Information about Sub-Saharan Africa África subsahariana
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Estimating the Cost of Financing African Development in the 1990s

Editor(s):
I. Patel
Published Date:
December 1992
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This paper discusses the magnitude of external resources that sub-Saharan Africa may require during the 1990s.1 There can be no firm projections because requirements are affected both by the growth and efficiency targets chosen and by a wide range of factors, internal and external, that often interact to reinforce or offset one another. The specific projections provided by this paper do, however, offer a point of departure for further discussion. To facilitate such discussion, a qualitative framework is given for considering how various factors affect resource requirements.

To achieve the gross domestic product (GDP) growth target of 5 percent a year by 2000 proposed in the World Bank’s Sub-Saharan Africa: From Crisis to Sustainable Growth, the quantitative scenario in this paper shows that sub-Saharan Africa could require gross external capital of $28–29 billion a year, on average, for the period 1991–2000. About half of those inflows would finance net imports of goods and services (other than interest), needed for current and future growth; the other half would finance debt-service payments on borrowing that financed expenditures mostly in the past.

These financing needs can be met with no increase in nominal gross external inflows. The composition of the gross inflows will change, however: by the end of the decade debt relief will disappear under the debt relief options now in effect, as debt becomes ineligible for further rescheduling; and aid flows would have to almost double over the decade, thus providing over two thirds of the resource transfers, if nonconcessional loans remain stagnant. Even if aid increases this much and net foreign direct investment doubles, a financing gap of $3-4 billion a year, on average, would remain. Achieving this scenario will require appropriate domestic policy reforms, especially those designed to raise investment to a level equivalent to 25 percent of GDP and to achieve a dramatic improvement in the efficiency of capital.

The conceptual framework used in this paper for estimating external resource requirements is based essentially on a two-gap model, in which the gap between domestic savings and gross investment must equal the difference between imports and exports and is financed by external capital or foreign savings. To provide a context for the discussions, the paper starts with a section on the economic history and evolution of sub-Saharan Africa. The main section analyzes the external resource requirements, as projected by the model, and discusses implications for other related economic and financial variables.

Economic Change and Evolution

The Last Thirty Years

About thirty years ago colonialism was ending in Africa. Resources were channeled substantially toward industrialization. Agriculture took second place, basically supplying raw materials and providing tax revenues. The development strategy, fully supported by donors, entailed a dominant role for the government, which spent heavily on the social sector and infrastructure. The region’s economies initially performed well after independence, but subsequently deteriorated. GDP grew at 5.9 percent a year during 1965—73, about the same rate as for other developing countries. Strong export demand and high investment, financed from export earnings, commercial borrowing, and aid, boosted the GDP growth rate; however, after the first oil shock in 1973–742 Africa’s performance started to lag behind that of other developing countries. In the early 1980s, output began to decline. The region has now suffered a decade of falling per capita income and begun to show signs that its land and human resources are eroding. With many African countries starting reform programs, GDP growth began to recover in the second half of the 1980s, but the aggregate growth rate for the region has remained below that in the rest of the developing world except in 1989 (Table 1).

Table 1.Growth of Aggregate GDP, 1967-89(In percent a year)
1967-731974-801981-841985-8719881989
Sub-Saharan Africa7.02.7-1.12.62.53.6
Less Nigeria4.42.01.93.11.52.2
Non-African developing
countries6.55.43.55.45.83.4
Source: World Bank data files.Note: Growth rates are calculated using trend line regressions and data in 1980 prices and exchange rates.
Source: World Bank data files.Note: Growth rates are calculated using trend line regressions and data in 1980 prices and exchange rates.

Performance has varied greatly from country to country. Average annual GDP growth during 1961—87 ranged from 8.3 percent for Botswana to—2.2 percent for Uganda. Oil exports greatly affected performance, with oil exporters doing well or badly according to fluctuations in the oil prices. Middle-income countries have, in general, fared better than low-income countries and small economies better than large ones. Domestic economic policies have also greatly affected countries’ ability to recover from external shocks, their economic performance, and their external financing requirements.

