UNITED NATIONS
ECONOMIC AND SOCIAL COUNCIL
8 January 1994 ENGLISH
Original: FRENCH
ECONOMIC COMMISSION FOR AFRICA Meeting of the Intergovernmental Group of
Experts of the fifth session of the
Conference of African Ministers of Finance
Libreville, Gabon 21-23 February 1994
ECONOMIC COMMISSION FOR AFRICA Fifth session of the Conference of
African Ministers of Finance
Libreville, Gabon 25-26 February 1994
ANALYSIS OF THE IMPACT OF DEBT-RELIEF INITIATIVES ON AFRICAN DEBT
E/ECA/TRADE/93/U
INTRODUCTION
1. One of the important aspects of the critical economic and financial situation of Africa since the start of the 1990s is the persistence of factors, both internal and external, which prevent African countries from allocating enough resources to financing their development. Among these factors are the increasingly heavy
debt burden and the inability of a large number of countries to service it.1
2 Africa's creditors, since 1978, have recognized the serious and long-term nature of the debt problem. Many countries and bilateral donors have realized that the poverty and economic rigidities prevail ing in many African countries make it difficult for them to respect their financial commitments without exter nal assistance.2 Since 1978 onwards, several bilateral creditors have converted their concessional develop ment loans to unrequited subsidies. The World Bank's Special Assistance Programme (SAP) and the Interna tional Monetary Fund's (IMF) Enhanced Structural Adjustment Facility (ESAP) both support bilateral donors. They were launched in 1987 to resolve the debt problems of developing countries more directly.
At the Toronto Summit, the industrialized countries accepted the idea of debt relief to low-income countries burdened by the debt problem. They have prepared formulae for such relief and have rescheduled the debt of some African countries such as Benin, the Central African Republic, Guinea, the Niger, Madagascar, Mali, Mauritania, Senegal, Togo, Uganda, the United Republic of Tanzania and Zaire.
3. The rescheduling measures taken by creditors and official donors, which constitute important steps for reestablishing normal relations between creditors and debtors, have not been able to resolve the situation of near-stoppage of payments in which some countries find themselves. It is currently estimated that con siderable special assistance is necessary for a certain length of time , beyond the planned expiry of the SAP and other special programmes for helping indebted countries to revitalize their international economic rela tions.
4. However, even with the multiplicity of debt-relief initiatives, African countries remain very indebted.
Concerted refinancing and debt-reduction strategies under the auspices of international financial institutions have had no more than limited impact.
5. The debt stock which fell from US$ 273.9 billion in 1990 to $251.6 billion only partly reflects the current gravity of the situation of African indebtedness. The arrears have increased, rising from $28.7 billion in 1989 to $32.3 billion in 1991. Neither the solvency/liquidity indicators nor the debt and debt-ser vice ratios have improved. The effects of exchange rate variation, that is to say, depreciation of the dollar as reserve currency and repayment currency, in relation to other currencies, in addition to the devaluation of African currencies, have increased the relative weight of the debt. Consequently, the external debt and
GNP ratio reached an average 101.2 per cent in 1991 while it was no more than 38.9 per cent in 1980.3
Moreover, the Persian Gulf crisis and signs of sluggish growth in OECD countries have also had an unfavourable impact on the access of African countries to capital markets. At a time when commercial banks face competitive and regulatory pressure to meet the cautious ratio requirements of banking authorities in developed countries, Africa is increasingly excluded from the international financial system.1 See Economic Commission for Africa (ECA): Strategies for mobilizing financial resources for the development of Africa in the 1990s (document E/ECA/CM.19/5, para. 3).
2 C. Humphery and J. Underwood, The external debt problems of low-income African countries, document presented at the Seminar on Experience with Economic Policy Instruments, African Centre for Monetary Studies, Addis Ababa, 30 April - 4 May 1990.
3 World Bank, World Debt Tables, 1992 to 1993.
6 The problem of the indebtedness of African countries is rendered even more complex by the appear ance of a syndrome of reluctance on the part of donors who hardly want to help indebted African countries any further. Moreover, international financial institutions which provide the greatest proportion of resources to Africa must now respond to the increasing demands from other regions, particularly from Eastern and
Central Europe.
7. From a strictly economic point of view, four clean-up measures are envisaged for the cycle of indebtedness to run its course more rapidly:4
(a) Cancellation of all African debts by public and private creditors;
(b) About a 30 to 50 per cent increase in African exports;
(c) The establishment of new debt-relief techniques;
(d) The search for new financing sources and the start of fresh initiatives for mobilizing around
$300 billion for African countries between now and the year 2005.'
8. As this report brings out, the balance of forces between creditors and debtors seem very unequal.6
TTie four key variables for debt reduction are entirely governed by the creditors. This includes both debt cancellation and the setting up of new debt-relief techniques. The increase in the exports of African coun tries through the removal or reduction of tariff barriers depends on the goodwill of developed countries.It is the same for mobilization of additional resources.
9. As the African debt crisis does not constitute a global threat to the international financial system,
it is difficult to get the international community to increase initiatives for relieving the African debt burden.7
10. The present study, which analyzes the impact of debt relief measures on Africa's external debt untilnow, comprises three chapters:
I. The external debt burden;
H. The initiatives already taken to resolve indebtedness;
III. Analysis of the impact of external-debt initiatives on African countries.
CHAPTER I
THE AFRICAN EXTERNAL DEBT BURDEN
11. With the eruption of the crisis of 1982, the risks of chain-reaction disturbance of the international
financial system created forced solidarity between debtors and creditors. Thousands of banks of all sizes
4
5
SeeP.H. Dembiski, The Puzzle of International Indebtedness. What do I know, PF, 1989.
