Pete’s blog

Debt relief is a very topical issue at the moment, with pop stars and actors firing up public interest in the matter. Africa and debt relief are also inextricably linked – Africa conjures up images of heavily indebted countries and one cannot think of debt relief with thinking of Africa. If this is such a big issue in Africa, the question is whether South Africa, with its Afrocentric policies, is doing enough. This paper will look why debt is such a problem in Africa, what is being done about it and what South Africa’s involvement is. South Africa’s apparent policy will then be analysed and discussed.

Why is debt relief needed?

The first thing that needs to be understood is why debt is considered such a problem in Africa. In 1998, Africa had $282.7 billion in external debt and made debt service payments of $25.5 billion a year. This may not appear that large in relation to developing Asia’s debt of $695 billion, but its significance can be understood in relation to Africa’s economic output. Africa’s ratio of external debt to GDP in 1998 was the highest in the world at 65.5%, approximately 6% of GDP being used annually to service this debt.[1] This however is the picture for Africa as a whole, the picture is more dire when only countries with a severe debt problem are looked at. Under one of their initiatives (discussed later), the World Bank and International Monetary Fund (IMF) identified a group of heavily indebted poor countries (HIPCs). Of the 29 countries benefiting from the HIPC initiative, 25 are in Africa[2]. For these HIPC countries, their ratio of external debt to GDP in 1998 was 103%[3] – the amount of external debt on average exceeded their total annual production. Although Africa receives aid from the developed world, this aid often does not cover the amount being paid to service this debt. As Trevor Manuel noted in 2005, “low-income countries received about $27 billion in aid but paid back $39 billion in debt repayment to rich country creditors – a net outflow of $12 billion.”[4]

Many explanations for Africa’s heavy debt burden are given – corrupt dictatorships, civil strife, poor governance, the oil shocks of the 70s and 80s, falling commodity prices, financial mismanagement, the IMF’s structural adjustment programmes, postcolonial dependency relationships, etc. The reasons for the debt are not relevant to this paper, only the situation that several African countries find themselves in. Due to the high levels of debt, governments have lost considerable amounts of decision making ability and spending power. Money that could be spent on health and education must instead be spent on debt servicing. Since the government’s influence over incoming aid is limited, their sovereignty over public spending has in effect been severely restricted. The debt in many cases is unsustainable and unlikely to be paid off in the foreseeable future. It lowers the country’s credit rating, making it more difficult and expensive to refinance existing debt. The poor credit rating proportionally affects the investment rating, limiting the ability to attract foreign direct investment. It is this relationship that earned the name ‘debt-trap’. The high debt levels limit the very growth necessary to pay off the debt, leading to a spiral of poverty and low growth.

What are the major initiatives?

Since most African countries had only gained their independence by the 1970’s, and the 1970’s and 1980’s were still dominated by Cold War politics, the debt problem only became recognised in the 1990’s. The structural adjustment programmes of the IMF in the 1980’s did perhaps recognise that debt was a problem, but the focus was more on the fiscal policies of the government being the cause, rather than the debt itself.

Foremost of the actors in international debt is the Paris Club, an informal ‘club’ of international creditors which first met in 1956. Although they are a “non institution” voluntary gathering[5], they are the best representation of the creditor nations and no large scale debt relief initiative would be possible without the support and agreement of the Paris Club. Also, since their primary mandate is to find solutions for when debtor countries experience payment difficulties, they were the main source of debt-relief prior to 1996. The terms under which debt would be reduced were revised by the Paris Club throughout the 1990s, increasing the level of debt cancellation from 33% under the ‘Toronto terms’, to 50% from 1991 under the ‘London terms’[6], and up to 67% in 1994 for the poorest countries under the ‘Naples terms’[7]. This debt relief was however not automatic and was subject to any conditions the Paris Club might choose to impose. Also the debt relief is given on a case by case, country by country basis.

