From Africa Recovery, Vol.15 #3, October 2001, page 26

Whither the debt?

Despite HIPC, African countries still struggle with heavy debt payments

By Gumisai Mutume

The Heavily Indebted Poor Countries (HIPC) initiative will not go far enough to relieve Tanzania's external debt, Finance Minister Basil Mramba recently told parliament. While the programme has provided some relief during the last two years, he said, Tanzania still owes billions of dollars to its foreign lenders. Under current conditions, it would take a long time for the country to get rid of its debt.

Tanzania's situation mirrors that of many other sub-Saharan African countries that have qualified for debt relief -- a substantial lowering of debt initially, with rising obligations as new money is borrowed to service old debt and finance basic development programmes.

After receiving assistance from HIPC, sponsored by the World Bank and International Monetary Fund (IMF), Tanzania's external debt fell from $3.8 bn in mid-1999 to $2.6 bn this year, expressed in "net present value" (npv, representing the market value of the original debt, discounted as if it were paid now, in a lump sum). However, relief is likely to be temporary, since savings will be spread out over 20 years and Tanzania must continue to borrow. Its debt could increase to $3.2 bn by 2005, and to $6 bn by 2015 (npv), when it will face service charges of $260 mn a year compared with $193 mn prior to HIPC (see table below, also see graph).

Debt servicing of 17 African countries Estimates, $mn
	2000	2005	2010	2015
Benin	62.5	36.9	43.9	72.8
Burkina Faso	33.8	41.5	54.7	83.2
Cameroon	312	347	375	n.a.
Gambia, The	19.6	9.8	18.7	23.4
Guinea	140	88	96	111
Guinea-Bissau	15	4	11	n.a.
Madagascar	104.5	81.6	119.5	156.2
Malawi	n.a.	47.1	55	85.9
Mali	88	66	76	125
Mauritania	87.4	43.3	n.a.	47.3
Mozambique	50	60	97	98
Niger	93.5	29	26.4	35.4
Rwanda	39.6	11.1	14.7	27.7
São Tomé & Príncipe	n.a.	1	3.3	2.8
Senegal	184.9	136.1	n.a.	n.a.
Tanzania	153.8	158.2	n.a.	258
Zambia	169	202	135	109
Source: World Bank, IMF.

African qualifiers

Worldwide, 23 countries have qualified for debt relief under HIPC, and according to World Bank estimates will eventually obtain a reduction in their debt of $20.3 bn (npv). For the 19 African HIPC countries, the savings will be $14.8 bn (npv), a significant figure compared with previous debt-relief schemes.

However, in Africa, only Mozambique and Uganda had qualified for "full" relief by October 2001, with their creditors writing off all the debts agreed to under the initiative. Another 17 African countries are receiving provisional relief while they work to fully meet HIPC's terms. As a result, the World Bank reports, repayments on the remaining debts of the 19 countries fell from $1.7 bn to $1.3 bn in the last year, while social spending rose from $2.6 bn to $3.2 bn in the same period, partly because the savings were spent on health and education, as required under HIPC (see box 1, below). The 17 countries are Benin, Burkina Faso, Cameroon, Chad, Gambia, Guinea, Guinea-Bissau, Madagascar, Malawi, Mali, Mauritania, Niger, Rwanda, São Tomé and Príncipe, Senegal, Tanzania and Zambia.

What is HIPC?

The initial HIPC plan was adopted in 1996 as a way in which donors could reduce the debts of the world's 41 most highly indebted poor countries to "sustainable" levels -- levels that countries could afford to service. Africa is home to 33 of these nations. In 1999, HIPC II was adopted, making it easier for countries to meet the qualifying conditions, including implementing World Bank and IMF structural adjustment programmes. It also attempted to simplify the process countries needed to complete, in cooperation with the Bank, to formulate national strategies for reducing poverty. These Poverty Reduction Strategy Papers (PRSPs) detail how the money saved will be spent on the social sector.

To qualify for HIPC, the ratio between a country's debt and its exports should be no higher than 150 per cent. Where the ratio of debt-to-revenues is used instead, this should not exceed 250 per cent. By the Bank's reckoning, a country with a ratio lower than 150 per cent is earning enough export revenue to service its debt. The debt is therefore sustainable.

Photo: © UNICEF / Giacomo Pirozzi

Jubilee Plus, a London-based debt activist group, has concluded, after analysing World Bank data, that at least 15 African countries will continue to face unsustainable levels of debt after receiving HIPC relief. The Bank's definition of "sustainable debt," the Group states, fails to include new debt which the poorest countries must continue to borrow in order to pay charges on their remaining "old" debts and to run their countries.

No 'exit' under HIPC

Jubilee Plus and others make the case that HIPC does not provide deep enough relief. In using only debt-to-export or debt-to-revenue figures, the Bank both sets the ratios too high to be serviced sustainably and also fails to consider vital ongoing obligations such as key social and infrastructure spending that must be met by the poorest countries. Under these circumstances, HIPC cannot provide an "exit from current debt problems," the debt activists maintain, and long-term debt sustainability under HIPC "is a mirage."

