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The foreign debt of African nations has increased so rapidly in recent years that threats of bankruptcy hover across the continent, raising the prospect that Africa’s most serious crisis will be triggered not by drought, but by debt. The debt problem is not only slowing economic growth and increasing poverty; it is fomenting political upheaval by forcing these nations to neglect social and economic development in order to make debt payments. People in many countries are denied the most basic public services as their governments devote dwindling export earnings, their main source of income, to economic and political survival.
Famine is now the familiar signal of Africa’s misery, and the drought is a basic cause of the current emergency. But the foreign debt represents the long-term danger to the African countries’ economic viability because it blocks their return to steady economic growth and locks them into greater dependency on the outside world. Without a solution to the debt crisis, the African nations can neither gain the agricultural self-sufficiency that is needed immediately, nor dream of an economic takeoff even beyond the year 2000.
Latin America has emerged as the focal point of alarm over the debt problems of developing nations. Latin American debt is huge, mainly commercial, and concentrated among fewer countries; the aggregate debt of the 50 states belonging to the Organization of African Unity (OAU), by comparison, is exceeded by the combined debt of just two Latin American countries, Brazil and Mexico. It has been projected that default by Brazil alone would cost the United States a loss of $25 billion in gross national product and of 400,000 jobs, within a year.
But if the preponderance of Latin America’s indebtedness represents the international debt bomb, the fuse extends to Africa. Notwithstanding the smaller magnitude of African external debts as a whole, the debt of almost every African country is astronomical in relation to its export earnings. And nearly two decades of failed economic policies have rendered African societies more volatile and less productive, weakening their capacity to repay. Debt servicing has exceeded the ability of most countries to fulfill their obligations to external creditors, public and private. The short-term consequence has been debt rescheduling by creditors in order to forestall an erosion of the traditional rules underpinning the international economic system, including the necessary rationale for new lending. But the future danger is that today’s debt crisis in Africa will culminate in bankruptcy problems reaching far beyond its shorelines.
The origins of Africa’s debt crisis stem from external and internal factors spanning the last decade. Perhaps the most fundamental are the external: oil price increases commencing with the Arab oil boycott of 1973-74 slapped oil importers with new burdens; the subsequent worldwide recession devastated foreign exchange holdings; the steep rise in Western interest rates and the higher costs of refinancing unpaid balances bloated existing debts. At the same time, African nations continued to be marked by the colonial vestige of a fixed linkage between their primary commodities and cash crops, on one hand, and external trade, on the other. Africa’s economic fortunes, in other words, remained subject to the vicissitudes of world export markets.
Internally, agriculture was widely neglected as most African governments concentrated on the development of urban areas, despite the fact that African populations remained overwhelmingly rural. Farm output, increasing about 1.3 percent annually through the 1970s, was steadily surpassed by an annual birthrate of over three percent. Inflation reached Latin American proportions. Border and civil wars devoured precious capital and sometimes prevented development of both cultivable and mineral-rich territories. Weapons imports grew to the point at which Africa (excluding Egypt) claimed 14.9 percent of world arms imports in 1982, becoming second in the Third World only to the Middle East, which had 41.9 percent. (The African total rises with the inclusion of Egypt, which, like Algeria and Libya, is among the world’s ten biggest arms importers.)
The drought, meanwhile, exacted its terrible toll on agriculture and populations alike, leaving the afflicted nations with no choice but to use their foreign exchange reserves for food purchases abroad. In 1984 the U.N. Food and Agriculture Organization identified 24 sub-Saharan countries threatened by drought-induced famine. Ethiopia has so far been the most conspicuous object of Western relief efforts; but Sudan, where approximately six million people now face starvation, seems destined to become the next theater of misery.
The accumulated factors, external and internal, did not apply to every nation; but the solvency of the fortunate few, such as Gabon and Botswana, was heavily outweighed by the spreading plight of the debt-ridden majority. Thus, by 1981, 20 of the 32 developing nations with arrears reported on external payments were African. Unlike the Latin American debt, the external debt of African nations is preponderantly public, or official, owed mainly to international financial institutions and West European governments. Commercial, or private, debts are not the main concern simply because commercial banks, anxious about most countries’ creditworthiness, have denied loans to all but a few African countries; the exceptions include such major oil exporters as Nigeria and Algeria, and such non-fuel commodity exporters as Zaïre, Cameroon, Ivory Coast and Kenya.