The need for a formal, structured programme to address the debt burden was recognised by the international financial organisations, and in 1996, the IMF and World Bank launched the Heavily Indebted Poor Countries (HIPC) initiative. This initiative identified countries with heavy debt burdens and proposed debt relief if these countries followed a set framework. 33 of the countries identified under the HIPC initiative were in Africa[8]. The original HIPC programme had several flaws and did not make any significant progress, and as a result was enhanced and revised in 1999. The Enhanced HIPC Initiative slightly expanded the list of eligible countries and attempted to speed up the debt relief process. HIPC relief requires a country to produce and implement Poverty Reduction Strategy, thereby providing evidence that the debt relief will be properly focused and there are set criteria and tasks which a country must perform before it becomes eligible[9]. By April 2006, 25 out of the 33[10] African countries had reached the so called ‘completion’ point. The remaining countries only have until the end of 2006 to “adopt an IMF or World Bank supported program and reform”[11].

Another major group involved in the debt relief process is the Group of Seven (G7)/Group of Eight (G8). Made up of the major industrialised countries, they represent the majority of the creditor countries as well as the group with enough resources to address the problem. The first major G7 summit dealing specifically with debt relief was held in Cologne in 1999. The enhanced version of HIPC relief most came from this Cologne summit. Debt relief and poverty reduction remained on the G7/8 agenda, but the next major breakthrough was in London in 2005. At this meeting, the members agreed to a $40 billion debt cancellation of heavily indebted countries[12]. This agreement became know as the Multilateral Debt Relief Initiative (MDRI). It is essentially an add-on to the HIPC system – rather than an average write-off of 67% under HIPC, the MDRI promised a 100% debt write-off for countries completing their HIPC requirements.[13]

However it is unlikely that as much progress would have been made with regards to debt relief, without the significant pressure and public interest created by civil society. Major international figures have been involved in promoting debt relief, from Jesse Helms to U2’s Bono to the Pope[14]. The Jubilee 2000 campaign was the main focus of debt cancellation pressure, collecting 17 million signatures that were presented to the G7 at the 1999 summit. By 1999 the movement was in over 50 countries and was meeting with officials of the IMF, World Bank, Paris Club and G7[15]. This global campaign involving famous personalities has created large scale awareness of and interest in debt relief.

This public interest, as well a general millennial spirit, also led to the United Nations (UN) Millennium Summit. This summit committed to set poverty reduction targets, know as the Millennium Development Goals (MDGs). Because the MDG were very specific targets in a very specific timeframe (by 2015), it has resulted in poverty reduction progress becoming measurable. Knowing whether or not a country is likely to meet its MDGs has resulted in renewed focus and pressure on debt relief and other poverty reduction measures. At present the UN Economic Commission for Africa believes Africa is unlikely to meet its MDGs, and faces a financing gap of 10%-20% of GDP to reach the goals[16].

Lastly is Africa’s own response to debt relief – the New Partnership for Africa’s Development (NEPAD). Born out of a merger of the Millennium partnership for the African recovery Programme (MAP) and the Omega plan, NEPAD is a proposal in which Africa promises greater self regulation in return for greater foreign investment. The NEPAD programme goes far beyond pure debt relief, but debt relief is addressed as a form of capital flow. It identifies the two objectives of linking debt relief with poverty reduction strategies and the fixing of debt service ceilings to a proportion of fiscal revenue[17].

What is South Africa’s involvement?

Since one of South Africa’s principles of foreign policy is “a belief that our foreign policy should reflect the interests of the continent of Africa”[18], one would expect South Africa to be in the forefront of these initiatives – and they have been. At the 1999 Organisation of African Unity (OAU) summit in Sirte, Libya, South Africa, together with Algeria were mandated to engage Africa’s creditors on the total cancellation of Africa’s external debt[19]. This mandate stemmed in part from the ‘African Common Position on Africa’s External Debt Crisis’ declaration, adopted in 1997[20], and the 100% write-off of African debt became Africa’s position.

Since receiving the mandate, South Africa has been represented at most major debt relief summits and committees. Representation has also been at a very high level, often being President Mbeki himself, but mostly being Trevor Manuel as finance minister. Aziz Pahad notes that “the President has played a major role in ensuring that the African development agenda is humanity’s agenda. His input in the … G8 and Millennium Summits is internationally recognised.”[21] Mbeki most notably attended the G8 Summits in Okinawa in July 2000 (in his capacity as Non-Aligned Movement (NAM) chair)[22], and in Gleneagles in July 2005 (in his full capacity as a head of state), but has put in an appearance at almost every G8 Summit in between. Mbeki’s vision of an African Renaissance is seen as the driving force behind the creation of NEPAD, and his tireless promotion of NEPAD and the African Renaissance has earned the respect of world leaders.