The Crisis

In the 1970s, most African countries expanded public consumption and investment. Instead of raising domestic savings, governments financed much of the expansion with foreign funds, taking advantage of expanded borrowing capacity based on unprecedented high export prices and negative real interest rates in international markets. This quick expansion required rapidly rising imports, which grew faster than during any other period in the past thirty years (7.6 percent annually for the years 1974–80). The increase in imports was largely financed by nonconcessional borrowing, which continued after the second oil shock despite a sudden rise in international interest rates, as borrowers and lenders believed that the high export volumes could be soon restored and that high export prices would continue. These expectations did not materialize, and in 1984 nonconcessional lending was sharply reduced following the global debt crisis; in 1985 there was virtually none.

The large increase in absorption during the 1970s failed to establish a sustainable base for future growth. During most of this decade, GDP growth was lower than population growth and exports stagnated. The poor quality of public investments, financed at the margin by foreign savings, and domestic policies that reduced the region’s international competitiveness diminished economic efficiency and undermined the region’s ability to cope with the huge reduction in foreign capital. The region ended the decade in crisis.

The crisis was pervasive, affecting all areas of the economies (Table 2). During 1981–84, export and import volumes fell (by 7.5 and 6.8 percent annually, respectively); investment as a percentage of gross national product (GNP) went back to the 1966–73 levels (16.7 percent); gross national savings as a percentage of GNP averaged only 9 percent, or about half their 1974—80 level; foreign direct investment expanded at the lowest rate of the last thirty years; export market shares continued to erode. To make matters worse, net nonconcessional capital flows collapsed, and the negative real interest rates of the past gave way to very high ones. Debt at 45 percent of GNP in 1983–84 was more than double its 1975 level, and the debt-service payments, despite rescheduling, reached 27 percent of exports in 1984, or four times higher than in 1975. Despite the crumbling economies, private consumption continued to grow during 1981–84, albeit at a small and reduced rate (1.1 percent a year), financed by a rapid decline in the gross national savings rate (which reached an all-time low of 7.3 percent of GNP in 1983) and modestly increasing net official development assistance (ODA) flows. This consumption growth, however, was lower than population growth, and per capita consumption declined 2 percent a year.

Table 2.Evolution of Key Economic Indicators for Sub-Saharan Africa, 1967–88(Average annual percentage change; unless indicated otherwise)
1967–731974–801981–841985–871988
Gross domestic product (GDP)7.02.7-1.12.62.5
Export volume17.10.2-7.52.11.2
Import volume4.37.6-6.8-0.7-2.8
Gross domestic investment
(percent of GNP)116.722.316.715.016.6
GrOss national savings
{percent of GNP)113.017.29.08.88.0
Private consumption4.11.81.11.32.2
Gross official development assistance
(percent of GNP)23.23.64.26.68.9
Terms of trade index
(1980 = 100)183.984.4101.383.074.2
Gross national income
Total3.94.5-1.10.72.4
Per capita1.21.7-4.1-2.40.9
Source: World Bank data files.Note: Growth rates are calculated using trend line regressions and data in 1980 prices and exchange rates. GNP = gross national product.

Refers to 1966–73.

Refers to 1970–73.

Source: World Bank data files.Note: Growth rates are calculated using trend line regressions and data in 1980 prices and exchange rates. GNP = gross national product.

Refers to 1966–73.

Refers to 1970–73.

The drop in output was caused by the very low efficiency of investment. High population growth, oil price and international interest rates shocks, war, and drought have contributed to the crisis in sub-Saharan Africa, but weak economic management—beginning in the 1970s—was also a major cause. Bad investments and inappropriate domestic policies weakened domestic economic productivity, reduced flexibility to respond to shocks, and left a legacy of debt service that began to absorb a growing share of both domestic and foreign resources. Weak policy-implementing capacity also impeded improved economic performance.

The Reforms

The case for reforms was too strong to ignore. By the mid-1980s, many sub-Saharan countries had begun the reform process; by 1990, 29 had active World Bank-supported adjustment programs and 27 had IMF-supported programs. Reform programs started first in the area of macro-economic stabilization; fiscal, monetary, exchange rate, and other macroeconomic reforms were used to bring aggregate expenditures in line with total available resources. The programs that followed, in the later 1980s, focused more on increasing output and reducing the social costs of adjustment. These reform programs increased the emphasis on adjustment policies to improve productivity and increase production and exports. They liberalized external and domestic trade, raised producer prices, strengthened the financial sector, restructured public enterprises, improved public investment programming, reordered public expenditure priorities, and improved performance in key sectors, especially agriculture and industry. In many countries, these reform efforts have depreciated the real exchange rate, raised real interest rates, reduced domestic deficits, liberalized trade and prices, and improved public sector management including public enterprises.

