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From 1970

rose from

INTRODUCTION

to 1980. the total Hili,"

external debt of Afrioan countries

$9.1J to $107.8 billion. The debt accumulation

continued to accelerate throughr out the 19805. It reached an .-alarming figure of $245 billion in 1989.

The great build-up of African debt was a direct consequence of

the oil price increases and the cyclical fluctua tions in the

prices of primary commodities. It led to fiscal imbalances It'1

most of these countries: a steep rise in public expenditure.

re l ative to rise in the revenues. Thus. f or i nstance, in 1977,

r",- total public expenditure in Africa as a whol e was 22.0 percent of

GOP. while public revenue was 16.9 percent . In 1987 public

e xpen d iture rose to 27.4 percent of GOP whereas public revenue

was 21.6 percent (thus leavin g a gap of 6 percent as budget

def ici t). The result of the widening defi c i t was that the debt

accumulated faster than either the growth in GNP or export ~

Thus, the ratio of debt to GNP rose from 38 t o 95 per cent

between 1980 and 1988 . Similarly. the ratio of debt to e xport

increased from 122 to 335 percent during the same pe riod, and the

debt service ratio rose from 15 per cent in 1980 to 50 per cent

in 1988. According to the World Development Repor t of 1992. out

of the 26 countries classified as severely indebted low incomE~

countr ies . ·24 countries were in Africa.

commenti ng on the African debt crisis, the UN Secretary and

~xecutive $ecretary of the ~conomic fommi ssion for Africa.

Mr. Adebaya Adedejo. bemoans "Analysis of both net inflow (the

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difference between disbursements and repayment on the principal)

and ne t resources transfer (disbursements l ess repaymen t on the

pr in c ipal and interest payments) reveals a distressingly sad

sto ry of exte r na l finan c ing in Africa. The in ter-play of the

various causes of Africa"s external indebtedness has resulted • 1n

a development cr i s i s. serious

difficulties

Many countries have experienced Dr (¥:{to(\~

as ev idenced by the numbe ] that have 1

reso rted to

rescheduling the i r debt service ob li gations" . Again, the @rga-

nisation of African Un i t y (OAU) nott:l5 ; "although the exte r nal

indebtedness of our countries might seem small in volume when

compared with the corresponding figures of other developing world

• it represents 36 percent of domesti c product of the regIon, gross

• • 1984. and debt • • expected to be much higher regIon 1n servIce 1S

2 than 27 per cent of exports in 1988" . Also in 1987 the Nigeria n

President. Ibrah im Baba n.9ida) reminded, "it is unrealisti c t o

expect any developing country to spend more than 30 per cent o 'f 3

its export earnings on external debt servic i ng" His add r ess

opened a conferen ce organised by the United Nation s Economi c

Commission for Af rica on African debt crisis in 1987 at Abuja

(Nigeria) .

--. - - ---------.- ----------------------------------------- - ------ ---

1. Adebaya . Adedeji: "Foreign debt and Prospects for Growt h in Af r i ca du ring the 1980' s" • 12y.r.ng,l.. Q[ t1Q2~r.!l. AiLi ~§.!l. 2tY2i~~. Cambridge University Press. Camb ridge. UK , Vol . 23 NO.1 1985 p.56-67.

2. O.A.U_ Declaration on economic situation in Africa. 1985 , paragraph 12.

3. African Research Economic Series". England. UK.

Limited. atci£~ B~§~~c£n §~ll~tiQ -VoL 24, . No.6. p_ 8731, exter. Devon,

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Finally in 1 987 , t he heads of s t ates 1\J of l Grganh;.ation of At r i c8()

Unity declared Africa comm on position on t he continent exte rnal

debt in the followi ng words:

"We r eaffirm that our external debt constitute5 contr uctua l

obl i gations ente r ed into individually by our member _states . an d

wh i ch t hey intend to honour " .

"The problem of indebtedness is historically linked with that 0 1

dev e lopment~ its solution lies primarily in Atri cs · s ability to 4

engender real development" .