The indebtedness of individual African countries ranges from amounts regarded as inconsequential by most bankers to sums so large they not only imperil the stability of the borrowers in question but are also causing increasing concern among official creditors. In 1983, Africa’s total external debt climbed to $150 billion, as estimated by the U.N. Economic Commission for Africa. This figure equals about one-third of Latin America’s debt, but the African crisis has placed increasing strain upon the so-called Paris and London Clubs, the international agencies that reschedule, respectively, public and private debts. In 1984, African countries were responsible for ten of the 14 official reschedulings by the Paris Club.
Oil-importing countries—the vast majority of African states—have been hardest hit. Their stability was upset first by the Arab oil boycott, then later by the doubling of oil prices from 1979 to 1981. The big oil exporters (Nigeria, Algeria, Libya, Gabon, Angola and Congo) have naturally fared much better. However, oil exporters and importers alike are now reeling from damages of the debt crisis—as are the privileged few, such as Nigeria and Ivory Coast, who benefited from the commodity price boom of the 1970s and until recently maintained high credit ratings. Consequently, the real question for the future is which countries will acquire the capacity to manage their debt problems and which will slide further down the slope toward bankruptcy.
Rescheduling has been the principal respite from the debt burden for most African countries. Zaïre holds the world record of six reschedulings between 1975 and 1983. Togo, not far behind, had five reschedulings; Liberia and Sudan tallied four each; Madagascar and Malawi, three. Indeed, Africa surpassed all other developing regions in the number of multilateral debt renegotiations during the period.
The scope of the African crisis is starkly dramatized by the plight of Sudan, which at the beginning of 1983 had an estimated debt of $7 billion, or more than seven times its export earnings; by 1985, its foreign debt had risen to $9 billion. Sudan’s debt-service ratio, according to World Bank projections, will still average 80-90 percent for the rest of this decade, even with such remedies as a consolidation of outstanding arrears. Considering Khartoum’s persistent failure to make payments on its debt to the United States, President Reagan’s decision to freeze U.S. assistance to Sudan in February 1985 was not surprising.
Africa’s current debt problem is inextricably connected to severe setbacks in other economic sectors. Surely the most painful has occurred in agriculture, the traditional backbone of Africa’s predominantly rural societies. Among the mineral-rich countries, the decline is mainly attributable to government policies that neglected agricultural productivity in the vain hope that rising revenues from mineral exports, particularly oil, would assure ample income for consumer purchases abroad. State control of agriculture in most African nations undermined productivity by fixing farm wages so low that peasant farmers frequently abandoned the countryside, leaving cultivable land fallow and farm marketing in decline. The result was a sharp drop in Africa’s share of world trade, even in the commodities in which the continent had a comparative advantage—coffee, tea, groundnuts, sugar, sisal, cocoa and cotton. After the 1960s, when most of Africa acquired political independence, agricultural output grew by more than three percent annually in only six countries (Ivory Coast, Kenya, Cameroon, Malawi, Swaziland and Rwanda), and it had begun to decline in some of these by the early 1980s.
Everywhere in Africa agricultural productivity suffered from the decline of prices for non-petroleum primary commodities that started in the 1970s and continued into the 1980s. In current dollars, these prices dropped by 27 percent between 1980 and 1982. Meanwhile, the prices for African imports of manufactured and various consumer goods from industrial nations increased, using up almost all those foreign exchange earnings not already consumed by debt repayments. The value of Africa’s total exports dropped for the third consecutive year in 1983 to $64 billion, or nearly one-third below the 1980 level. So serious were the negative terms of trade by 1984 that African primary exporters encountered their worst year since the Great Depression.