ECA, document E/ECA/CM.19/5, op.cit.. table 4.
• p. Norel, THfli WArlti frJW«. fl1 historical Approach, (ed.) Syros, Paris, 1986. M. Ikonicoff, The
art and the science of using multinationals, M0"<*e diplomatique, May 1985.1 P. Arnaud, La dette du tiers mode, (ed.) La decouverte, Paris, 1984.
E/ECA/TRADE/93/11 Page 3
and in all countries accepted the procedures for consolidation and rescheduling. International banks were then overextended and undercapitalized. The intervention by multilateral agencies and OECD governments imposed "the order of the system" on developing countries which had adopted macro-economic stabilization programmes, while the London Club banks agreed to participate in "defensive" loans. They had increased their assistance for refinancing interest payments, thus protecting the quality of their loans. That period is now over. Although the banking system shows marked disparities, a large number of banks have con solidated their balance sheets while increasing their own funds and the level of provisions for doubtful loans by reducing their assistance to risky countries. Indebted countries have adopted fiscal and monetary remedial measures through market regulation. Official creditors have participated in these efforts both by sustaining the adjustment programmes and also by accepting debt reductions and encouraging commercial banks to make loans. Despite the worthwhile results, this strategy has not resolved the acute problem of over- indebtedness in a number of developing countries. The prospects of returning to capital markets remain very uncertain, with a few notable exceptions in Latin America.
A. Total debt
12. The stock8 of Africa's total debt, including guaranteed public debt (bilateral and multilateral), private debt and the drawings on the IMF which were $273.8 billion at the end of 1991, reached $281.7 billion in 1992. This total at the end of 1992 represented a value of 285.2 per cent of the export of goods and services from the African continent and 98.3 per cent of its GDP. The debt withdrawn which was $US 240.5 billion in 1991 reached $242.6 billion in 1992. This decrease by $2.1 billion was due to the guaranteed public debt which rose from $231.5 billion in 1991 to $233.6 billion in 1992. The increases in terms of this debt, such as interest rates, maturity and grace periods, have practically remained the same since 1987, or have varied
only slightly.
B. Guaranteed public debt
13. The share of long-term guaranteed public debt which, in 1991, was 96.3 per cent of the total debt, was maintained at 96.4 per cent in 1992 despite a small reduction in volume. The share of official credits in total debt, which was 73 per cent in 1991, rose to 77.3 per cent in 1992 but decreased in volume, falling from $169.3 billion in 1991 to $162.3 billion in 1992. Bilateral debt forms an important share of this total.
In 1992, it was 41.9 per cent of the total debt of all African countries. Multilateral debt rose from $54.2 billion in 1991 to $60.0 billion in 1992. The service of guaranteed public debt in its turn forms almost more than 94 per cent. In 1991, $22.5 billion were allocated to guaranteed public debt, of a total debt service of
$24 billion. Multilateral financial institutions collected $5.2 billion in 1992, while transfers from these same institutions were not more than $2.7 billion, that is, a deficit of $2.5 billion.
C. Private debt
14. Total private debt comprising all short- and long-term loans on commercial terms, as well as banking obligations, totalled $69.9 billion in 1991. In 1992, it reached $85.8 billion, that is, an increase of $16 billion. The terms of such debt have not changed very much in recent years. While the average interest rate was 8.7 per cent in 1990, it fell by 1.3 points in 1991 and stabilized at 7.4 per cent. The average period of maturity remained the same in 1990 and 1991 and stabilized at 6.6 years. Taking the difficult economic conditions into account, the grant element of private debt has increased, rising from 3.7 per cent in 1990 to 7 per cent in 1991.
15. Commercial debt service which was $12.5 billion in 1991, that is 52.3 per cent of the total debt ser vice, fell to 45.5 per cent in 1991, although in terms of volume, it rose to $15.7 billion.
All the figures cited, unless otherwise indicated, are from the World Bank.
Table 1. Net transfers to African countries (in million US$)
Disbursements Reimbursements:
(i) Principal (ii) Interests (iii) Net transfers
1985 19 577 18 489 11904 6 585 1088
1990 21 862 24 107 15 804 8 303 -2 245
1991 18 855 23 961 15 417 8 544 -5 106
1992 19 356 34 393 23 508 10 855 -15 037
D.
World Bank.
Net transfers to African countries
16. As shown in table 1, since 1990, African countries have experienced net flight of capital which could have been used for reimbursement of contracted debt. From around $2.2 billion in 1990, this bleeding reached $15 billion in 1992. Such a burden weighs heavily on the balance of payments of African countries.
CHAPTER II
INITIATIVES TAKEN UP TO NOW TO RESOLVE THE DEBT CRISIS A. General framework of external debt relief for African countries
17. The current debt-relief framework is inscribed within a logical process which was initiated by the United Nations Conference on Trade and Development (UNCTAD),9 according to the following procedure.