Trevor Manuel has undoubtedly used his position as a governor of the World Bank as a platform to promote Africa’s agenda. When he chaired the annual meeting of the IMF and World Bank in 2000, he used the opportunity to highlight unsustainable debt burdens and debt relief[23]. In the same year he contributed to the IMFC discussion on the World Economic Outlook (WEO) report, again highlighting poverty and debt relief[24]. Manuel has since been involved in many of the panels, commissions and discussion groups around debt, including the UN Conference on Financing for Development in 2002[25], the OECD Global Forum on International Investment in 2003[26], the Commission for Africa in 2005[27] and chairman of the Development Committee of the World Bank. The 100% debt relief achieved under MDRI could be ascribed in some degree to South Africa’s efforts at promoting Africa’s position, particularly in the Commission for Africa.

If one compares the slow rate and ineffectiveness of debt relief from 1996 to 1999 under the original HIPC initiative, to the successes and focusing of debt relief from 1999 to 2005, it can be argued that this is partly attributable to the high level of South African involvement and influence in the proceedings.

What exactly is South Africa’s policy towards debt relief?

African debt was identified as a problem from the very beginning of the ANC led government. The Foreign Policy Perspective document of 1994 states that “it is of critical importance to highlight the debt issue. … Unless the issue of debt relief is dealt with more sympathetically an intolerable burden will continue to be placed on future generations of impoverished people.”[28] However, there is in general a lack of public declarations on debt relief by South Africa and no clear statements of South African specific policy. South Africa appears to be taking the quiet diplomacy approach toward debt relief, and so its policy can best be determined through its actions rather than its statements.

To understand how South Africa feels about debt itself, one can look at how South Africa has dealt with its own debt. South Africa has not been immune from the heavy debt burdens of Africa – in Manuel’s first budget speech in 1997, debt servicing represented 21% of the budget spend and 6.4% of GDP[29]. Although not a crippling debt, it was a severe constraint on growth. This debt was mostly incurred by the apartheid government to wage wars on its neighbours and oppress its people, and is seen by many as ‘odious’. ‘Odious debt’ is a concept recognised under international law, whereby “if the debt of the predecessor is deemed to be `odious’, i.e. the debt proceeds are used against the interests of the local populace, then the debt may not be chargeable to the successor.”[30] Calls have been made for the write-off of apartheid debt under these terms and any such effort would undoubtedly succeed, however the government has taken no action on this. There are two possible explanations for this. Firstly South Africa’s debt is structured very differently to most heavily indebted countries – most of South Africa’s debt in held by private creditors, rather than international finance institutions. As one article calling for its write-off even points out, 40% is held by the Public Investment Commission, who is responsible for financing civil service pensions[31]. Writing off this debt would cripple most pension funds, who are by law required to hold a minimum amount of government debt, and would increase the social burden of the government. The other possible explanation is that South Africa is reluctant to divert resources from more urgent cases in Africa. A write-off of South Africa’s debt without a simultaneous write-off of the rest of Africa’s debt, would result in a severe backlash and resentment from the rest of Africa. This would alienate South Africa from Africa and cripple its African initiatives.

South Africa’s approach has rather been careful fiscal management, improved tax collection, and a gradual reduction in the debt. Significantly, South Africa has avoided any substantial new debt. As Alan Hirsch relates, the IMF and World Bank were all too keen to offer the new ANC government several new loans at inauguration, but these were turned down by the ANC. He suggests that this derived “from a fear of losing sovereignty as a result of indebtedness.[32]” South Africa’s internal policy and efforts were effective, and by 2005 debt servicing was down to 14% of the budget spend[33], allowing more money to be allocated to social services. So from South Africa’s own approach to its debt, it can be seen that it views debt as negative, as a limit on sovereignty, and should be carefully controlled and managed. Also in South Africa’s own experience, it has learnt that debt can restrict growth and poverty reduction efforts.