Even though the aggregate results for sub-Saharan Africa as a region are dampened by those countries that have not engaged in reforms, the trends show how output growth has been restored in the region, reaching 3.6 percent in 1989, compared with –1.1 percent in 1981–84. Export performance is beginning to turn around, but import volumes are still declining, albeit at a slower pace than before the reform period. Gross domestic investment and national savings, which reached their lowest point in 1983–85, are no longer declining as a percent of GNP (although the gap between the two remains about the same as in the early 1980s). Private consumption began to recover in 1985—87 and improved in 1988, as stronger output growth was channeled more into consumption than savings (see Table 2).

Response to reforms is more evident when the record for reforming countries is examined separately. Recent data, through 1990, for the countries eligible for the Special Program of Assistance (SPA), which covers most reforming countries, show that during SPA1 (1988—90) output in the 20 core SPA countries grew at 4 percent a year, on average.3 Exports grew almost as fast, and gross domestic investment (GDI) expanded even faster; gross domestic savings (GDS) continued to grow as a share of GDP; and the decline of real per capita consumption is close to being arrested (Table 3).

Table 3.Selected Performance Indicators for Sub-Saharan Africa, 1980–90(Annual average percentage change; unless specified otherwise)
1980–841985–871988–90
GDP
SPA core countries1.03.24.0
Other countries3.33.22.2
Export volume
SPA core countries-0.63.03.7
Other countries1.32.02.4
GDI (percent of GDP)
SPA core countries18.416.719.3
Other countries23.921.219.6
GDS (percent of GDP)
SPA core countries2.94.04.9
Other countries8.99.38.8
Terms of trade index (1987 = 1)
SPA core countries1.051.060.94
Other countries1.211.061.02
Source: World Bank data files.Note: GDI = gross domestic investment; GDS = gross domestic savings; SPA = Special Program of Assistance. Other countries include Somalia, Zaïre, and Zambia; and exclude Angola, Comoros, Djibouti, Equatorial Guinea, and Swaziland because of incomplete data. GDP, exports, and terms of trade data are on 1987 constant prices and exchange rates. GDI and GDS ratios are based on current price series.
Source: World Bank data files.Note: GDI = gross domestic investment; GDS = gross domestic savings; SPA = Special Program of Assistance. Other countries include Somalia, Zaïre, and Zambia; and exclude Angola, Comoros, Djibouti, Equatorial Guinea, and Swaziland because of incomplete data. GDP, exports, and terms of trade data are on 1987 constant prices and exchange rates. GDI and GDS ratios are based on current price series.

In contrast to the expansion that took place in the SPA countries, deterioration, or at best stagnation, characterized countries outside the SPA group. During 1988—90, output growth continued to slow and was only 2.2 percent a year, on average, despite the fact that this group includes some of the fast-growing sub-Saharan countries like Botswana and Mauritius. Export growth was also weaker, expanding only slightly faster than GDP; real investment increased moderately;4 gross domestic savings fell as a share of GDP; and the decline of real per capita consumption continued.

External Flows and the Investment-Savings Gap in Sub-Saharan Africa

As national savings dwindled and public consumption and investment continued, external resources have been used to finance growing fiscal deficits on both current and capital budgets. The investment-savings gap has increased two and a half times in 22 years, growing from 3.7 percent of GNP in 1966-73 to 7.4 percent in 1985-88 (Table 4); for the SPA countries, ODA reached about 14 percent of GDP—or almost three times the share in 1970-73. While in 1966 almost 90 percent of investment was financed by sub-Saharan Africa’s savings, in 1988 only 50 percent was. The persistent widening of this gap has occurred mainly in the International Development Association (IDA)-only countries, that is, those countries eligible to borrow IDA credits but not IBRD loans.