The first time that a developing country finds itself in financial difficulty, it requests that its debt problem be examined at the international level. The debtor and his creditors reach an agreement through the multi lateral organization with which this is convenient. As a second step, a global analysis of the economic situa tion of the debtor country is made, taking into account both balance-of-payments difficulties and the long- term structural and financial problems. The analysis should notably stress: (a) review of the domestic economic situation of the country by assessing the use that it makes of both domestic and external resources, for safeguarding its development; (b) an estimate of short- and long-term capital requirements; and (c) con sideration of the structure and prospects of balance-of-payments positions, monetary policy and currency policy. As a third step, an extensive programme of action established on the basis of the analysis carried out during the second phase is launched by common agreement.
18. This programme should contain such elements as: (a) adoption of suitable domestic policy measures;
(b) granting of bilateral and multilateral supplementary financial resources on favourable terms; and (c) immediate debt relief, in the form of balance-of-payments support arising from the need to reschedule the debts owed to creditor governments or guaranteed by them.
19. This framework, although standard, has never been able to resolve the burden of indebtedness in a sustainable manner. Faced with this failure, political leaders of developed countries have since initiated a series of debt-relief plans and agreements which conform to traditional practices. The best known are,
9 See UNCTAD, document TD/blll67, paras. 63-74, Review of implementation of the guidelines annexed to resolution UNCTAD 222 (XXI).
E/ECA/TRADE/93/U Page 5
namely the Baker Plan, the Brady Plan, the Toronto Agreement, the Dakar Plan, the Netherlands Plan and the Trinidad and Tobago Plan. Since then, there has been a multitude of debt-conversion programmes such as debt-conversion for conservation of nature, debt conversion into assets, etc. These new programmes are founded on a secondary credit market.
B. Traditional initiatives
(i) Classical rescheduling
20. Traditional initiatives share the principle that tension in the area of international indebtedness is a problem linked to liquidity. From this point of view, the debt rescheduling carried out by the Paris Club, by the London Club or by the boards of commercial banks, are short-term solutions.10 The solutions which are usually proposed are implemented so that the debtor countries in payments difficulty may quickly take up the integral debt service and distribute it in a manner meant to uphold the confidence of the creditor.
Nevertheless, with the aggravation of the debt crisis, it has become evident that the principle has difficulties in definitely resolving the problem of banking debt. Since 1985 the diagnosis has changed. All the actors on the debt market have begun to consider the debt crisis as partly structural and of a long duration. It is on this basis that several creditors have not introduced the concept of multiannual rescheduling in the area of public debt.
(ii) Multiannual rescheduling
21. From the point of view of those who launched the idea of multiannual rescheduling, this should be more flexible and allow adaptation to changes caused by world economic instability especially at the level of interest-rate and exchange-rate fluctuations. Rescheduling should be done during the period covering the readjustment programme. Upon reviewing the situation of each debtor country, official creditors should plan on negotiating agreements granting a period of consolidation of 5 to 10 years, and of reimbursement over 20 to 30 years, with a grace period of 10-15 years.
(iii) Bilateral aid programmes
22. A number of OECD countries have set up aid funds in grant form to encourage reduction of the trade debt and also official development assistance (ODA) loans. Thus, the German, Belgian, Japanese, French, Dutch, Swiss and more recently, the United States Governments offer financial and technical assist ance to facilitate debt reductions.
(a) The Toronto debt-reduction options
23. The wide-ranging debt-reduction Toronto options were formulated by the secretariat of the Paris Club and discussed and accepted by the economic summits of the seven most industrialized countries, held in June and September 1988.
24. The Toronto options consider that the bilateral debt of low-income countries to the Paris Club should be rescheduled according to the group of options which would arise under favourable conditions. The debtor countries should negotiate repayment terms on the basis of the following three options for debt granted under unfavourable conditions:
10 W. Cline, International Debt: Systematic Risk and Policy Response. Institute for International Economics, Washington, 1984.
(a) Option A: Cancellation of one third of the deadlines concerned and rescheduling of the remainder by anticipating a deadline falling after a grace period of 8 years. Interest-on-arrears would be payable at market rates;
(b) Option B: Adoption of a longer repayment period for debt granted under liberal conditions (deadline of 25 years, after a grace period of 14 years). Interest on arrears would be payable at market
rates;
(c) Option C: Levy of a rate of interest on arrears somewhat lower than market rates and repay ments according to a deadline of 14 years, after a grace period of 8 years.
25. The Toronto options marked an important turning point in the debt-reduction strategy. For the first time, creditor governments recognized the need for concessional relief of the public debt contracted under commercial terms. Nevertheless, application of the options proposed under the Toronto agreement has revealed their inadequacies over time.
(b) The Dakar Plan
26. At the Francophone Summit at Dakar in 1988, France proposed cancellation of the public debt (ODA) of the least advanced countries of Africa. Application of this measure by France resulted in debt cancellations on the order of $40 billion and reductions in interest charges at $US 1.4 billion.11
(c) The Baule Plan
27. In 1989, during the French-African Summit at Baule, France raised the issue of middle-income countries in Africa such as C6te d'lvoire, Cameroon, the Congo and Gabon. For the latter, France proposed a maximum reduction of 5 per cent of interest rates on the credits granted to these countries. In autumn 1990, France proposed extension of the Baule Plan to all middle-income countries, through lengthening of the maturity period and/or debt conversion.
(d) The Libreville Plan
28. During the French-African Summit at Libreville in October 1992, France proposed a debt cancellation fund called "the Libreville Fund". This fund, endowed with FF 4 billion, is destined for middle-income countries in the franc zone: Cameroon, Gabon and C6te d'lvoire. The basis of conversion is the rescheduled debt under the auspices of the Paris Club. Utilization of this fund is not dependent on the prior conclusion of an agreement with the IMF or the Paris Club.