Only three countries -- Benin, Mozambique and Uganda -- will meet the Bank's criteria for "sustainable" debt shortly after receiving HIPC assistance. For others, it could take some years. Tanzania's debt is expected to reach "sustainable" levels by 2007 and, from 2009 to 2018, it could be 25 per cent lower than without HIPC. However, Burkina Faso's debt, which was reduced to $655 mn last year and should become sustainable by 2007, will again spiral upwards to $1.3 bn (npv) by 2015. Of this, more than $1 bn will be in new debt; the rest will be principal and interest on old debts. Neither Malawi nor Niger will carry sustainable debt before 2013.

"In terms of long-term sustainability ... I want to note that what the HIPC initiative purports to do is basically bring the countries in question to a situation where they would have a good chance to carry on and remain sustainable over time," says Mr. Jacob Kolster, programme manager of the HIPC Unit at the World Bank. In April, the Fund and World Bank recognized that while HIPC can substantially reduce external debt, "long-term debt sustainability will only be achieved if the fundamental causes that triggered the debt build-up in the first place have been redressed."

Whose failure?

The Bank and the Fund note that the "fundamental causes" include failed economies, a reluctance by African governments to consistently implement prescribed economic reforms and their inability to attract foreign investment.

"The solutions to the debt crisis have been confined to issues of good governance and economic reforms, yet it is well known that Zambia's debt, for example, has greatly resulted from poor terms of trade and international political situations, such as its role in the anti-apartheid struggle," says Ms. Charity Musamba, coordinator of the non-governmental group, Jubilee-Zambia. "Unless a holistic perspective is adopted, these outside pressures will continue to lead Zambia into further external debt."

Such outside pressures include poor prices for African commodities on the international market. Based on its own market projections, the World Bank believes revenue in HIPC countries will rise from $12 bn in 1999 to $22 bn in 2005, with average annual GDP growth rates of 5-6 per cent between 2000 and 2005. Yet from 1990 to 1999, actual growth rates averaged 2.1 per cent in sub-Saharan Africa, and current prospects for growth in Africa remain bleak.

'Wildly optimistic' forecasts

The Bank's optimistic forecasts are unlikely to be met, in part because of the continuing slide in the prices of primary commodities, on which most HIPC countries depend for much of their revenue. Uganda depends on coffee for 60 per cent of its export revenues, but the price of the crop has declined by 70 per cent since 1997. The price of groundnuts has fallen by 15 per cent over the same period, with Guinea-Bissau depending on the crop for 70 per cent of export earnings and Malawi, for 60 per cent.

Oxfam, an international aid agency, notes the Bank's "wildly optimistic growth projections" are undermining the effectiveness of HIPC relief, since the amount of debt relief provided is directly linked to anticipated revenues.

In considering the notion of "failed economies," debt activists often point critically to the structural adjustment programmes which the Bank and IMF have obliged many African states to implement. Despite evidence that these programmes have not only reduced the role of the state in economic life but have also failed to reduce poverty or significantly stimulate economic growth in sub-Saharan Africa, their prescriptions continue to be mandatory for all HIPC countries. They are incorporated into the Poverty Reduction Strategy Papers (PRSP) that each country must prepare in order to qualify for HIPC, and the Poverty Reduction and Growth Facility (PRGF) through which the IMF finances adjustment programmes.

"Countries that want debt relief through the HIPC programme must enter into a Faustian bargain: for debt relief in the future, comply immediately with several years of IMF/World Bank programmes -- the same ones that have meant increased debt and more desperate circumstances for the middle and lower classes in their countries," says Kenyan activist Ms. Njogi Njoroge Njehu of the 50 Years Is Enough Network, a Washington-based network critical of the policies of the Bank and the Fund.

Grants instead of loans

To help the poorest nations escape the trap of increasing debt, activists are looking to the Bank to provide grants rather than new loans. Earlier this year, US President George W. Bush proposed that the debt crisis could be resolved if the Bank gave at least half its financial support to the poorest countries in grants. "Debt relief is really a short-term fix," Mr. Bush said in an address to the World Bank in July. "The proposal today doesn't merely drop the debt, it helps stop the debt."

The US is the Bank's largest shareholder. It appears unwilling to support Mr. Bush's proposal with the necessary new funds. Were it accepted, it would affect only a portion of new Bank loans and would not make an impact on the 46 per cent of sub-Saharan Africa's debt that is lent directly by countries.

Many of the donor countries that oppose Mr. Bush's proposal prefer that a maximum of 10 per cent of Bank lending be in grants and they say that the development banks -- such as the African Development Bank -- should continue to generate income through loans.

Spreading debt relief beyond HIPC

UN Secretary-General Kofi Annan is among those calling for the extension of debt relief to non-HIPC countries. "More money is flowing out of these poor countries to service debt than is going in," Mr. Annan told a press conference in July. "So I hope that debt relief, which has been on the agenda of the industrialized nations for many years, will be accelerated, and that help will be given to the poorer nations."

Debt activists have long argued that eligibility for debt cancellation should be assessed on a case-by-case basis. In addition to the 41 countries worldwide that are potentially eligible for HIPC, there are at least 11 others, they say, urgently in need of debt cancellation. In Africa, they mention Nigeria and Zimbabwe.