Table 4.Investment and Savings in Sub-Saharan Africa, 1966–88(Average annual percentage of gross national product)
1966–731974–801981–841985–871988
Sub-Saharan Africa
Gross domestic investment16.722.316.715.016.6
Gross national savings13.017.29.08.88.0
Gap13.75.17.76.28.6
Nigeria
Gross domestic investment14.822.813.810.313.6
Gross national savings10.323.78.88.48.7
Gap14.5-0.95.01.94.9
Other IBRD countries2
Gross domestic investment22.229.526.421.819.6
Gross national savings14.212.213.714.711.7
Gap18.017.312.77.17.9
IDA-only countries3
Gross domestic investment16.118.816.816.116.3
Gross national savings13.810.67.36.95.7
Gap12.38.29.59.210.6
Source: World Bank data files.

Defined as investment minus savings.

IBRD = International Bank for Reconstruction and Development.

IDA = International Development Association.

Source: World Bank data files.

Defined as investment minus savings.

IBRD = International Bank for Reconstruction and Development.

IDA = International Development Association.

The decline in savings in sub-Saharan Africa can be explained by two main factors: (a) declining income, which leaves fewer resources for public and private consumption and savings; and (b) the government’ s negative savings that resulted from growing recurrent budget deficits.5

Donors and recipients commonly focus on the inadequacy of funds for investment; however, inadequate demand for investment is equally, or more, important in explaining low levels of investment in sub-Saharan Africa. Inadequate demand has been caused by the insufficiency of sound public investment projects that are attractive to international or bilateral lenders and donors, and by low and uncertain returns on private domestic assets—caused in part by distorted economic and financial policies, as well as political animosity and uncertainty, which make private investment less attractive than in other countries. The weak demand for domestic investment is demonstrated by large capital flight from the region. While difficult to evaluate, cumulative capital outflow from 36 sub-Saharan African countries may have amounted to as much as $40 billion between 1976 and 19876—an amount equivalent to about half the total official development assistance received by sub-Saharan Africa during the same period. Assuming a linear function between investment and output, this cumulative capital flight would have cost an output loss by 1987 of about 30 percent of GDP. This situation suggests that stagnant investment and output resulted from inadequate demand for investment, as well as inadequate national savings and external financing.

In fact, net external flows to sub-saharan Africa have almost doubled as a percentage of GNP during the past two decades. Net loan disbursements plus grants and net foreign investment amounted to 6 percent of sub-Saharan Africa’s GNP in 1970, but to 10.9 percent in 1988. Moreover, the net flows have become more concessional. In 1970, less than half the net flows were concessional compared with five sixths in 1988.

Past trends show how past borrowing coupled with inefficient public investments and domestic policies that weakened production incentives and competitiveness has increased the region’s dependence on foreign resources. The task ahead is to expand reform programs that can gradually reduce this dependence. In the interim, however, foreign savings are still needed to help increase the effects of reforms.

Estimated Financing Requirements

The Analytical Framework

The basic targets and assumptions used to project financing requirements for sub-Saharan Africa during the 1990s are presented in Table 5. They are similar to those used in Sub-Saharan Africa: From Crisis to Sustainable Growth (World Bank (1989a)). For the region as a whole, that report assumed real GDP growth during the 1990s of 4—5 percent a year, annual export volume growth of over 5 percent, an import elasticity falling to about 1.1 by 2000, investment rising to 25 percent of GDP, and an incremental capital output ratio declining from about 7 in 1990 to 5 by 2000. These targets are more optimistic than historical trends for the region overall, bur they are consistent with the historical experience of successful countries in and out of Africa and with recent improvements in reforming countries. The key assumption in these projections is a dramatic improvement in savings performance over the decade, to around 20 percent of GDP by 2000. This would reduce the dependence on net external financing by half, from 10 percent of GDP to 5 percent, by the end of the decade.

