IMF takes $1 billion in two years from Africa as official report reveals five new reasons to Drop the Debt

The growing scale and depth of the debt crisis in the world's poorest countries is revealed in the official annual report on global debt, published today by the World Bank.

The figures and analysis in Global Development Finance 1999 show five key new developments, making debt cancellation more urgent than ever:

1. The IMF extracted a net $1 billion from Africa in 1997 and 1998, reversing the trend of the last five years. At the same time, it spent billions bailing out bankers in East Asian crisis economies

2. Developing countries paid back $13 for every $1 they received in grants in 1998, up from $9 in 1996

3. Commodity prices have plunged, crippling the poorest countries' ability to repay foreign debts

4. Grants to developing countries went down from $35 billion in 1991 to $23 billion in 1998 - including a $2.8 billion (11 per cent) fall in the last year

5. Despite borrowing less than they paid back in 1998, total debt in developing countries rose again - by $150 billion to a new total of almost $2.5 trillion.

IMF takes $1 billion out of Africa in two years

The tables buried in Global Development Finance show how the IMF's relationship with sub-Saharan Africa has changed dramatically in the last few years - with serious consequences. Between 1993 and 1995, there was a net transfer of funds from the IMF to Africa, as new resources outstripped repayments. In 1997 and 1998, this trend has been thrown dramatically into reverse, with a net transfer from Africa to the IMF adding up to more than $1 billion ($643 million in 1997 and $390 million in 1998).

 

 

The switch in the flow of resources between the IMF and Africa coincides with the beginning of the series of bailouts for East Asian economies arranged and partly funded by the IMF.

Despite the huge repayments to the IMF by African countries, total African debt has continued to rise (see below).

Developing countries paid back $13 for every $1 they received in grants in 1998

The report shows that developing countries continue to pay far more to creditors in debt payments than they receive from them in grants - and the gap is increasing. As grants fell and debt service increased, developing countries paid nearly $13 in debt repayments for every $1 they received in grants in 1998 - up from $9 in 1996 and $12 in 1997.

Even in Africa alone, where this ratio has always been much smaller, the gap between grants and debt payments is increasing. In 1998, sub-Saharan Africa paid $1.41 to creditors for every $1 received in grants - up from $1.36 in 1997 and $1.38 in 1996.

Commodity prices have plunged

The World Bank confirms that commodity prices have fallen heavily, affecting the poorest countries' ability to earn the foreign currency need to repay debts.

Commodity prices overall lost 16 per cent of their value in 1998, continuing a longer-term trend. Metals and minerals prices ended the year 33 per cent down from their peak in August 1995, while food prices fell 21 per cent from their level in April 1996. No recovery is expected before 2000, and then is expected only to be slow.

This fall in commodity prices is attributed to two factors. First, the crisis in East Asia has reduced world demand and forced crisis-hit countries to look to their own supply sources rather than importing from elsewhere. A more significant factor, though, is the long-term suppression of commodity prices. The report says that the greatest impact in reducing commodity prices has come from increased supply caused in particular by “improved technology, better economic policies, and increased privatisation of production”. Ironically these developments, which are so damaging to many heavily-indebted countries, are all specifically encouraged by World Bank and IMF-sponsored structural adjustment programmes.

World trade and economic prospects in the wake of the East Asian crisis are also bleak for heavily-indebted poor countries. The report says that “the crisis in emerging markets is likely to be deeper and more prolonged than earlier assessments had suggested” with the growth forecast for developing countries revised downward to 1.5 per cent in 1999 - the lowest since 1982.

Grants to developing countries went down from $35 billion in 1991 to $23 billion in 1998

Grants to developing countries have continued their historic fall, with a one-year drop of 11 per cent to $23 billion in 1998. This obviously further limits the funds available for spending on crucial needs in health, education and sanitation, and the effect of funds being diverted towards debt repayments is all the more severe.

Despite borrowing less than they paid back in 1998, total debt in developing countries rose again

The report shows that the classic debt trap is still ensnaring many poor countries in Africa and Latin America. During 1998, developing countries succeeded in paying back more in debt repayments than they took on in new loans. These negative “net transfers on debt” amounted to $16 billion. Despite this, total debts increased, from $2.32 trillion in 1997 to $2.47 trillion in 1998.

This effect was felt in the key regions of sub-Saharan Africa and Latin America too. Latin American debts increased by 5 per cent to $736 billion, despite the region paying back $20 billion more than it borrowed in 1998. Similarly, Africa's debts increased by 3 per cent to $226 billion, despite African countries paying back $3.5 billion more than they borrowed.

Jubilee 2000 comment

This report comes hard on the heels of a series of proposals from the British, American, French, German and Canadian governments, all claiming to tackle the problem of unpayable debt comprehensively. It comes as the World Bank concludes the first part of its review of the Heavily Indebted Poor Countries' (HIPC) initiative. The message to all these creditors is clear; the recent flurry of thinking on debt may be welcome, but it does not go nearly far enough.

The report presents new information about the scale of the debt crisis. Aid is falling. Commodity prices have plunged. The IMF has extracted a billion dollars in two years from Africa. Total debt continues to rise, despite ever-increasing payments. And the developing world now spends $13 on debt repayment for every $1 it receives in grants.

Gordon Brown and his G8 colleagues will have to go back to the drawing board and recognise that what is needed now is not just a little more debt cancelled, or a few more countries included, or a slightly faster timetable adopted. They should accept the need for a major step, to set behind us once and for all the burden of unpayable debt as we enter the new millennium.

This report should set alarm bells ringing in Washington, London, Bonn and Tokyo. If finance ministers and officials respond to this emergency call by radically upgrading their ambitions for a deal on debt at the Cologne G8 summit in June, this report will have served an important purpose.

The scale of the challenge is clear. Are the G8 leaders up to it?