(e) The Trinidad and Tobago Plan
29. The Trinidad and Tobago Plan, which was proposed by Great Britain during the Commonwealth Conference at Trinidad and Tobago at the end of the September 1990, would replace the three Toronto options with a unique range of credit-relief measures for bilateral credits through reduction of a supplementary one third of all the debts to be recovered.
30. The innovation of the Trinidad and Tobago Plan rests on regulation of the total eligible debt of a debtor country by a long-term rescheduling operation over 25 years, with capitalization of interest payments during the first five years. The cash savings during the first year of the plan was estimated at $2.7 billion for the 19 countries eligible, of which 17 were African countries.
The exchange rate used to estimate the amount cancelled is 5 French francs (FF) to US$ 1.00.
E/ECA/TRADE/93/11 Page 7
(f) The Canada initiatives
31. Canada decided to cancel the ODA debts of Commonwealth countries.
32. With the exception of the Libreville Fund, all bilateral deb-reduction programmes have to be agreeble to the Paris Club and must be ratified by each creditor government.12 Two major creditor countries, the United States of America and Japan, remain reluctant with regard to such debt cancellation proposals and insist on a case-by-case approach to the Paris Club measures.
33. In the case of the Toronto conditions, the United States chose the option of extending repayment periods, which does not represent a concession in financial terms but rather extension of risk to the country.
(iv) Combined multilateral and bilateral aid
(a) The Baker Plan and the new conditionalitv
34. Since 1985, the United States of America has launched two debt-reduction plans: the Baker Plan and the Brady Plan. The central thesis of the Baker Plan is an admission that international debt will not be reabsorbed unless debtor countries are able to achieve sound and sustainable growth. The Baker Plan proposed three lines of action to help the most indebted countries get out of this difficult situation:
(a) Commitment of the debtors to implement structural adjustment programmes;
(b) Increasing the resources available to the IMF and other international financial organizations to assist debtors in applying such policies;
(c) Increase of net inflows of banking capital to such countries.
35. Reaction to the Baker Plan was rapid. In August 1986, the IMF created the Structural Adjustment Facility, and capitalized it with STD 2.7 billion on a long-term basis (10 years), bearing a symbolic, nominal interest (0.5 per cent). Such resources were to help the poorest countries among the most indebted to carry out the structural transformations.
(a) In December 1987, the IMF structural adjustment instrument was strengthened by creation of the Enhanced Structural Adjustment Facility, with a budget of STD 6 billion;
(b) In August 1988, the IMF took an additional step by deciding to create the Compensatory and Contingency Financing Facility, whose resources had to be used especially for protecting structural adjustment programmes from exogenous shocks.
(b) The Bradv Plan
36. In March 1989, the United States marked a turning point in the official strategy of creditor countries13 with the introduction of the Brady Plan. This entailed replacing debt reduction with a refinancing strategy. Since May 1989, inspired by this plan, the World Bank and the IMF, with the support
12 The agreement answers to the principle of sharing the burden through uniform treatment applicable to all creditors in terms of loan repayments. On this subject, please see document E/ECA/Trade/92/7, paras.
27-28: effective strategies for external debt relief to Africa.
13 See various IMF publications (occasional papers).
of official bilateral creditors, established specific financing policies in order to reduce the banking debt of developing countries with medium-term, macro-economic adjustment programmes. With regard to the World Bank, funds allocated to assisting debt-reduction operations rose to 25 per cent of the loan adjustment programme over a three-year period or 10 per cent of the total loan programme. If necessary, additional resources up to 15 per cent of the Bank's total loan programme over a three-year period, may be used as surety for interest payment. Globally, the Bank and the IMF can release up to $25 billion in resources to support the Brady initiative.
37. In addition, the World Bank set up a special instrument in 1989 to support buy-back operations at discount prices for low-income debtor countries which are eligible for IDA loans totalling $100 million. The facility can provide up to $10 million per country. The funds are supplemented with bilateral financing coming mainly from France, Japan, Switzerland, the United States and other donor countries. This facility was most recently extended to the Niger, Mozambique and Senegal.
C. Market initiatives for debt restructuring
38. Traditional debt-restructuring initiatives, having been unable to solve the problems of the indebtedness of poor countries, the secondary market has come to the rescue of indebted countries and creditor countries through the institution of a menu system for creditors who can choose between various debt-relief modalities. The global orientation of market initiatives consists of debt refinancing without exposing the creditor bank to additional risks while maintaining the solvency of debtor countries.
39. Debt-restructuring market initiatives1* generally include debt buy-back options, loan conversion, granting of new loans and loan reschedulings.
40. Currently, the price level on the secondary market shows that buyers are no longer very many and actually play a very limited role.
(i) Deht buv-back with discount
41. Debt buy-back procedures on the secondary market allow indebted countries to reduce their debt by profiting from discounted bank loans on secondary markets. The effectiveness of a buy-back arrangement depends on the original source of financing (loans or grants) as well as on the debt profile.
42. For the most indebted countries, the buy-back objective is, above all, for redistributing loans among the creditor banks, to protect the small banks. For the least-indebted, low-income countries, the point of buy-back is to eliminate the debt owed to commercial banks.
