Working Paper
Impacts of Africa's Growing Debt on its Growth

The main theme of this manuscript is to demonstrate that growth in Sub-Saharan African (SSA) countries has continued to decline under the burden of the foreign debt over the last fifteen years. After a decade of painful lost growth, the continent faced a devastating debt crisis at the turn of the decade. The main distinguishing features of the second debt crisis of the 1990s is the fact that the crisis affecting low-income countries residing mainly in SSA and the majority of their debt is owed to official creditors rather than to private creditors. The total debt stock of SSA is reaching US$ 200 billion at present, which is roughly equal to the combined debt stock of Argentina and Brazil. Although SSA debt represents 12 per cent of debt for all developing countries, only recently is there beginning to be international sensitivity to the magnitude of the growing debt-burden in SSA. Sub-Saharan African is the only region in the world where debt exceeded its GNP since 1990. The severe difficulties that many African countries faced in servicing their debt resulted in the persistent accumulation of arrears, which are unpaid debt service obligations.Despite similarity in the path and causes to the two debt crises, efforts and responses to resolving the crises were distinct. Creditors responded to the first crisis more speedily and flexibly than the second crisis. In both crises the response was triggered by imminent default. In this case, it is shown both theoretically and empirically that the reasonable response is to forgive partially the debt now rather than later. The inability of some creditors to respond to the situations in which debt will eventually have to be forgiven for SSA reflects a lack of political will to act now. Such an inaction sets up a tax on policy reform and makes it politically difficult to sustain economic reforms in SSA. The implementation of the reciprocity concept, preferably retroactively, will likely encourage reforms in debtor countries and protect creditors against moral hazard.Two important lessons emerged from the first debt crisis and are relevant to the current situation. First, the importance of debtor country capacity to pay was the main determinant in devising the debt-reduction scheme. Empirical evidence indicates that more than half of the low-income SSA countries could only meet about 15 per cent of their debt service payments. Second, market evaluations assisted in persuading creditors of the need to make adequate concessions. The market value of the commercial banks claims on SSA countries were 10-18 cents on a US dollar debt.There is, therefore, a compelling case for debt-reduction. Significant debt relief can be the most important external factor contributing to African economic recovery. This study confirmed that significant debt-reduction at a level suggested by the recent Naples proposal is essential to meet the terms of trade losses, to sustain economic reforms, to preserve Africa's share in ODA and to resume growth.