African governments are looking for at least a $3 bn replenishment of the African Development Bank's soft-loan fund in negotiations with financing institutions. This follows tortuous negotiations at the ADB's 27-29 May annual meeting in Abidjan of a 35 per cent capital increase (about $7 bn) for the bank and new voting rules on its board favouring the non-regional (predominantly Western) shareholders. After late objections from Nigeria and Libya had been overcome, the non-regionals backed the capital increase, took an extra 7 per cent stake in the bank and won a veto on executive board decisions.
Photo: IMF
Bank President Omar Kabbaj, former deputy finance minister of Morocco, argued for the new deal -- cutting the African stake from 66 to 60 per cent and increasing the non-regional stake to 40 per cent -- as an acceptance of "financial reality." The critical point, Mr. Kabbaj told Africa Recovery, was to reinforce the bank's conservative financial management. The key measure of this -- the bank's capital-adequacy ratios -- would improve further under the increase: the percentage of debt to usable capital is to fall from 78.1 per cent before the capital increase, to 55.7 per cent after it.
The critical issue for Mr. Kabbaj since he took over in 1995 has been to reestablish the ADB's financial credibility through a tough reform programme. That year, the bank introduced new credit rules which disqualify 39 of Africa's 53 countries from borrowing on the ADB's quasi-commercial terms, except for very specific projects with a proven commercial return. Because of their low per capita incomes and indebtedness, these 39 countries can borrow only from the concessional African Development Fund (ADF), and few are likely to qualify soon to borrow from the ADB proper.
With the new credit rules and a much tougher policy on arrears, together with a massive management shake-out that saw most senior staff replaced, Mr. Kabbaj's team has been able to persuade the financial markets that they now preside over a "born-again" commercially sound development bank. But he still has a major political problem: to convince the 39 governments barred from borrowing from the bank that the ADB group is still relevant to Africa.
The most effective way for Mr. Kabbaj to do that would be a rapid expansion of the operations of the soft-loan ADF. "My wish is that we maintain the level of funding [some $3 bn over two and a half years] achieved in the seventh replenishment (ADF-7)," said Mr. Kabbaj, adding that it is too early to speak of precise figures or the bank group's negotiating strategy.
He expects negotiations to proceed much faster than the protracted ones over ADF-7, since the major issues of governance reform in the bank group -- which caused a four-year delay in ADF operations -- have been addressed by the management over the past two and half years. He predicts the negotiations for ADF-8 could be completed before the end of the year -- by which time ADF-7 resources should have run out at current disbursement rates.
Following Botswana's and South Africa's contributions to ADF-7, there is likely to be pressure on some of the other wealthier African states -- such as Algeria, Egypt, Morocco and Tunisia -- to contribute to ADF-8. Nigeria, whose $40 bn gross domestic product ranks fourth after South Africa, Egypt and Algeria, has its own plans to reform the $260 mn Nigeria Trust Fund, which forms part of the ADB group and has made just one loan in the past two years.
For the 39 countries ineligible for loans from the main ADB, the ADF's concessional loans have assumed a key role for development planners. During 1990-96, the ADF provided an average of 8 per cent of all multilateral aid to Africa, a figure expected to rise even higher following the Bank group's reforms.
In what was its first full year of operations since 1993, the ADF approved new loans of $1.1 bn in 1997. Almost 70 per cent of the loans were for projects -- mainly in agriculture, health and education. The lending also included an emergency assistance programme in Madagascar.
Most non-regional shareholders have fully backed last year's revival of the ADF. "The new management at the bank has succeeded in reestablishing the credibility of the fund at a time when donors have become much more skeptical about the value of multilateral aid efforts," one of them said. Others said the $3 bn target for ADF-8 is a realistic starting point. They pointed out that, in effect, the ADF is competing with the replenishment of the World Bank's soft-loan IDA facility. There is also the increasing tendency for bilateral aid to be targeted to promoting private sector initiatives -- even in infrastructure projects in such areas as telecommunications and electric power generation. "Donors will ask what value-added does the African fund contribute," one non-regional official argued.
Another said it is too early to comment on non-regional support for a $3 bn replenishment. The agreement on the bank's capital increase and new voting procedures signals a "new stage in the partnership" between the non-regional shareholders and African governments. He added that while the core governance issues at the ADB and ADF had been addressed, negotiations would focus on the operational efficiency of the ADF, its effectiveness in reducing poverty, and its ability to promote gender and environmental criteria in the projects it supports.
*Patrick Smith is Editor of Africa Confidential, based in London.