(ii) Debt exchanges and conversions (swans)
43. Debt exchange or debt swap is a current technique much used in practice by commercial banks which are very exposed in developing countries.15 The banks participating in the swap prepare a loan "cocktail"
and issue a commercial paper in exchange, introduced on the market through considerable discounting linked to the quality of the debtors. The buyer of the commercial paper bets on the capacity of the debtors to repay
14 United Nations, Debt-equity Conversions. A Guide for Decision-makers, document ST/CTC/104, New York, 1990.
15 Paul Krugman, "Private capital flows to problem debtors", in National Bureau of Economic Research, Developing Country Debt and the World Economy, edited by J. Sachs, University of Chicago,
1989, pp. 285-296.
E/ECA/TRADE/93/11 Page 9
the debts and ensure regular payment of the interest on their debts. If the purchasing operation obviously comprises a risk, this risk is reckoned as being covered beforehand, by the difference between the nominal price and the loan-transrer price. Currently, there is a multitude of debt-conversion plans such as debt conversion for the environment, debt conversion for education, debt conversion for health, etc'
(iii) Debt conversion for share obligations
44. Many debtor countries, especially from Latin America,16 have made the offer to commercial banks of converting rescheduled loans into equity shares or bonds at discounted rates or at reduced interest rates.
It was thought that such a strategy would encourage the participation of London Club banks to increase their activities in debtor countries. The actual value of the shares offered would guarantee a profit equal to or higher than the liquid value of loans on the secondary market for bank credits.
(iv) Debt conversion for equity participation in local enterprises
45. This method has three simultaneous objectives: (a) reduction of the debt and debt service; (b) stimulation of private investment; and (c) buy-back of public enterprises within the framework of a privatization programme. To be credible,17 the assets acquired through debt conversion must belong to the State and, in order to attract foreign creditors, should present some expectation of profitability.
46. Currently, developing countries, for political reasons, refuse to sacrifice their economic sovereignty for overcoming debt and refuse at the same time to lose control of the "jewels" of their economies.18 47. In conclusion, debt reduction marks a turning point in relations between debtor countries and international banks. These reductions, nonetheless, are not accessible to more than a limited number of large debtor countries presenting a "critical mass" of indebtedness, enough to impose a forced solidarity between debtors and creditors. For high-discount countries, financing debt reduction raises questions of opportunity cost while the discount reflects suspension of debt servicing. For the other countries, debt reduction raises the problem of the conditions for returning to capital markets. Given the lack of sound macro-economic programmes, debtor countries risk19 facing very well-equipped banks which restructure their portfolio to favour commercial loans and short-term inter-biink credit lines.
CHAPTER III
ANALYSIS OF IMPACT OF EXTERNAL DEBT INITIATIVES ON AFRICAN COUNTRIES
48. To measure the effectiveness of debt-relief initiatives, two general criteria should be used: (a) their contribution to increased net-resource transfers; and (b) their share in improving the solvency of beneficiary countries. Every initiative should, moreover, assist in restoring debt-servicing capacity. Under such
16 M. Mortimore, HeM equity conversion programmes: Guidelines for debtors. UNCTC paper presented to a workshop on Negotiating with Transnational Banks, held in Bangkok, 13-19 February 1989.
17 International Finance Corporation, Privatization in Developing Countries, vol. 4, No. 1, February 1990.
18 P.H. Dembiski, L'endettement internationalcoU. Que sais-je, PUF, 1989.
19 Masood Ahmed and Lawrence Summers, "Le point sur la crise de la dette dix ans apres", in Finance ft Developpement. September 1992, vol. 29, No. 3, pp. 2-5.
conditions, the debtors which record large positive resource flows will more easily ensure the repayment and servicing of old debts than that of a further new loan. Another way of measuring the attempts to restore normal debt-servicing capacity is to examine the equivalent volume of non-concessional debt under each option at the end of a specified period, for example, at each end-of-year cancellation, rescheduling or conversion.
A. Debt cancellation
49. Despite the measures taken by public creditors to cancel the ODA debt of low-income countries, in accordance with resolution 165 (5-IX), adopted in 1968 by the Trade and Development Board, debt relief to African countries in the form of ODA remains important. The donors cancelled $1.6 billion of this debt in 1989 and in 1990, $5.7 billion. It was estimated that in 1991 cancelled debt would be around $2.9 billion. The developed countries which have cancelled the most contracted bilateral debt in the form of ODA were France, Canada, the Federal Republic of Germany and the United States. Recently, during meetings of the African Development Bank, several creditor countries announced fresh initiatives entailing cancellation of a considerable amount of the ODA debt of low-income African countries. It is reckoned that debt cancellation will enable the beneficiary country to import, invest and develop itself. This is preferable to rescheduling, which does not increase net resource transfer, but which instead risks aggravating the financial situation of indebted countries due to the additional financial costs associated with interest consolidation.
B. The reschedulings
(i) Concessional public debt
50. Reschedulings, which comprise reprogramming of debt-servicing, are currently governed by the terms of the Toronto Plan, centred around the three options cited earlier.
51. In the case of debt contracted as official development assistance, it was agreed that the deadline should be that of option B and that the interest rate would also be at least lower than the initial rate, regardless of whatever option might be selected. As has been said previously, several donor countries have applied more generous measures in converting ODA loans into grants. The most recent case is that of the above-mentioned Libreville Fund. Capitalized with FF 4 billion, the Fund had already cancelled FF 1 billion by mid-1993.20
Table 2. Paris Club reschedulings for some African countries. September 1990-1992 (in million US$)
Country Cameroon Congo C6te d'lvoire Morocco Nigeria
Consolidated amounts 1 080 1 298 724 2 489 3 048
Maturity period Grace period 14 years 8 months
14 years 3 months 14 years 6 months 14 years 14 years 5 months
8 years 5 years 8 years 8 years 7 years
World Bank.