A decrease in the volume of external investment, both private and public, has compounded the setbacks in African production and trade. For example, in 1980, American private direct investment of $592 million in Africa trailed far behind investment in most other Third World regions—$736 million in the Far East and $5 billion in Central and South America. Official development assistance dropped four percent in real terms overall in 1981; the International Development Association, the soft-loan window of the World Bank, which had been disbursing 30 percent of its credits to Africa, was forced by a reduction in U.S. contributions to curtail its activities significantly. Total foreign investment in Africa, particularly from West European countries, had grown rapidly during the 1970s, but began a downward trend early in this decade. Net disinvestment is emerging in some countries, resulting in a collapse in public utilities and the communications infrastructure.
Debt servicing, above all, has vitiated the development of African economies. A decade ago analysts regarded it as worrisome when a country spent more than a fifth of its annual export earnings on payments of its medium- and long-term external debt: by this standard, the vast majority of African countries are in deep trouble. Their debt-service ratios have risen so steeply in the last five years that they now average 30-40 percent. This means that the typical country must allocate from a third to nearly a half of its foreign exchange earnings merely to service its foreign debt, with dramatic increases expected in the next few years.
Debt-service payments on current public and publicly guaranteed medium- and long-term debt will probably expand from $5 billion in 1982 to an average of $11.6 billion during 1985-1987. Capital formation in Africa, which peaked in 1981 at 27.8 percent of gross domestic product (at constant prices), decreased to only 5.7 percent in 1983, largely as a result of debt-service payments. Relative to the declining financial resources of most African nations, debt servicing has been onerous enough to compel some to postpone necessary development projects and others to shelve indefinitely their modernization plans.
Indeed, debt servicing can be said to be at the core of the African countries’ economic crisis. Externally, it prolongs their dependence on external creditors. At home, it thwarts their fundamental objective of transforming their stagnating economies into modern developed societies. By depleting available hard currencies, it also cuts back capital for food imports at a time when the drought is compounding this need.
To escape the debt burden, several countries have raised the possibility of forming a debtors’ cartel. Some African countries, such as Algeria and Nigeria, are among the biggest debtors in the Third World; four other countries (Zambia, Ghana, Malawi and Sudan) were among the 11 largest recipients of International Monetary Fund (IMF) loans as of March 1985. Deliberate default by a group of debtors would inflict visible damage on the financial institutions of major Western creditors. On the other hand, the chances for a cartel’s success are lessened by the official nature of the African debt, which denies these countries the collective influence they would have if their debts were concentrated among private banks. To formulate a common platform for negotiating loans and repayment of their foreign debts, the OAU states have scheduled a special summit meeting in Addis Ababa during July 1985.
Political upheaval—sometimes violent—is the more likely, and increasingly common, consequence of Africa’s economic problems. Cutbacks in food subsidies and public services have provoked anti-regime demonstrations in Tanzania, Ghana and Zambia during the past five years, and "bread riots" have erupted in Egypt, Morocco and Tunisia. Civilian deaths and political instability have been the ubiquitous result of these uprisings, which were quelled by police or military repression.
Violence also exploded in Sudan in February 1985, after President Gaafar al-Nimeiri terminated government subsidies on fuel and food in a last-ditch effort to cut state spending. Nimeiri had hoped that this move would help win IMF approval for new credits. Within days, however, university students and professional unions demanding Nimeiri’s resignation took to the streets in a nationwide strike that precipitated a communications blackout and paralyzed Khartoum. At the time, Nimeiri was in Washington making a desperate plea to the Reagan Administration for renewed U.S. economic assistance. The Sudanese leader’s fate was sealed not in Washington, but in Khartoum: the military responded to the uprising by toppling the regime, and the deposed president could not go home again.
When the coup took place, Sudan owed the IMF almost $130 million in arrears, and the figure was expected to reach $225 million by the end of 1985. It is not surprising, therefore, that the IMF had required that austerity measures be imposed, among them an end to state subsidies, as a precondition for additional loans. IMF conditionality did not cause the coup; Nimeiri’s downfall must ultimately be attributed to numerous political and economic failures that had already thrust the country into chaos and bankruptcy. But, insofar as Nimeiri’s move to end subsidies for bread and other basic commodities resulted in sharp price rises, which in turn sparked the riots, the IMF program was clearly a precipitating factor.