Table 5.Past and Projected Key Economic Indicators for Sub-Saharan Africa, 1985–88, 1995, 2000(Average annual percentage change; unless indicated otherwise)
1985–8819952000
Domestic indicators
Real gross domestic product (GDP)2.64.05.0
Real gross domestic investment (GDI)-6.98.77.7
GDI (percent of GDP)14.020.725.0
Gross domestic savings (percent of GDP)11.416.620.0
Real consumption per capita-0.70.11.3
Real gross national income (GNY)-1.84.25.4
Real GNY per capita (1988 U.S. dollars)314.0304.0334.0
Real effective exchange rate-4.01-3.3-3.4
Incremental capital output ratio (ICOR) (at 1988, 1994, 1999 prices, respectively)6.84.94.8
Trade indicators and official development assistance
Import elasticity-1.61.01.0
Import volume-4.04.15.0
Imports (percent of GDP)22.933.139.3
Export volume1.93.64.3
Exports (percent of GDP)20.329.034.3
Import prices6.34.65.4
Export prices-4.64.85.9
Terms of trade index (1988 = 100)111.5103.5107.5
Real gross official development assistance (ODA)13.93.31.1
Gross ODA (percent of GDP)5.98.69.0
Debt-service indicators before debt relief
Debt-service ratio (percent of exports)26.515.7
Debt-service (percent of GDP)7.85.4

Sources: World Bank data and projections.

Median for about three fourths of the sub-Saharan countries; 1986-88.

Sources: World Bank data and projections.

Median for about three fourths of the sub-Saharan countries; 1986-88.

The requirements are based on “the most likely” scenario presented in the World Development Report 1990, which assumes that industrial countries will grow at 3 percent a year during the 1990s. The projections use an import elasticity of one. Reserves are targeted to rise gradually to three months of imports by 2000. Compared with 1988–90, the terms of trade index for the region (excluding Nigeria) is projected to increase slightly during the decade, but to increase substantially for Nigeria; for IDA-only countries, however, the index would remain below its level in 1988—90, declining slightly over the decade. Bilateral ODA flows are assumed to grow in line with nominal GNP in the countries of the Organization for Economic Cooperation and Development (OECD). Multilateral ODA flows in the early 1990s stem from present arrangements, and after 1993 are assumed to grow at the same rate as bilateral aid, except for the IMF. Private transfers are assumed to decline to zero by 2000. The assumptions lead to an increasing openness, in line with assumed trade liberalization measures and continued real currency depreciation.

Projected Gross External Capital Requirements

Sub-Saharan Africa

The gross foreign financing requirements for all of sub-Saharan Africa, before debt relief of any kind or the accumulation of new arrears, are projected to average about $28 billion a year (in nominal prices) between 1991 and 2000, or about $50 per capita annually (see Table 6).7 These projected financing requirements compare with estimated gross financing of” $27-28 billion in 1988 and $24-25 billion in 1982,8 implying that the financing needs can be met with no nominal increase in gross external capital. Foreign financing at this level is equivalent to only about 1214 percent of the total capital flows to the developing world in 1988.

Table 6.Past and Projected Financing and Debt Relief for Sub-Saharan Africa, 1985–88, 1995, 2000(Average annual percent of GDP; unless indicated otherwise)
1985–8819952000
Total foreign financing required
In billions of U.S. dollars14.826.532.0
In percent of GDP10.214.212.7
Gross foreign inflows projected10.111.911.9
Of which
Loan disbursements6.56.25.8
Official transfers3.15.05.3
Dtrect foreign investment0.40.70.8
Net debt relief121.2-0.7
Residual financing gap0.11.11.5
Memorandum items
Debt-service indicators
after debt relief
Debt-service ratio
   (as percent of exports)31.222.517.7
Debt service6.56.66.1

Sources: World Bank data and projections.

Net of moratorium obligations on consolidated amounts.

Debt relief and accumulation of arrears have already been taken into account in calculating financing requirements because historical debt service is shown as payments, not as obligations.

Sources: World Bank data and projections.

Net of moratorium obligations on consolidated amounts.

Debt relief and accumulation of arrears have already been taken into account in calculating financing requirements because historical debt service is shown as payments, not as obligations.

In real terms (deflated by projected import prices), the gross external financing requirements would average about one fourth less than nominal requirements. As African economies continue to grow over the period, gross external financing requirements would also decline as a share of GDP, from about 18 percent in the early 1990s to about 13 percent by 2000. After 2000, gross external financing requirements could continue to rise in nominal terms while declining as a share of GDP. This financing comprises what is required both to improve growth and development in the future (the trade gap of goods and nonfactor services) and to deal adequately with the legacy of past borrowing for earlier consumption and investment expenditures (debt-service obligations). The 1990–97 requirement levels mirror the movements of the debt-service obligations: high in the early years, declining in the midyears, and stabilizing after 1997. The requirements rise in the last part of the decade mainly because of the continually widening trade deficit. The trade gap widens during the decade because export growth lags behind import growth in aggregate (owing primarily to the low growth in Nigerian oil exports), the terms of trade decline for oil importing countries, and because the base for projecting import values is about a third larger than export values.

