principle, an IMF source in Washington anticipates no further major problems for arriving at an HIPC deal for Mozambique.

The preliminary document for Mozambique recommends an HIPC deal taking effect by the end of this year and ending in June 2000. Due to Mozambique's acute vulnerability to external shocks, it also recommends a target NPV debt-to-exports ratio at the lower end of the 200-220 per cent range and a debt service-to-exports ratio below 20 per cent.

Relief at the lower end of the debt-to-exports target range would require donors to provide $1.48 bn, assuming an end point in 1999. This includes $946 mn from bilateral creditors and $533 mn from multilateral creditors.

But, the figure for bilateral creditors -- calculated on the basis of amounts owed to each creditor -- could exceed the Paris Club's ceiling of 80 per cent cancellation of eligible debt stock. Multilateral creditors favour proportional burden-sharing, but the Paris Club wants the multilaterals to pick up the tab for amounts over 80 per cent. Mozambique awaits the outcome of this dispute.

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