International aid efforts to alleviate the African crisis began to engage the IMF at the beginning of the 1980s, when it emerged as a major lender to African nations. IMF negotiations were tense from the outset, as African supplicants objected to its binding loan conditions, such as restrictions on the level of domestic spending, relaxation of price controls and ceilings on external borrowing. In particular, the IMF’s common requirement for eliminating subsidies on consumer goods, often perceived by Africans as the agent provocateur—as in Sudan—of the food riots, provoked strong objections.
Currency devaluation, however, epitomizes the contradictory perspectives of the IMF and Africa. Devaluation is supposed to expand a country’s foreign exchange earnings by stimulating its production and curtailing its imports, which become more expensive as a direct result of devaluation. But African producers remain incapable of exerting much influence over the prices of their exports, or reversing the decline in demand for their commodities that has resulted from Western substitution of synthetics for cotton, aluminum for copper, and artificial sweeteners for sugar. Thus Tanzania angrily resisted IMF conditions of a massive devaluation in 1981. Likewise, Nigeria has continued to reject IMF conditionality in the aftermath of the military coup in 1983.
But most of Africa’s cash-starved economies have accepted devaluation as part of the acrid medicine they must take to obtain IMF loan assistance. Ghana, for example, reduced its currency from 1.75 cedis to the dollar in 1981 to 30 cedis to the dollar only two years later—a devaluation of over 90 percent. For certain African states, especially the resource-poor, compliance with IMF conditions is inescapable because the IMF represents their ultimate safety net against financial ruin. Somalia, Guinea-Bissau and Cape Verde, for instance, have obtained as much as a third or more of their GNP from official development assistance.
The IMF and the World Bank work closely together on structural adjustment programs in Africa. Membership in the IMF is a prerequisite of membership in the World Bank, which allows for longer-term adjustment not provided for by the IMF. Substantial delays in payments of outstanding loans can provoke a suspension of disbursements on existing credits. The debt crisis has only accentuated Africans’ vested interest in access to multilateral loans. By May 1985, every one of the 50 OAU states except Angola had become a member of the IMF.
In 1984 the World Bank created the Special Assistance Facility for sub-Saharan Africa, a new operation to provide loans on easy terms to boost food output and restore decaying infrastructures. Originally proposing a budget of $2 billion, the bank scaled back its original target to only $1.25 billion by May 1985; the United States, preferring bilateral to multilateral arrangements, refused to contribute. Economic reform remains a condition for assistance from the available budget.
The Reagan Administration, emphasizing free market policies, has reinforced the pressures for reform. Certain countries have been made ineligible for U.S. economic assistance by the Brooke Amendment, approved in 1976 as part of the Foreign Assistance Appropriations Act. This amendment prohibits U.S. assistance to any country defaulting for more than a calendar year on payments of both principal and interest on a U.S. loan. Under this law, Tanzania and Ethiopia were denied economic assistance in 1984 (though not emergency food aid); Zambia, a pro-Western nation, and Liberia, an American partner since its nineteenth-century creation by Afro-American settlers, were listed as potential violators of the Brooke Amendment. The U.S. African Economic Policy Reform Program, launched in 1985 with $75 million in economic support funds, constitutes the Administration’s new lever of pressure on selected countries. Its target of more than $1 billion in fiscal year 1986 for bilateral economic assistance to selected sub-Saharan countries will further encourage African governments to relinquish statist and socialist policies in favor of free market reforms.
A consensus is growing among all Western lenders, whether multilateral or bilateral, public or private, that the African economies cannot be stabilized without fundamental adjustments. The real possibility that these lenders will eventually coordinate aid policies turns yet another screw on African leaders’ ability to obtain aid without yielding to Western prescriptions.
Nearly all African leaders have conceded the need for some kind of reform. Complaints persist on certain aspects of IMF support, especially its usual short-term duration of less than two years. But Ghana, Senegal and Malawi, among others, have already initiated major efforts to advance economic growth in accordance with IMF guidelines. In March 1985, even Tanzania’s President Julius Nyerere reversed his position and resumed talks for an IMF loan.