20 See Michel H. Bouchet, "Du renouveau sur le Front de la dette" in Jeune Afriaue. No. 1706, 22 September 1993.
E/ECA/TRADE/93/11 Page 11
52. The Paris Club has introduced a new debt-processing plan for severely indebted countries at its meeting in September 1990.21 According to this plan, debtor countries could repay consolidated concessional loans, over a 20-year maturity period, including a 10-year grace period. The credits provided and other official loans that were non-concessional would be reimbursable over a 15-year maturity period, including an 8-year grace period.
(ii) Non-concessional public debt
53. Non-concessional public debt consists mainly of bilateral loans and export credits guaranteed by the government. In 1990, it totalled22 an in-flow of $2.3 billion and in 1991 it reached a level of $1.5 billion.
According to World Bank estimates, in 1992 this debt category stabilized at $1.4 billion for all African countries. The high interest levels charged by public creditors on this type of loan penalizes African countries which have faced negative transfers since 1990. In fact, from -$112 million in 1990 the net transfer which continued to decrease in 1991 stabilized at -$752 million. It was estimated that in 1992 the negative out-flow would reach -$1.7 billion.
54. The total debt service was $3.7 billion in 1990, that is 22.6 per cent of the total debt service payable by African countries. This percentage was 20.3 in 1991 and it is estimated that it will reach 23.7 in 1992.
55. Rescheduling this debt under liberal terms was done within the Paris Club framework. Following the agreement concluded by the industrialized countries at the Toronto Summit in June 1988, significant although very limited progress has been achieved.
56. Thus, for the 17 African countries which benefitted from the 1989 non-concessional public-debt rescheduling, the savings realized that year on interest payments23 represented less than 2 per cent of debt-
service payments.
C. Multiannnual rescheduling
57 Over the 1989-1992 period, 24 African countries have benefitted from multiannual rescheduling totalling $52.8 billion. Of this, five countries, namely Egypt, C6te d'lvoire, Morocco, Nigeria and Zambia totalled $45.3 billion, that is 85.6 per cent of reschedulings.
58. For 1992, multiannual reschedulings only totalled $4.3 billion and the terms were based on a common "menu card". Exceptions have been Morocco which benefitted from a 19-year maturity, with a 9-year grace period, Cameroon which had a $1.1 billion debt rescheduled over 19 years, with a 9-year grace period and Cdte d'lvoire, which was able to reschedule $742 million over 14 years, with an 8-year grace period.
21 World Bank, World Debt Tables 1992-1993, vol. 1, Analysis and summary tables, p. 79.
22 World Bank, World Debt Tables 1990-1993, vol. I, op.cit.
23 Calculations based on World Bank statistics, World Debt Tables 1991-1992.
Table 3. Multiannual reschedulings 1989-1992
Country Angola Benin
Burkina Faso Cameroon
Central African Republic Chad
C6te d'lvoire Egypt
Guinea Guinea-Bissau Madagascar Malawi Mali Mauritania Morocco Mozambique Niger Nigeria Tanzania Togo Uganda Zaire Zambia
Total
In million US$
365 316 71 1 701 43 33 2 901 28 164 116 40 335 43 54 112 4 289 504 177 7 795 1 185 279 138 1602 2 111 52115
Source: World Bank, World Debt Tables, op.cit, D. Multilateral debt relief
59. Multilateral financial institutions have taken some measures to relieve the debt-service burden and also to avoid accumulation of arrears. The World Bank, since 1988, decided to set aside 10 per cent of the amounts repaid to IDA, to assist eligible countries to pay the interest and the loans granted by the World Bank at market rates.24 Several donor countries have provided additional resources for this purpose. The IMF established the Structural Adjustment Facility and the Enhanced Structural Adjustment Facility (ESAF), to provide concessional aid to low income countries in balance-of-payment difficulties.
60. The IMF took measures to regulate the existing problems of arrears. To this end, it requested developed countries which were members of the Fund to supply additional resources within the context of support groups for helping developing debtor countries which were late with the IMF repayments and which wanted to take measures for remedying the situation. Until now, these support groups have achieved limited results and no African country has benefitted from such aid. At the beginning of 1990, the Fund adopted a new approach by which all member countries which had significant arrears owed for a long time to the IMF, may acquire drawing rights through sustained improvement of economic results under the programme framework called accumulation of rights.
24 ID/B/1280/Add.l, paras. 156-158.
E/ECA/TRADE/93/11 Page 13
E. Commercial debt relief
61. Reduction of commercial debt is generally made by the London Club and recently, within the framework of the Brady Plan which centres its strategy on debt reduction and debt servicing. Nevertheless, this plan is not relevant to more than a small number of middle-income African countries, because commercial debt only represents a small part of the total debt of African countries. In 1991, it represented 9.7 per cent of the total debt while the World Bank estimated that it would reach 7.5 per cent by 1992.
62. The World Bank financed the Brady Plan for low-income countries eligible for IDA financing programmes. Mozambique and the Niger are the two African countries which have profited from such
financing.
