Hazards of Debt Cancellation Point to Benefit in Africa Finding its Own Sustainable Growth Path - A Letter to the Editor

August 26, 1998

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HAZARDS OF DEBT CANCELLATION POINT TO BENEFIT IN AFRICA
FINDING ITS OWN SUSTAINABLE GROWTH PATH

A Letter to the Editor
By G.E. Gondwe
Deputy Director of the International Monetary Fund's African Department
Financial Times
August 26, 1998

Reproduced with the permission of the Financial Times

Sir, Nguyuru Lipumba (Personal View, "A question of morals", August 18), calls upon the rich industrial countries and the multilateral institutions to "wipe the slate clean" -- that is, simply write off all the debt of low-income countries -- citing moral and economic grounds. I take strong issue on both counts.

First, Mr. Lipumba, whom I know very well from the days we worked together in Tanzania, dismisses too easily the moral hazard problems of total and unconditional debt cancellation.

Who would lend again to recipients of such cancellation? Why should countries that have misused resources more than others have more of their debt cancelled? What guarantee is there that the money saved would be put to effective use?

This latter concern is addressed under Fund-supported policies which aim to achieve high quality growth that leads to poverty reduction.

The record shows that when IMF-supported policies have been effectively implemented, the result has been higher social spending and sustained economic growth.

Indeed, in our most recent study of 32 low-income countries implementing adjustment programmes supported by the Fund during 1985-96, real per capita spending on health and education increased, on average, by an impressive 2.8 per cent annually during the programme periods, helping to underpin discernible improvements in key social indicators.

Moreover, of the 22 African countries in the study, as many as seven enjoyed real per capita growth that exceeded the average of all developing countries over the 10 years ending 1995.

Second, Mr. Lipumba's implication that a total debt write-off will prove a panacea for Africa is sadly mistaken for debt is only one of many problems that Africa must grapple with, and the pressures to misallocate money are strong.

Unconditional cancellation could risk debt relief being squandered on corruption, military expenditure, or grandiose projects with little, if any, benefit in terms of sustainable growth or poverty reduction.

At the same time, there is no doubt that many low-income countries face unsustainable external debt burdens, even after traditional debt relief mechanisms.

This is why we have been moving swiftly, together with the World Bank, to implement the heavily indebted poor countries (HIPC) Initiative.

In the two years since its launch, commitments of about $6bn have been made to six countries, Bolivia, Burkina Faso, Cote d'Ivoire, Guyana, Mozambique and Uganda, not exactly a demonstration of a lack of political will. Over the coming year, we hope to consider a number of others, including Mali, Mauritania, and Ethiopia.

A key aim of the HIPC Initiative is that debt relief be provided in a process that provides some assurance that the money will be put to effective use to promote poverty reduction.

Africa is a large net recipient of external resources, more than twice debt service payments -- thanks to generous debt relief by creditors and large amounts of grants and highly concessional loans.

This means it is well placed to root out poverty, raise living standards and place itself on a path of sustainable growth, provided it adopts appropriate policies.