A Review of the Literatu r e on African Oebt :

The phenomenal growth of debt i n Afri c a has already drawn tho

at tention of s e ve r al economi sts and internati onal organisations

like lHF and l8RD. For e xa mp l e,Krumm (1985) studied the c auses

o "f rising African debt . The two major findings of h i s study are:

first , the two oil shocks of 1973- 74 and 1979- 8 0 and the sub50e-

quent depression of non-o i l commodity market have tended to dis-

locate African economy . l e ading t o a perceptibl e rise in t l u~

total debt levels of t hese countr i es from 1978 onwards; and

s econd , the r i se in t he r e a l in te r est rate i n the 19805 tends to

have furth e r eggra va t e d t he p r ob l e m especially fo ,· some

----------------------------------------------------------------"-4 . Africa c ommon position on the con t in e n t" s e><ter-nal d e bt

(Declaration of the e x traordinary assemb l y at the head!!> of s "tate and government of the organi sat i on or Af rica un ! ty). Addid Ababa Ethiopia. Dec embe r 1, 1987.

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countries such as Malawi and Zambia. Higher real inter8st

rate increased debt level by a$ mu ch as 12 per cent in these

countries during 1979-83 . The main conclu8ion of the study • 1S

that. there is a s trong case tor ef "fective debt reI ief. That

alone would make possible a return to norma lised relations

between debtors and creditors. and at the same time provide s an

increased flow of resources to the debtors in support of e "fforts

to achieve positive in come growth. Hi z recommendations are

combination of debt relief measures and ef forte. to promote

exports from African countries. These measures. according t o

him , would have a strong impact on the restoration o f t he

viability of African econom i es.

In 1989 Joukin Stymne traced the causes of rapid growt h of

African debt with special reference to Sub-Sahara ,' Afri c cln

countries. He demonstrated that the growth of debt would bec ome

unsusta inable by the end of the 19906 if the current trends

continue . He suggested that in order to restore normal externa l

payments relationship and at the same time increase the abi l ity

o "f these coun tries to pursue income and employment growth. i t

would be necessary to conelder debt relief and to expand expor t s _

Joshua Green (1989) also assessed the debt problems of sub- sahara n.-

African countries and exam ined various proposals for reform_

,"tlis inclUdes proposals to assist countries in meeting debt

service ob ligations and mea8ures for bilateral debt forgiveness

aimed at e liminating both bilateral and multilateral debt and

provid;ng all future assistance in the form of grants.

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Seyyed Abdulai (1990) studied the causes of Africa 's debt and the

bUI~den which varies widely among the 50 developing and indebted

countries of the continent . The two major findings of his study

are: first the miscalculation by lenders and borrowers alike o "f

the growth and export potential. and the viability of projects

financed by external borrowing has tended to raise t he total debt

level; and second . unfavourable markets for the region's product~

tend to have aggravated the problem. He argued that the combined

effect o f r ising debt services. reduced expo rt earnings a n d \'If, .. ~

diminished capital flows bas squeezed t he resou r ces f 0,.·

i nvestment and operational imports. He also demonst rated that.

the • economiC

p rac tically

gains

wiped

achieved since decolonization /I, '

out in~1980s. and the income of

have been

the averag e

Af r ica today is comparable to its level 3 0 years ago. He

r e commends that an integrated approac h includ ing debt relief.

t r a de p r omotion and new development assistance wou ld be essential

f o r r esumption of growth in the African economies.

Davi d Woo dword (1991) argued that the origin of the Af rican deb·t

c r- isls goes back further. to serious structura l problems -econom ic . social and polit i ca l problems inherited at the t ime o·r

independence . Apart from critically .low income levels. many

African countries faced in varying degrees y exceptionally low

educational level, weak physical and social infrastructu re , over

dependence of the economy on production of a single commodi ty .

generally with a · very unstable international market_ Thes.e

fac tors contributed considerably to creating conditions in which

debt problems r ose and more importantly for greater severity of

debt problem in Africa than other developing regions_ Theref o re

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he suggests debt r e lief meas ures including debt forgiveness which

is essential to r emove debt over han g on development .