The next question is: why is achieving debt relief for other African countries in South Africa’s national interest? Firstly South Africa is part of Africa and not on some distant continent – instability and poverty in neighbouring countries directly affect South Africa in terms of security and refugees. As Alfred Nzo told SADC, “We cannot be an island of prosperity surrounded by a sea of poverty.”[34] Secondly, Africa is South Africa’s closest and best potential market. South Africa has limited ability to compete in the established markets of the developed world and faces stiff competition from the Asian economies. South Africa has the advantage in Africa, from proximity and from an understanding of the culture. This view is shared by South African business, as shown in an opinion survey in 1997 in which 62% of companies thought that Africa was their best option for foreign investment[35]. Therefore debt relief, and the promotion growth and poverty reduction in Africa also creates opportunities for South African business. Lastly, South Africa shares close ties with the rest of Africa and seeks to promote “Pan African solidarity”[36]. South Africa’s foreign policy is very Afrocentric and Thabo Mbeki is passionate about his dream of an African Renaissance.

South Africa also has a tendency to lead by example, and its own contribution to debt relief speaks volumes. In 1995 South Africa unconditionally and unilateral cancelled the apartheid era debt due by Namibia, and in 1999 cancelled debt due by Mozambique[37]. South Africa has also shown its full support of the debt relief initiatives, making contributions to the HIPC Poverty Reduction and Growth Facility Trust[38] and making a full upfront payment of its share to the MDRI fund in 2006[39].

Another important aspect of South Africa’s policy towards debt relief is that it is hardly ever addressed in isolation. Debt relief is always mentioned in the context of poverty relief and highlighted as one of many required interventions. Aziz Pahad summarises this position:

“Debt relief should not be seen in isolation, but as a vital part in an overall, enhanced and coordinated package of measures aimed at developing a new agenda to integrate the developing world into the global economy.”

The NEPAD programme itself is the recognition of this principle, where debt relief is only a small part of a larger scheme. As Greg Mills argues:

“African problems are large and structural as well as voluntarist. This means that they may persist beyond isolated reforms, which include debt relief and policy changes.”

Through constant emphasis of the bigger picture, South Africa appears to be steering developed countries away from the belief that debt relief will be a panacea. A concern of many in Africa is that the bold debt relief initiatives detract from African solutions to the problem, creating the concern that debt relief “might eclipse NEPAD”[40]. South Africa’s constant promotion of NEPAD, assisted by the targets of the MDGs, has ensured that this has not yet happened.

Conclusion

South Africa has approached the debt issue in its usual quiet diplomacy style of constant engagement in multilateral forums, without any public fanfare. Through its actions and own experiences, it has clearly shown its support of debt relief initiatives. Through its involvement and representation in the decision making bodies around debt relief, it has been able to promote Africa’s interests and agenda. South Africa has been committed to the promotion of debt relief, but has also tried to keep it in the greater context and has preferred the promotion of larger initiatives, in particular NEPAD, rather than the specific the promotion of debt relief. Through the relative success of the debt relief programmes and efforts since 1998, in 2005 Africa’s ratio of external debt to GDP has been reduced to 35.2% and the HIPC’s ratio was down to 69.7%. Although much still has to be done, in particular to achieve the “ultimate objective [of] the total cancellation of Africa’s debt”[41], progress has been made. With the HIPC initiative effectively ending at the end of 2006 and with poverty and debt relief not on the agenda for the 2006 St Petersburg G8 Summit[42], more effort will be required in the future to ensure that debt relief stays on the agenda until it has been effectively dealt with.