Regardless of the outcome of the economic reforms, it is evident that massive infusions of additional capital will neither resolve the African debt crisis, nor eliminate the larger economic problems of which it is a part. As a matter of fact, heavy borrowing by some countries has merely enabled them to postpone policy reforms because the new loans eased the adjustment process—though only at the expense of higher debt-service ratios. Such loans saved the African governments from having to shrink consumption levels that have fallen so low that they expose approximately 150 million Africans to death from malnutrition. Domestic savings also disappeared in countries with access to external aid, as governments expanded consumption and deferred tax increases.
The cumulative effect of foreign aid on African economies has not only caused them to relax local efforts at resource mobilization, it has made them vastly more dependent on external support than they were when most acquired political independence nearly two decades ago.
Although Western Europe shoulders the weight of the African debt, Washington cannot avoid assuming a role in resolving it. The United States is the principal contributor to the World Bank and the IMF, and is therefore involved, albeit indirectly, in multilateral approaches to African borrowing.
American interests are also affected by the serious deterioration in U.S.-African trade. U.S. exports to African countries, which jumped 93 percent between 1978 and 1981, slid from $10.9 billion in 1981 to $10.1 billion in 1982, as economic pressures forced those countries to cut back on such imports as machinery, transportation equipment, and chemical and agricultural products. U.S.-African trade has lagged behind U.S. trade with other developing regions, as Africa’s share of world imports slipped below five percent in 1983 and exports declined as well.
Access to African minerals remains important to the United States, where industrial recovery will require increasing imports of such commodities as cobalt and chromium, as well as to Western Europe, which in 1982 purchased 50 percent of developing Africa’s exports. Oil imports, though not an American priority, continue to be important to America’s allies in the European Economic Community. A total failure by the African countries to meet principal and interest payments on their debts could damage those European economies which maintain either large trade relations or monetary alignments with defaulting African states. International financial institutions would be similarly affected by widespread African default.
American policymakers must also recognize the possibilities created by economic distress for increased Soviet activity on the continent—another opportunity for Moscow to penetrate the mineral-rich countries on which the West relies. It is doubtful, however, that Moscow could afford huge investments along the lines of its support to Egypt during the 1950s, and Soviet agriculture obviously provides no model for this most urgent of Africa’s development needs.
Most African countries remain firmly in the Western camp; while several governments have adopted socialist policies, few have followed Ethiopia in linking themselves to the Soviet bloc. But cold-war competition, already prevalent in a few areas, will certainly intensify if U.S. assistance to African regimes declines. Desperation, in other words, could push these regimes to explore alliances with the Soviet Union—if only as a stratagem to extract more aid from the West.
What can the United States do to relieve Africa’s debt crisis—the new symbol of the continent’s economic breakdown—while reinforcing Africa’s ability to meet its international financial obligations?
Because Africa’s debt crisis is inseparable from its failure in agriculture since 1960, it is obvious that future U.S. assistance must emphasize rapid agricultural development. To be effective, such aid cannot be limited to augmenting production of cash crops to increase exports; it must help Africans enlarge and diversify domestic farming in order to generate growth and self-sufficiency within their economies. Economic development spearheaded by increased agricultural productivity would also obviate the need for food imports, thereby preserving precious hard currency for other essential investments.
Recent attention on the drought and famine has deflected policymakers’ awareness of Africa’s abundance of cultivable land and water sources. It is often forgotten that the African continent is three times as large as the United States, that Zaïre alone possesses 13 percent of the world’s hydroelectric potential. The tragedy lies in a record of gross administrative neglect of naturally endowed lands that had yielded abundant harvests for centuries prior to independence. But Africa has not lost the capacity for a flourishing agricultural market that could both satisfy local appetites and provide a cornucopia to the world. It is this reality that prompted the editors of New Nigerian to write in 1984: "Blessed with vast arable land, Nigeria should be the breadbasket of the world. But it is the hungry mouth."
If Africa managed to expand and diversify agricultural production, public and private American capital could then be assigned to a second area of great potential: food processing. U.S. equity investment in African food processing—of vegetables, fruits, cocoa, marmalades and fish—would significantly expand foreign exchange earnings. It would also increase the amount of foodstuffs for local markets. The H.J. Heinz Company’s investment in Zimbabwe’s Olivine Industries, a large producer of edible oils, soaps, candles and protein meal, exemplifies the enormous possibilities both for African productivity and African-American collaboration. Heinz acquired a 51-percent interest in the operation in 1982, the country’s socialist government retained the rest.