Debt-service obligations—before rescheduling and before the accumulation of any additional arrears—comprise more than half of the gross external financing requirements in the first half of the 1990s, but fall to about 40 percent by the end of the decade. In comparison, debt-service obligations were equivalent to about three fourths of the gross external financing requirements in 1988 but only about a third in 1982. The importance of debt service in total requirements reveals that the external financing problem in Africa is much more than a structural imbalance of imports and exports and indicates the importance of debt relief measures as a source of financing. The most effective to reduce the trade gap will be to achieve growth that is considerably faster than GDP growth. This will be easier if the needed imported capital and intermediate goods have adequate foreign financing.

Changes in underlying assumptions and targets will affect the projections, mostly because of their impact on the trade balance. A few examples illustrate the range of possible effects. If the GDP growth target were 1 percentage point higher in each year (which implies that the target proposed in Sub-Saharan Africa: From Crisis to Sustainable Growth would be achieved by 1995)—and there were no improvement in import efficiency, gross financing requirements would rise by 20—25 percent, or by $6—7 billion a year on average. If the assumed export growth were 1 percentage point higher in each year (bringing it closer in line with that of other developing countries)—and there were no offsetting increases in imports, gross financing requirements would fall by about 15 percent, or some $4 billion a year on average. If the projected terms of trade index were 1 percentage point below the base-case scenario in each year (but still resulting in a slight improvement over the period), gross financing requirements would rise by about 15 percent, or $4—5 billion a year on average. And if policy reforms could improve efficiency enough to lower the assumed import elasticity by 10 percent (becoming 0.9 instead of 1.0), gross financing requirements would decline by over 5 percent, or almost $2 billion a year.9

Projections by Groups of Countries

The aggregate projections for the region mask divergent trends and needs among countries. Some countries—especially the poorest—usually have much more severe financing needs than others—like oil exporters. Moreover, the use of aggregate estimates may underestimate regional needs because it implicitly assumes that surpluses in some countries can offset deficits in other countries, although surpluses are unlikely to be given or loaned to other African countries. In lieu of estimates for each country, the problem caused by divergent trends among countries can be alleviated by grouping countries according to their prospects and needs.

The IDA-only countries account for over 75 percent of the total gross financing required for the region. The financing requirements for these countries are driven by a widening trade deficit, which more than doubles in current terms during the 1990s, rather than by debt service. Therefore, substantially narrowing the requirements cannot be accomplished by short-term solutions. Because exports cover less than $3 out of every $4 of imports in these countries, the export growth rate will have to be a third higher than the import growth rate—or 8—10 percent a year—for a sustained period of time to lower the nominal trade gap. Exports would have to grow even faster if terms of trade decline. Provided that policy reforms are effective, and assuming a favorable trade environment in the industrial countries, the trade gap may begin to narrow after the end of the decade if export growth continues to accelerate. The required rates are optimistic, but they have been achieved by successful developing countries.

For the middle-income countries and Nigeria, the situation during the 1990s contrasts sharply with that of the low-income countries. Middle-income countries10 account for 20 percent of the total requirements for the region. Their requirements decline during the decade in real terms as well as a percentage of GDP. As opposed to the IDA-only countries, their requirements are not driven by trade (they have a small trade surplus) but by debt service. Debt-service obligations rise during the decade as payments for nonconcessional obligations contracted in the second half of the 1980s become due. Debt relief could fill much of the financing gap of this group. If the creditor community granted more generous debt relief than the Toronto terms of the Paris Club assumed in the model, the need for new financing would be considerably less.

Nigeria needs an average annual gross financing (before debt relief) of $2.4 billion only from 1991 to 1995. From 1996 onward Nigeria would generate a surplus. Nigeria’ s requirements decrease because of both an increasing trade surplus and declining debt-service obligations over the decade. After debt relief (which includes reduction of commercial bank debt), Nigeria would need an annual average of only $1.1 billion in 1991 and 1992, as it generates surplus after that.