---

 

[1] World Economic Outlook: Globalization and Inflation, International Monetary Fund, Washington DC, April 2006, pg. 238 – 245

[2] Ibid, pg 173 – 174

[3] Ibid, pg 244

[4] Manuel T, Action for Africa in 2005, http://www.info.gov.za/speeches/2005/05020809451001.htm, 3 February 2005

[5] Description of the Paris Club, http://www.clubdeparis.org/en/presentation/presentation.php?BATCH=B01WP01, June 2006

[6] London terms, http://www.clubdeparis.org/en/presentation/presentation.php?BATCH=B03WP02, June 2006

[7] Naples terms, http://www.clubdeparis.org/en/presentation/presentation.php?BATCH=B02WP06, June 2006

[8] World Economic Outlook 2001, International Monetary Fund, Washington DC, 2001, pg 35

[9] Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative, http://www.imf.org/external/np/exr/facts/hipc.htm, April 2006

[10] World Economic Outlook: Globalization and Inflation, op. cit., pg 173 – 174

[11] Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative, op cit

[12] What debt relief means for Africa, http://www.csmonitor.com/2005/0613/p01s02-woaf.html, 13 June 2005

[13] The Multilateral Debt Relief Initiative (MDRI), http://www.imf.org/external/np/exr/facts/mdri.htm, May 2006

[14] Arslanalp S, Henry PB, Debt Relief: What Do The Markets Think?, http://www.nber.org/papers/w9369, December 2002

[15] Collins C, Break the chains of debt, http://www.un.org/ecosocdev/geninfo/afrec/subjindx/132debt2.htm, September 1999

[16] The Millennium Development Goals in Africa: Progress and Challenges, Economic Commission for Africa, Addis Ababa, August 2005

[17] A New African Initiative, http://www.polity.org.za/html//govdocs/misc/mapomega.html, July 2001

[18] Foreign Policy Perspective in a Democratic South Africa, http://www.anc.org.za/ancdocs/policy/foreign.html, December 1994

[19] The Position of South Africa regarding Debt Relief, http://www.dfa.gov.za/foreign/Multilateral/profiles/debt.htm, February 2004

[20] Africa, Our Common Destiny, Commission of the African Union, Addis Ababa, May 2004, pg 68 -69

[21] Pahad A, GCIS Parliamentary Media Briefing, http://www.info.gov.za/speeches/2000/0009181218p1002.htm, 15 September 2000

[22] The Position of South Africa regarding Debt Relief, op. cit.

[23] Manuel T, Opening Address By Chairman, http://www.info.gov.za/speeches/2000/0010021010a1005.htm, 26 September 2000

[24] Manuel T, IMFC Discussion On The World Economic Outlook, http://www.info.gov.za/speeches/2000/03050909311006.htm, 16 April 2000

[25] Meet the People, http://www.treasury.gov.za/people.htm, March 2006

[26] Manuel T, OECD Global Forum on International Investment, http://www.info.gov.za/speeches/2003/03111812461002.htm, November 2003

[27] Our Common Interest: Report of the Commission for Africa, http://www.commissionforafrica.org/english/report/thereport/english/11-03-05_cr_report.pdf, March 2005

[28] Foreign Policy Perspective in a Democratic South Africa, op. cit.

[29] Manuel T, Budget Speech, http://www.treasury.gov.za/documents/budget/1997/speech/speech.pdf, 1997

[30] Hanlon J, Dictators and debt, http://www.jubileeresearch.org/analysis/reports/dictatorsreport.htm, November 1998

[31] Morudu P, “Cancel the Apartheid Debt” in Mayibuye, http://www.anc.org.za/ancdocs/pubs/mayibuye/mayi9712.html, December 1997

[32] Hirsch A, Season of Hope, University of KwaZulu-Natal Press & International Development Research Centre, Scottsville & Ottawa, 2005, pg. 243

[33] Manuel T, Budget Speech, http://www.info.gov.za/speeches/2006/06021515501001.htm, 2006

[34] Barber J, Mandela’s World, James Currey, Oxford, 2004, pg 182

[35] Ibid, pg 179

[36] Foreign Policy Perspective in a Democratic South Africa, op. cit.

[37] Collins C, op cit.

[38] The Position of South Africa regarding Debt Relief, op cit.

[39] Manuel T, African Development Bank 2006 annual meeting, http://www.info.gov.za/speeches/2006/06051815151003.htm, 17 May 2006

[40] What debt relief means for Africa, op. cit.

[41] The Position of South Africa regarding Debt Relief, op. cit.

[42] Putin V, Address by Russian President Vladimir Putin, http://en.g8russia.ru/agenda/index.html, 9 June 2006