63. In 1991, the Niger was able to buy back $108 million of its commercial debt with an 82 per cent discount. This operation was financed by: (a) an IDA loan of $10 million; (b) $3 million (grant) from the Swiss fund managed by IDA; and (c) a grant of $10 million from the French Government. In December 1991, Mozambique was able to buy back three-quarters of its commercial debt of $123.8 million, at 90 per cent discount. France, the Netherlands, Switzerland and Sweden financed the operation. Uganda was able to clear all its short-term debt.25
64. The World Bank had estimated that cancellation on the basis of such commercial debt buy-backs of 22 countries, as originally instituted by the special assistance programme, would need funding on the order of $200 to $300 million, according to the discounts in practices. Financing such buy-back operations would need additional financial contribution from bilateral donors.
65. In the case of the commercial debt of low-income countries, the World Bank in September 1989 established a special debt-reduction fund exclusively for IDA countries, endowed with $100 million coming from net revenue transfers from the World Bank. Over a period of three years, this fund allowed low- income countries to fulfil IDA conditions for obtaining grants for cash buy-back of loans held by commercial
banks.
F. Debt restructuring
(i) Recent trends
66. In the period from January 1980 to November 1982, 32 African countries renegotiated their debts with official creditors or commercial banks in a multilateral context. The total amount of debt thus restructured was estimated at $105.3 billion, of which $81.8 billion were debts due to official creditors and
$23.5 billion were debts due to commercial banks. Three countries, that is, Egypt, Morocco and Nigeria, totalled 68 per cent of all the restructured debts, with $71.6 billion.
67. Official creditors have restructured 77.7 per cent of all the debts while commercial sources accounted for 22.3 per cent of restructured debts.
68. During 1991 and 1992, commercial banking consortiums continued to improve debt-relief conditions by offering lower margins and somewhat longer deadlines.
25 See World Bank, op.cit.
Table 4. Multilateral debt-restructuring agreements January 1990 - November 1992 (in million US$)
Country Angola Benin
Burkina Faso Cameroon
Central African Republic Chad
Congo COte d'lvoire Egypt
Gabon The Gambia Guinea Guinea-Bissau Equatorial Guinea Liberia
Madagascar Malawi Mali Mauritania Morocco Mozambique Niger Nigeria Senegal Sierra Leone Somalia Sudan Tanzania Togo Uganda Zaire Zambia TOTAL
Official loans
365 312 71 1 701 67 33 1 761 3 538 33 727 1 898 19 348 64 70 76 1 325 84 102 227 7 674 1 250 374 13 693 972 112
221 998 1 871
73S 315 4 845 2 991 81 83*
Commercial loans
1 336
184 19 28
55 583 95
6 146 253 65 10 385 143 25
3 173
201
111
r 23 46:
Total
365 312 71 1701 67 33 1 761 4 874 33 727 2 082 38 376 64 70 131 1908 179 102 227 13 820 1 503 439 24 078 1 115 137 221 4 161 1 871 940 319 5 617 2 991
1 105 300
Source: World Bank World Debt Tables 1992-1993.
E/ECA/TRADE/93/11 Page 15
Table 5. Public debt-restructuring agreements (January 1980-November 19921
Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Total
No. of agreements 3
9 6 17 14 22 17 17 14 23 18 16 16 192
Rescheduled amounts 2660 3 277 678 8 739 4 569 17 412 11727 23 845 7 735 16 767 17 366 65 858 11 560 192 192
Source: World Bank, World Debt Tables, op.cit.
69. In fact, interest rates which averaged 10.1 per cent in 1982 continued to decline to 7.6 per cent in 1988 and stabilized at 7.4 per cent by 1991. The average grace period, which was 4 years in 1985, has nevertheless been reduced since then and was 2.2 years in 1990 and 1.8 years in 1992. The maturity period for reimbursement stabilized at 6.6 years in 1991 although it had reached 10.3 years in 1985. The grant element of the debt due to private creditors rose to 7 per cent in 1991, after having been 3.7 per cent in
1990 and even 0.6 per cent in 1983.
(ii) Debt-relief agreements with commercial banks 1991-1992
70. During the 1991 to 1992 period, there were five debt-relief agreements which were negotiated within the multilateral framework between commercial banks and African debtor countries. Under the Brady Plan, Mozambique was able to reschedule a debt of $120 million. The agreement signed accorded it a 15-year maturity period, with an 8-year grace period. The Niger was able to reschedule $111 million and Nigeria
$5.3 billion, while Gabon rescheduled $157 million over 13 years. The case of Nigeria is unique in the sense that it was able to negotiate a voluntary debt-reduction agreement through buy-back of $3.3 billion of the principal, at 62 per cent discount and $2.0 billion of its service with a discount of 38 per cent.
71. The debt relief offered by commercial banks comprises: (a) restructuring of the repayment of the principal coming to term over a preestablished consolidation period; (b) granting new long-term loans; and (c) commitment to maintain or to extend short-term lines of credit. Debt-relief agreements may contain one or several such elements.
G. The secondary market and swap agreements
72. The secondary market which has developed rapidly in recent years relies on market assessment of the value of portfolios made up by various loan contracts.26 In Africa, the secondary market encounters two major limitations for its applicability:
(a) In the first place, African debt consists mainly of portfolios of public origin, because up until now there has been no secondary market except for bank loans. It is therefore practically impossible to compare the debt financed by private and official creditors on this basis;
(b) In the second place, the secondary market is very narrow and is of interest to only three large debtors,27 because when taken individually, African countries are no more than small debtors with regard to the large international banks.