Projected Financing Sources

For illustrative purposes, possible sources of financing for these requirements are also shown in Table 7. The major financing sources, in order of importance, include gross loan disbursements from all lenders, official transfers, debt relief measures (net of additional moratorium debt service), and direct foreign investment. (Private transfers are treated as resources, included in the current account balance.) The composition of the major financing sources is assumed to change over the decade with the share of aid flows increasing but that of debt relief decreasing.

Table 7.Possible Sources of Financing for Sub-Saharan Africa, 1991–2000(Annual averages in billions of U.S. dollars)
Of which
1991–20001991–951996–2000
Gross loan disbursements12.110.813.3
Of which Concessional7.26.18.3
Official transfers10.08.411.6
Direct foreign investment1.51.11.9
Debt relief11.73.90.4
Residual gap2.93.32.5
Total financing28.227.528.9
Source: World Bank projections.

Net of moratorium debt service on rescheduled debt.

Source: World Bank projections.

Net of moratorium debt service on rescheduled debt.

Total gross loan disbursements, net official transfers, and direct foreign investment are assumed to grow at annual average nominal growth rates of 3-4, 7, and 10 percent, respectively. Gross disbursements of nonconcessional loans are assumed to remain constant, in nominal prices, at the 1988 level. As a result, the share of gross loan disbursements and official transfers in total financing—including debt-service reduction—would rise from 65 percent to 87 percent by the end of the decade. The share of direct foreign investment would double during the decade, although, because the base is very small, its contribution to total requirements remains low (6 percent in 2000). Debt relief of official debt is assumed, for all countries, at the most favorable terms currently allowed under the Paris Club, currently the Toronto Terms.11 In addition, reduction of commercial debt is assumed through London Club rescheduling and a combination of buy-backs at deep discounts, swaps, and other arrangements. However, total debt relief would gradually dwindle and become negative by 1998 as repayment of previous debt consolidations falls due. Two other reasons account for the relatively small contribution of debt relief to total financing resources: about a fourth of Africa’s debt is multilateral and currently not eligible for debt relief; and all new borrowing is assumed ineligible for rescheduling, which is in line with the current policy on cutoff dates.

Under this scenario, only about 90 percent of the requirements would be met—implying a residual gap of $3—4 billion a year, on average. This indicates the need for stronger reforms, export promotion, more efficient use of imports, and additional resources—namely, more favorable debt relief and larger capital inflows, especially from the private sector.

Methodological Summary

The financing requirements of sub-Saharan Africa were projected in nominal U.S. dollars using a macroeconomic accounting framework covering basic relationships among aggregates of the macroeconomy. The target rates of real GDP and export volume growth (about 5 percent a year) were assumed to be achieved gradually during the 1990s, accelerating from the lower levels of the late 1980s. Import volumes were set by an elasticity of one, relative to real GDP growth. While higher-than-aggregate elasticity manifested in the 1980s, when insufficient foreign exchange constrained imports, the future import elasticity, on the other hand, may be expected to exceed one, because of the severe compression of imports during the 1980s (import volume in 1988 was only 76 percent of the level in 1980), because of the need to rebuild critical infrastructure and productive facilities, and because of the need to expand basic social services. Moreover, import intensity normally deepens as economies grow and develop. The assumed international environment would be moderately expansive (3 percent growth in OECD countries during the 1990s). Because of rising real oil prices, terms of trade would be generally favorable for the region overall, but oil importers would face slightly declining terms of trade.

Policy reforms are not explicitly included in the model, although achieving the targets projected for key economic variables assumes the adoption of conducive policies. Real depreciation of domestic currencies is explicitly assumed (about 3 percent a year) because it effects how domestic prices move relative to international prices, and thus affects ratios expressed as a percentage of domestic GDP. Assumed increases in government revenue and decreases in spending would reduce the deficit by 4 percent of GDP during the 1990s, which improves the scope for increasing domestic savings.

The relationship between the amount of investment required and the projected growth rates, generally referred to as the incremental capital-output ratio (ICOR), is assumed to improve during the decade, with the ratio declining from 6.8 in 1985-88 to 4.8 in 2000 for the region as a whole. Substantial improvements in the ratio would be needed for the middle-income countries and Nigeria as the ratio is brought down from its present level to meet the target GDP and investment levels. This change assumes the implementation of policy reform programs that increase the efficiency of capital.

