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Debt Sustainability: Oasis or Mirage?
UNCTAD Report on Economic Development in Africa

In the context of the Millennium Development Goals (MDGs), the international community has set itself a target of reducing poverty by half by the year 2015. Many observers have now come to the conclusion that, on present trends, there is very little likelihood that this objective can be achieved at any time close to that date in the poorer countries, including in Africa.

UNCTAD has argued that the current levels of GDP growth would have to be raised to seven or eight per cent per annum and sustained if poverty reduction targets were to be met. This would imply doubling the current amount of aid to the continent and maintaining it at that level at least for a decade if the continent was to break the vicious circle of low growth and poverty. Such an action, within the context of an appropriate mix of domestic policies and supportive international measures, would generate sufficient investment and savings to reduce aid dependency in the longer term and place Africa on a sustainable growth path.

The continent’s debt problems and its resource requirements are inextricably linked to the capacity of African countries to generate capital accumulation and growth. It was contended that the Heavily Indebted Poor Countries (HIPCs) Initiative, and later its enhanced version, would ensure a permanent exit solution to Africa’s debt problems. There now seems to be an emerging consensus, however, that many African countries continue to suffer from a debt overhang despite the HIPC Initiative and various actions in the context of the Paris Club. The fact that even those countries that have reached (or are about to reach) the so-called completion point will soon find themselves in an unsustainable debt situation gives credence to the arguments advanced by critics with respect to the inappropriateness of the criteria applied in the debt sustainability analysis. And the fact that several more debt-distressed African countries are not eligible for HIPC debt relief reflects the lack of objectivity in the eligibility criteria.

Debt sustainability is basically a relative concept. The questions that beg for a response are: what level of debt is sustainable for countries in which the vast majority of the population lives on under $1 a day per person? Have debt sustainability criteria been based on internationally recognized benchmarks such as those of the MDGs, or on objectively and theoretically verifiable criteria? What is the relationship between Africa’s total external debt stocks and the actual amount of debt serviced? Is complete debt write-off a moral hazard or a “moral imperative”?

It was only in 1996 that the international financial community accepted the need for a comprehensive approach to the debt problems of the poorest low-income countries. The first major coordinated effort in this respect was the launch of the Heavily Indebted Poor Countries (HIPC) Initiative by the Bretton Woods Institutions (BWIs), the International Monetary Fund (IMF) and the World Bank. The Initiative was launched in response to concerns that many low-income countries would face unsustainable external public debt burdens even after receiving traditional debt relief. Against this background, the goal of the HIPC Initiative was to reduce the external public debt burden of all “eligible” heavily indebted poor countries (HIPCs) to sustainable levels in a reasonably short period of time. The Initiative was to make it possible for all HIPCs so designated to meet their “current and future external debt service obligations in full, without recourse to debt rescheduling or the accumulation of arrears, and without compromising growth”

An enhanced version of the HIPC Initiative was outlined in September 1999 after intensive pressures from non-governmental organizations (NGOs) and civil society at large, academics and debtor Governments highlighting the inadequacies of the Initiative. These include the limited country coverage of the original Initiative and the fact that it provided too little debt relief and delivery was too slow. The main aim of the enhanced HIPC Initiative is to strengthen the link between debt relief and policies tailored to a country’s circumstances to reduce poverty through the delivery of “deeper, broader and faster” debt relief. Thus, the major modifications contained in the enhanced framework are larger reductions to total debt stock, faster reductions in debt-service payments and a relaxation of the stringent qualification criteria contained in the original HIPC Initiative.

Despite these improvements to the original Initiative, the enhanced HIPC has had its share of criticisms: “… progress has been much slower than expected and the Initiative is suffering from problems of under funding, excessive conditionality, restrictions over eligibility, inadequate debt relief and cumbersome procedures” (United Nations, 2000, p. 2). The debt sustainability analysis (DSA) and the overly optimistic assumptions with respect to GDP and export growth rates have been particularly criticized.