73. It is said that on the secondary market some creditors are ceding their loans when they no longer want to participate in renegotiations programmes with debtors or when they prefer to limit losses to the dis count rate rather than take the risk of having to increase their exposure through involuntary loans. Other creditors, especially European banks and regional American banks, sell because they have provided enough loans and wish to withdraw once and for all from a problem which is exotic and foreign when compared to their normal activities.28 Thus, they refuse to participate in future rescheduling and to provide debtors with fresh capital. For oher purposes, finally, the sale of the debt of debtor countries is a source of necessary cash for re-organization of their portfolio.
74. Other methods are often used for reducing commercial debts. These entail granting loans to aid or charity organizations which use such payments in local currency as a supplement to their support programme to debtor countries.
75. It is within this framework that debt-conversion programmes for the environment and for conservation of nature are inscribed. As shown in table 6, four African countries have already benefitted from this type of debt-conversion programme over the 1989-1991 period. By buying back their total debt of $6,569 million for $1,778 million, that is a transfer price of 27.1 per cent. Madagascar has already resorted three times to this technique, for an amount of $3,149 million.
26 Jaime de Pinies and G. Anayiotos, The Secondary Market and the International Debt Problem.
United Nations Working Paper Series, DIESA, Working Paper No. 7, New York, November 1987.
27 Morgan Guaranty, LDC Debt Relief or Market Solution? World Financial Markets. September 1986.
28 Norel and E, Saint-Alary, I'Endettement de Tiers-Monde, (ed.) Saint Martin, Paris, 1988; P.H.
Dembiski, op.cit.
E/ECA/TRADE/93/11 Page 17
Table 6. Debt for nature swaps
Country Madagascar Zambia Madagascar Madagascar Ghana Nigeria
Year 1989 1989 1990 1991 1991 1991
Nominal value 2,111 2,270 919
119 1,000 150
Transfer price in percentage 45 20 48.5 49.6 25 43.3
Acquisition cost (US$ million)
950 454 446 59 250 65
Organization WWF/USAID
WWF WWF a
DDC/CI/SI NCF
Source: Agency of Cultural and Technical Cooperation (ACCT), Paris, 1992.
WWF: World Wildlife Foundation NCF: Nigeria Conservation Foundation CI: Conservation International DDC: Debt for development coalition SI: Smithsonian Institution
IV. CONCLUSIONS AND RECOMMENDATIONS
76. African countries will continue to need substantial external financial support to sustain their structural adjustment process and transformation of their production structures. At the same time, special efforts have to be made in the 1990s to correct the decline in such areas as food security, development of human resources, infrastructural investments and financing environmental protection measures.
77 To respond to the resource needs, it is necessary to resort both to debt-relief measures and to new financing on favourable terms. Debt relief will not be sufficient for placing African countries on the road to sustainable recovery, without a policy aimed at expanding and diversifying their production base to strengthen effectively their foreign exchange earning capacity. This process requires additional resources on favourable terms, to finance increased investment.
78. Although donors have committed themselves to various agreements - the second special assistance programme, the ninth operation for replenishing IDA resources, the fourth Lome" Convention - a substantial increase of resources beyond the levels already announced is necessary for continuing support to African countries. In this context, the sixth operation for replenishing the resources of the African Development Fund, which is currently under negotiation, should receive full support. The African Development Bank is hoping that donors will accept a 75 per cent increase of the Fund's resources, which means an injection of $4.7 billion for financing loans on favourable terms over the next three years.
79. It is also important to strengthen the effectiveness of the aid, both for the beneficiaries and for the donors. In this regard, the experience of the 1980s illustrated the need to reformulate development strategies and adjustment policies in African countries over a longer period, in the context of reform-support loans.
At the same time, emphasis must be given to strengthening the institutional capacities of beneficiary countries in coordinating and managing their resources. African countries should also promote favourable conditions for increased production efficiency, especially by intensifying their efforts for sound management.
80. It is necessary to view the debt problem within the global context of development. To this end, the principle of processing a country's debt within the context of a medium-terra development programme and of global financing needs, indicates that such a programme would benefit from coordination between creditors both public and private, and the donors should work in association with consultative groups, round- tables, commercial banking committees for reschedulings and the multilateral institutions.
81. Taking into consideration the over-indebtedness of most African countries whose resources tend to be limited, cancellation of a large part of their debt, especially that due to public creditors, remains the best solution for economic recovery. With regard to public debt to low-income countries on market terms, it would be convenient to revise the modalities defined at Toronto and to take urgent measures to cancel this debt totally. With regard to the debt owed to Paris Club countries by lower middle-income countries, it would be necessary to revise the modalities defined at Houston to include options for debt and debt-service reductions.
82. With regard to the debt owed to the commercial banks by low-income countries, credit buy-back opera tions should be intensified, with the assistance of donor contributions, in order to achieve elimination of this burden. With regard to the commercial debt of middle-income countries and in the context of the Brady Plan in general, financing should be centred moire on debt reduction than on granting new credits. In each case, negotiations should be based on reliable needs assessment for the country, in teirms of debt reduction and public accounts. Multilateral financial institutions could play a useful role in this respect. Fresh incen tive measures, especially through national laws and regulations, could also be specifically used for obtaining adequate levels of debt and debt-service reductions. Finally, the techniques of converting debt through credit swaps should be studied indepth and generalized, as necessary.
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