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Debt burden stunts the growth of a new... |
Debt burden stunts the growth of a new AfricaAn African economic renaissance may depend on an effective debt-relief initiative, writes ROBERT CHOTEAFRICA is showing tentative signs of economic turnaround after decades of under-performance. But the continent is still plagued by its heavy external debt burden. In sub-Saharan Africa, output per head is rising again, inflation is falling and trade deficits are narrowing. The discovery of oil reserves or the end of armed conflict are important factors in some of the most successful turnaround cases. But better government policies deserve much of the credit elsewhere. Sound policies - especially those that encourage domestic and foreign investment - remain crucial if this fragile turnaround is to be sustained.
From the developed world, Africa needs flows of trade and investment, plus continued progress in reducing the continent's external debt burden. Unfortunately, when it comes to the key themes of Western policy, European and US policymakers seem more focused on the first and second than on the third. This is especially disappointing at a time when the international debt relief initiative for the poorest countries, assembled painstakingly by the World Bank and the International Monetary Fund since 1996, is in need of another kick-start. African countries are not the only potential beneficiaries of the scheme, but they will enjoy the biggest gains from debt relief. Many of today's highly indebted poor countries got into trouble when falling commodity prices saw their exports crumble in the late 1970s. They borrowed overseas to finance investment and to compensate for lost foreign exchange earnings. When the debt crisis prompted most commercial banks to stop lending in the early 1980s, these countries were left to rely on government lenders and multilateral institutions. Between 1985 and 1995, their public external debt climbed from $90-billion to more than $200-billion.
Last year debt relief worth $1.16-billion at net present value was agreed for Bolivia, Burkina Faso, Guyana and Uganda. The World Bank promised $285-million, the International Monetary Fund $145-million, other institutions $390-million and government lenders $335-million. Uganda should reach the "competition point" at which the promised relief is delivered next month. But the initiative has run into problems with Mozambique, one of the poorest countries in the world. Mozambique needs $1.5-billion to reduce its debt to a sustainable level, more than any other single beneficiary and at a fifth of the initiative's total cost. As its contribution, the Paris Club of creditor governments has offered up to 80% relief on eligible categories of debt owed to its members. But such a large proportion of Mozambique's debt is owed to governments rather than multilateral institutions, that 80% relief on the Paris Club debts would leave the institutions contributing more than their fair share. The Paris Club countries eventually agreed to do more in January, effectively raising the relief they offer to 86%. But this still leaves a $100-million funding gap. Britain has offered $10-million, Canada $7-million and the US is expected to offer relief equivalent to 88% through the Paris Club. Most participants expect bilateral donors to meet two-thirds of the gap, with the multilaterals meeting a third. One possibility would be to tap a $170-million interest subsidy fund held in the World Bank by a variety of oil exporting nations. It would be surprising if such a relatively small gap could not be filled, but the delay in closing a deal is causing a few chewed finger nails. One problem is agreeing the terms for Russia's contribution to Mozambique. If this proves an obstacle, it does not bode well for the likes of Nicaragua, Guinea Bissau and Tanzania, for which Russia is also an important creditor. Agreeing on a debt-relief package for Mozambique would be a milestone for the initiative, but other challenges remain. One concern is that Ethiopia's participation in the initiative may be unduly delayed because its 1996 "enhanced structural adjustment facility" agreement with the International Monetary Fund has lapsed. Ethiopia should be back on track soon and it would be unfortunate if its lapse did lasting damage to its hopes of debt relief. Some creditor countries that have always had doubts about the plan - notably Germany - are worried that Mali is now seen as eligible for help. Mali's debt was originally thought to be sustainable under existing mechanisms, but three factors have changed the picture: weaker exports, lower world interest rates and the discovery of more loans on its books. Sceptics fear that other countries may follow, raising the cost of the initiative from its present $7.5-billion. But, in fact, the cost of the initiative seems more likely to fall than rise, not least because a one-year delay in Ivory Coast's eligibility will reduce the cost of its relief. Critics who argue the initiative is not generous enough may point to Mali as evidence that the sustainability calculations are based on over-optimistic assessments of export performance. The counter-argument would point to Uganda, where better-than-expected exports means debt relief will be slightly more generous than first intended. With luck, US President Bill Clinton's visit will give new impetus to the debt-relief initiative. The US has supported the plan strongly, although its insistence on long policy track records for the potential beneficiaries grates with some of its more liberal supporters. - Financial Times.
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