Need for the Preaent Study

The available studies on the s ubject conOentrated more on sho r t

term measures such as ability or willingness of debtor country to

honour its obligation. In fact debt relief or debt resc hedu ling

will not in any way minimize the burden of debt. but i t is a

short te rm measure in overcoming the difficulties. The p resent

study. to the extent possible, intends to concent r ate on long

term measures such as getting the right type of • mac ro-economl C

policies, reduc ing the budget deficit, avoiding balance of payme n t

problems, encouraging domestic savings, encou ragi ng competit ion

through domestic deregulation and privatization of public en ter

prises. and accelerating the flow of private forei gn capita l to

different sectors of the economy. In brief, the following an!

the objectives of the study:

(1) to discuss and analyse the basic economic st r uctu r e of African cou ntries

(2) to know the main features, characteristics and structure of African debt

(3) to examine the relationship between African debt and economic development

(4) to prescribe long term solutions for the crisis

Approac h at t he Pr esen t study

As a first step. the an a l ysis is performed for the re9ion as a

who le . What we expect t o f in d from th is is the overall dimen5ion

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Of t he p robl em. In t he n e~t s tep, w.tpre5entf detailed analys i s

on volume. ~t ructure and burde n of e xternal debt in a ll Afri can

Count l ias. The ob jecti ve i s t o ha ve a cl ear pe r'capt i on of the

magnitude of Af r ican de bt. In the t hird s t ep. we pe r for m

Cldetailed analysis by t a kin g fi ve Af ri can coun tries namely Sudan.

Ghana. Nige r ia. Tun isia and Morocco . Sudan. Ghana and Nigeria

are belected because they represent low income African count ri es

with a GNP per capita less t han $610 in 1990. Tunisia and

Morocco are se l ected to represent middle income countries wit h a

GNP per capita between $610 and $7620 in 1990. Besides th i s low

illeoma - middle income differentials. there are othe r s t riking

features. Nigeria is a major oil exporter from the reg i on. wh i l e

Mo roc co is listed as one of the fifteen hea vil y indebted

c ountries of the wor l d .. The fIve countrIes toget he r account for

Cl bvuL one third of the total population of the r e gi on and about

orl e - fourth of the total national product of the region.

In tht: fourth step. efforts have been made f o r empiri cal

vurification of the hypothesis pertaining to debt and development

for these ~elected five African countries with the he l p of linear

regre~sion equations.

We tested the hypothesis fo r fi nding out correlation coef fi cient

and coefficient of dete rm i nation at one percent and five percen 't

e. lgnificance l evel ve r ify ing the re l ationship among variables

con~idered i n t he theo r ies. The resul ts are found to be

encourag in g wh i c h su pport t he va l i dity of the hypothesis.

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In the final step we have given our conclusion and su~gestions

indicating the required changes in the economi c policies 0·' Africa so that economic development of Africa can be enhanced_

Before ending this section, a few words about these five

countr ies merit attention_

All these five countries got into the debt trap largely due to

adverse domestic economic policies. After 1973, they all

launched ambitious development programmes with heavy reliance on

external loans. , But the bulk of plan expenditure in the post

1973 period was to meet the current consumption instead of inves­

ting in projects that would have sustained development. FOf-

instance. in the case of Sudan. out of a total expenditure of

19917 million Sudanese pounds (L.S.) in 1989 (which constituted

23.4 percent of GNP). almost 80

current consumption requirements.

it percent of

. ~ AgaIn ~L total

f.<­was 67 per cent ofl current expenditure and hen ce

went to meet

current revenue

the government

had to resort to deficit financing and incur external debt • 111

order to meet its development expenditure. As a result. axternal

debt of Sudan increased from $5164 in 1980 to $12965 million • 111

1989 which is 83 per cent of its GNP. Similarly in the case of

Ghana. out of a total expenditure of 45763 million Ghanian

cedies (p) in 1985 ( which constituted 15 percent of t/.P

income). almost 91 percent of total expenditure went

its fa fer

national

curren t

consumption. and only 9 percent was for investment~ Here again 1~

total revenue was 76_0 percent ~ of 'consumption ~

expenditure and

hence the government had to resort to deficit financing and more

external borrowing 1ft QF~.r to meet its development expenditure M

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Thus e xte r nal debt of Ghana increased from $1314 in 1980 to $3151

million i n 1989 whi c h was 61.3 percent of its QNP .