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1

Based on Culagovski (1991) which explains in more detail issues related to savings, investment, and efficiency of capital; it also describes, in the annex, the general assumptions used in the projections and the sensitivity results to changes in major assumptions. A summary of this PRE working paper, “African Financing Needs in the 1990s: A World Bank Symposium” was also published in October 1991.

2

The biggest increases in oil prices, here referred to as oil shocks, took place in 1973—74 and 1979-80, and are the basis for the periods selected to average data.

3

Donors and creditors launched this ongoing program in late 1987 as an extraordinary response to the problems facing low-income, debt-distressed African countries lacking adequate resources to adjust and grow. Twenty-three countries have received assistance from SPA; however, because Somalia and Zaire received support in 1988 and 1989 but are now inactive, and Zambia became eligible for SPA only in late 1990, only 20 of them are defined as “core” countries.

Data used for the SPA analysis are based on constant 1987 prices and exchange rates, and therefore ate not directly comparable to data through 1988 used in Tables 1 and 2 and elsewhere in this paper, which are based on constant 1980 prices and exchange rates. Aggregates are unweighted averages, which characterize the experience of a typical country in each of the groups and avoid the problem of large countries, like Nigeria, dominating the weighted averages.

4

Because the GDP deflator rose faster than the prices of investment goods, investment continued to decline as a share of GDP.

5

Some misclassification of foreign inflows may make the level of domestic savings look lower than it actually is. This misclassification stems from the possible overreporting of foreign-funded investment and underreporting of foreign-funded consumption. Savings ate calculated as the difference between production and consumption. To the extent chat part of consumption has actually been financed by foreign funds (and would not occur without this foreign financing), actual domestic savings will be higher than calculated.

6

See Chang and Cumby (1991). This estimate is based on a broad definition of capital flight, measuring the total increase in the private sector’ s net foreign assets. An alternative measurement, based on the change in the stock of private claims held abroad, gives an estimate about 20 percent lower. In a different study, Alexander Yeats (1989) calculated that African countries paid considerably more than other developing countries for the same imports; part of these higher payments is a conduit for capital flight.

7

The requirements are the sum of three major components: the trade balance (of goods and services, excluding interest obligations on external debt), all external debt-service obligations, and assumed increases in foreign reserves. The estimate excludes Angola, Botswana, Cape Verde, Comoros, Djibouti, Equatorial Guinea, Gabon, Lesotho, Mauritius, Namibia, Seychelles, and Swaziland. These countries—many with positive current account balances—accounted for less than 10 percent of sub-Saharan GDP in the mid-1980s and are unlikely to have significant on projections of total financing requirements.

8

This historical figure includes an estimate for debt-service obligations that were not paid, because they were either rescheduled or allowed to fall into arrears. For example, unpaid debt service was on the order of $10 billion in 1988 (excluding any interest arrears on short-term debt).

9

Changes in interest rates would have a small effect on debt-service obligations, A rise in interest rates of 1 percentage point would increase debt-service obligations by only $0.3—0.4 billion a year, or only 1-2 percent of gross financing requirements for the region.

Assuming that higher oil prices dampen consumer demand and stimulate increased energy efficiency within Africa, each dollar increase in oil prices will raise financing requirements by about $250 million a year for the oil importing African countries. However, the additional cost to the oil importers would be less than the larger revenues of the five oil exporting countries. At current export levels, each dollar increase in oil prices would raise export revenues by $750 million a year.

10

Projections for this group are based on data for four countries: Cameroon, Congo, Côte d’ lvoire, and Zimbabwe. Other middle-income countries were not considered because they are either too small or are not expected to need special balance of payments support. Their projections are made for the oil sector separately, on the basis of known deposits.

11

Under these terms all rescheduled concessional debt is to be repaid with a 25-year maturity, including a 14-year grace period. Moratorium interest charges should be at least as low as the rates on the original loans. For nonconcessional debt, the creditor countries can choose repayment conditions from a menu of three options: (a) partial cancellation, (b) extended maturities, and (c) concessional interest rates. The grant element of this scheme is 19 percent, which compares with 81 percent for IDA loans. In addition to the application of the Toronto Terms, most concessional loans are assumed to be written off, in line with current practice.

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