Third, Washington could reduce or eliminate trade barriers that restrict certain African products. Sugar quotas, for example, have limited imports from Ivory Coast, Malawi, Madagascar, Mauritius, Swaziland and Zimbabwe. Tariffs on textiles and apparels, averaging ten percent, are among the highest in the U.S. tariff schedule, and adversely affect exporters such as Morocco, Nigeria, Ghana and Liberia. Several countries have encountered obstacles in exporting peanuts to the United States because of America’s quotas and technical standards. Without jeopardizing domestic American producers, selective trade modifications could be introduced to boost Africa’s primary exports substantially.
Import substitution is a fourth area where the United States can promote African self-sufficiency. Rather than trying to build local African enterprises through the export of American equipment and supplies—such as tin cans for the development of food canning or paper for printing—the United States could provide technical and capital assistance to local producers and entrepreneurs who could then create such industries from local resources and with local manpower. This would contribute to self-reliance in such industries as beverages, leather and shoes, which now depend on large quantities of imported chemicals and spare parts.
In addition, I would recommend three separate fiscal remedies to deal directly with the African debt crisis: a debt moratorium, a debt write-off and a conversion of debts into grants. A debt moratorium would suspend obligations at current levels for a specified long-term grace period, perhaps ten years or more, while African governments accumulated foreign exchange and maximized capital reserves before resuming repayments. A moratorium does not excuse debts; it simply allows a breathing spell before the appointed day of reckoning. It would not be a unilateral action, as was Mexico’s suspension of principal payments on its debts to foreign banks in August 1982. Moratorium on the African debt would require mutual agreement between African governments and the foreign governments to which much of the debt is owed. A U.S. initiative could help European governments organize a moratorium; the United States, thus, could catalyze a process that would simultaneously pare down Africa’s debt obligations and arrest its current drift toward catastrophe.
Debt write-off, on the other hand, would excuse certain African debts, or portions of debts, outright. This option acknowledges the fact—often obscured by policymakers—that some African countries are already technically in default. A debt write-off of specified portions of a country’s debt, if not the whole, would simply recognize the situation that already exists. Debt rescheduling is a temporary palliative that does not provide substantive remedy; it merely postpones the problem until it has been aggravated by higher interest rates. The economic devastation endemic in a few war-torn or resource-poor countries, such as Chad, means that they will probably never be able to pay their foreign debts. In such cases, a debt write-off could be justified, not only to respond to the debtor’s bankruptcy, but also to protect international financial structures and practices.
Conversion of debts into grants is an alternative to debt write-off. An African nation’s obligations to the United States would be, in effect, redefined as grants; but the debtor would not necessarily be excused from some kind of quid pro quo, because payment could be accepted in the currency of the country. If such an arrangement were made with Mauritius, for instance, the United States could spend its acquired rupees on consular and other U.S. personnel purchases locally. Mauritius’ foreign obligations to Washington would be cleared. This would also allow a reduction in dollar inflows to Mauritius for embassy operations.
The ultimate rationale for all these recommendations is that the debt burden of African states may actually be twice as large as officially reported, because the statistics of the World Bank, the IMF, the Organization for Economic Cooperation and Development and even the African governments usually do not include loans with maturities of less than a year. Official military transactions are also excluded; but military expenditures, principally on a cash basis, often inflate the overall external debt.
There are, of course, definite limits to outside efforts to assist any African country seeking a return to normal growth and external and internal equilibrium. U.S. intervention to reduce or eliminate African obligations to international financial institutions, for instance, is not to be expected, even if it were desirable. The basic improvements necessary for the African economies—particularly a pricing policy that provides adequate wage incentives for farming—are clearly the Africans’ own responsibility. Such limitations, however, do not preclude any U.S. assistance.
International trade would not be the only victim of default by numerous African debtors; the more ominous danger is that an African collapse would spread to other developing regions, with calamitous results for the entire international financial system—to say nothing of the political and human consequences across a continent.