In the c as e of Nigeri a , out fl«

of ).tot al expenditure of 26081

million Niger i an Naira in 1987 (whi ch cons t i t u t ed 26.8 perce nt of

i "ts GNP), al most 66 percent of this total expenditu re went f or

curren t consumption, a nd only 34 percent was fo r in vestmen "t

r p u rposes. t otal reven ue was 101.2 percent of consu mption expen -

d i t ure and hence the government had to r esort to mo r e def i ci t

f i nancing and more external debt in order t o meet its development

expen d i tu re. Thus the Nigerian e xt ernal deb t inc r eased f roll!

$8934 i n 1980 to $32832 milli on in 1989 whi ch constitu t es 119

percen t of its GNP.

"~ I n the case of Tunisia , out ofLtotal expenditure of 3424 ~illion

Tu ni s ian Dina r s in 1989 (which constituted 39 .3 percent of its

na ti ona l i ncome), almost 80 perce nt of thi s tota l expenditure

we nt f or cu r rent consumpt i on, and only 20 percent wa s fo r i nvest-

men t purpos es. Thus external debt of Tuni si a i nc reased f rom

$352 7 in 1980 to $ 6899 million in 1989 whi ch constitutes 72

percent of its GNP.

Finally • 1n t he case o f Morocco , out a

of L total e xpenditure of

59121 mi ll ion Mo r"occan Di r hams i n 1989, (w hich c on s ti tuted 30. 7

percent of i ts GNP ). almos t 80 pe rce nt of total expendi ture wen t 1:"

fer cur l' ant consumption and onl y 20 pe r cent was for inve stmen t

purposes . Thus the e >< t e rnal debt of Morocco increased f r om $9678

in 1980 to $20851 mil l ion in 1989 which was 96 percen t of i t s

GNP .

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Oata Sources

The time period covered for thIs study is mainly the period from

1970 to 1990~ The main sources of our data are:

1~ In ternational Financial Statistics Year Book (International Monetary Fund)

2. Govern ment Finance Statistics Year Book Monetary Fund)

3~ World Tables (World Bank)

4. World Debt Tables (World Bank)

(Internati onal

5~ Economic Survey. Ministry of Finance (Government of Sudan )

The methodology of the present study is di cta t ed by the availa-

bility of data. As far as possible secondary data have been

utilised .

Limitations of the Study •

The sign ificance of the study is however limited f or • varIOUS

rea sons. First. the study bases its analysis on a sample of five

c ountries. Whether these five countries correctly po rtray the

r eal i ties of the whole region is something on which one mi glyt

like to quarrel. However. we expect the results to b. unbiased

because these countries have been selected from a population of

bo th low and middle income group of countries.

Second. the analysis could also not be extended t o the debt of

non-guaranteed private debtors within the countries se lected. as

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the source does not furnish the required information to attempt

n-a?l analysis~ such

Th ird. Due to lack of availability of consistent and adequate

data in all years and in all cases. we had to ,~ esort to e~tima -

tions in some cases . Considerable effort has been made to stan-

dardize the data and to harmonize related data set drawn trom

As diverse sources . i_eauee statistical metho d s . c overages .

practices and definitions differ widely. full compa r-ability carl

not be assured.

Chapter Scheme

Chapter I: presents a general picture ot the Af r i can economy -

sectoral composition of GOP and the structlll'al c hanges .

Demographic transition. school enrollment and urblUlisat i on t hat

have taken place from 1960 to 1990 in a s man y as t wenty Afri can

coun tries which represent high income, middle • ln come Bild l o w

income African countries.

Chapter II: presents upto date data on volume. composition and

structure of debt in all countries of Africa. It al s o c ontains c';\

r-eview of some studies done so far on the topi c for Afri c a as a

OS whole ari a part thereof.

a Chapter I I I: pres.entsL datai led anal ysi s of debt and davelopment

of five African countries Sudan. Ghana. Nigeria. Tunisia and

Morocco. The idea is to probe into the. problem ot debt llnd

development with detailed empirical data of t l'ese countries.

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These five countries have been carefully selected to represent

both major and ordinary borrowing countries~

Chapter IV: presents the empirical verification of hypothesi s

pe r taining to debt and " lIP I flo development wlt~he p 0 Inear regre ssion

equations.

Chapte r V . "

p r esents the majo r findi n g s and s ug g e sti o ns f or

i mproving the e c onomic well~being of Afri c an c o untr ies .

•

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