"We suffer from the unfair misunderstanding that we are a rich oil country that does not need debt relief," Nigerian President Olusegun Obasanjo said earlier this year. "In spite of our oil endowment, our debt to export ratio is 250 per cent, which both the IMF and World Bank agree is far too high for a developing country." Nigeria's economy is highly dependent on oil, which brings in 40 per cent of GDP and 85 per cent of foreign exchange earnings. However, despite its relative oil wealth, poverty is widespread and it is among the 20 poorest countries in the world, according to the Bank. Per capita income, at $310, is lower than the $390 that is average in the HIPC countries.

Those seeking to expand HIPC relief, also point to the situation in Zimbabwe, a country the World Bank views as "low-income with moderate debt." In 1996, its debt-to-exports ratio was 160 per cent, slightly higher than the HIPC threshold. The case is made that Zimbabwe needs HIPC relief because continued debt-servicing hampers its ability to confront urgent health crises such as HIV/AIDS or to spend in vital areas such as education. At independence in 1980, Zimbabwe spent 1.2 per cent of gross national product on debt compared to 9.1 per cent on education. By 1995 this had risen to 10.3 per cent on debt and 8.5 per cent on education. Health absorbs 3.5 per cent of gross domestic product, in a country ravaged by HIV/AIDS, while interest payments on debt account for about 3 per cent. Zimbabwe has one of the world's highest HIV infection rates. Life expectancy, once in the high 60s, has shrunk to below 50 years. But the country's involvement in the war in the Democratic Republic of the Congo, where it at one point was spending some $3 mn a month, weakened its case. The Bank and the Fund have frozen all new lending to the country.

Extending HIPC to poor countries such as Nigeria and Zimbabwe is out of the question for the Bank and the Fund. There simply is not enough money, they say. According to Mr. Masood Ahmed, deputy director at the Fund, "If you try and expand the scope to cover all the poorest countries ... the magnitude becomes such that it's not only completely unaffordable for the Bank and Fund, but it would actually mean ... we would have to then close down PRGF as a facility because it's a revolving fund ... and pull out of support for the poorest countries."

*****Box 1***** Channelling debt savings to social development Some HIPC countries have been able to divert resources saved from debt servicing under HIPC to boost spending on health and education. In 1996, Mauritania spent $125 mn on debt service and $80 mn on education, health and poverty reduction combined. Last year, after qualifying for interim HIPC relief, debt costs fell to $88 mn while $97 mn was spent on social services. In order for Mauritania to receive full relief it is required to spend its savings on raising primary school enrolment rates. During the last decade, the rate has risen from 45 to 86 per cent. The goal is 99 per cent attendance by 2005. In April 1998, Uganda became the first country to benefit under HIPC. Last May, it also qualified for full debt relief under HIPC II. Its debt fell from $2.4 bn to $1.7 bn (npv). Spending on social activities grew from 5 to 7 per cent of GNP between 1998 and 2000. The education budget rose from 17 to 20 per cent of government spending during the same period. Also in 1998, Uganda established the Poverty Action Fund to finance programmes aimed at eradicating poverty. From 1998 to 2000, the government's contribution to this fund increased from 4 to 13 per cent of total expenditure. Uganda benefited from debt relief at a time when the country was transforming its education system. As part of its development strategy, Uganda introduced free primary schooling in 1997 for up to four children per household. Enrolment immediately doubled to 5.2 million and, by 1999, had reached 6.5 million.

*****Box 2***** Foreign investment to Africa slips Foreign direct investment (FDI) in sub-Saharan Africa slumped from nearly $8 bn in 1999 to some $6.5 bn in 2000, bringing the continent's already low share of FDI to below 1 per cent of the world total and reversing an upward trend in recent years (see graph). The drop, chronicled in the UN Conference on Trade and Development (UNCTAD) World Investment Report 2001, reflected the the fact that investment flows to two of Africa's three largest FDI recipients, Angola and South Africa, were cut in half in 2000. Another 20 sub-Saharan countries suffered more modest declines. FDI inflows to North Africa, as a region, remained at about the same level in 2000 as they did the year before, $2.6 bn. The new figures, while disappointing, UNCTAD reports, are still significantly higher than FDI flows in the early 1990s, reflecting the success of African efforts to improve business climates and raise investor confidence. Investment remains concentrated in just a handful of African countries, however, with Angola, Nigeria and South Africa receiving nearly 60 per cent of FDI inflows last year. For these and a number of other African countries, reports UNCTAD, "FDI continues to play an important role in financing capital formation." A handful of the more industrialized African countries do not only receive FDI, but also invest abroad themselves. In 2000, African corporations invested some $1.3 bn outside their own countries. South Africa alone accounted for 43 per cent of this amount. With the restructuring of South African industry following the end of apartheid and the economy's greater opening to world markets, a number of firms began investing in new markets abroad and listing on foreign stock exchanges to tap into external capital sources, which were considered essential "for survival in the new climate of global competition," UNCTAD reports.

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