A View from the African Development Bank
- I. Patel
- Published Date:
- December 1992
The theme of this year’ s symposium is Structural Adjustment, External Debt, and Growth in Africa. Within that broad theme, this brief paper focuses on Africa’s adjustment and external debt problem, with particular reference to the issues and options at stake. To set the stage for the main body of remarks, the paper begins by briefly surveying some of the principal factors underlying the related problems of adjustment and external debt in Africa. It then provides an overview of the structural adjustment programs adopted in most African countries. Finally, some issues and options facing the African countries in the immediate future are given.
Recent Economic Crisis: Origin and Evolution
The decade of the 1970s saw the emergence of persistent and unsustainable balance of payments disequilibria in many African countries—disequilibria that had their origins in various external and internal factors. To focus our thoughts more sharply on the current options and the challenges faced by policymakers, it may be useful to pinpoint some of the critical elements linked to these factors.
On the external side, mention is usually made of the oil price hikes of 1975 and 1979, which represented large real income losses for many countries and also marked the emergence of steadily worsening current account deficits. In the uncertain environment that prevailed at the time, responses varied from country to country. Indeed, while a few countries undertook various policy measures to adjust to the significantly altered global economic environment and absorb, as smoothly as possible, the impact of the price increase, most African countries simply resorted to foreign borrowing as a means of financing the resulting payments disequilibria. This, as it turned out, was an easy option, facilitated, in part, by the perceived need of various international financial houses to recycle the huge payments surpluses of the oil exporting countries and by the favorable terms under which the associated credit was extended.
Beyond the oil price increases, another major external shock to the African economies was the sharp declines in non-oil commodity prices. Although one can point to phases of commodity boom in the 1970s, the decade of the 1980s witnessed a pervasive downward trend in non-oil commodity prices. For instance, in 1986 alone, non-oil commodity prices fell by 10 percent in real terms, and in the 1980–86 period, as a whole, by as much as 30 percent. For a region with as high a degree of commodity export dependence as Africa, export price declines of this magnitude did nothing to improve an already precarious external payments situation—what with the known low demand elasticities for commodities and with technology-induced shifts to substitutes, in some instances.
Closely related to all this was the decline in Africa’s terms of trade. In fact, during the 1980s, while the terms of trade for all developing countries declined at an average annual rate of about 2 percent, for Africa, the corresponding figure was almost 4 percent. And although there is some controversy about the impact of adverse terms of trade movements on economic growth, there is little disagreement that they represent real income losses that can have a negative impact on the current account situation.
Beyond this, the performance of the world economy, in particular that of the developed market economies, also contributed to the worsening external payments position in Africa during the period. In the 1980s, as we all know, the industrial market economies grew at an annual average rate that was a full percentage point less than in the 1970s. If one simply recalls that these economies represent the largest markets for Africa’s exports, it is not difficult to conclude that the decline in Africa’s export earnings and the corresponding payments disequilibria are partly traceable to the slower growth of the industrial countries and the simultaneous decline in import demand.
While external factors have clearly contributed to Africa’s difficulties, the policies chosen in Africa are not without blame. Indeed, inappropriate domestic policies, ranging from overly expansionary fiscal and monetary policies, to price and other market distortions, to disincentives to the export sector, to weak public and private investment programs and incentives, and to an often cumbersome administrative machinery have also been important contributors to the present crisis.
This is, of course, all quite familiar territory, but the point can further be illustrated with one example. Overly expansionary monetary policy, partly to finance fiscal deficits, had, during this period, as a natural consequence, higher rates of inflation. But as we know, higher rates of inflation, relative to one’ s trading partners, lead to real appreciation of the domestic currency, particularly under the fixed exchange rate regimes that prevailed in most African countries in the decade of the 1970s, and reduce international competitiveness. Similarly, overly expansionary monetary policy in a situation of stagnant or slow-growing gross domestic product (GDP), as occurred during the period, is ultimately reflected in attempts to increase real import demand, thus further worsening the current account situation.
The combined result of all these developments—external shocks and domestic policy failures—was the emergence of an untenable balance of payments position; slower economic growth; fiscal crisis; and even a heightening of social and political tensions.
As is well known, the initial policy response in several countries was to view the disequilibria that arose as a short-run phenomenon that could be readily corrected by the application of narrow demand management measures. But it soon became apparent that the observed disequilibria were not amenable to short-run policies of this type and that a more gradual, growth-oriented set of policies—in the form of structural and sectoral adjustment programs—was called for.
The decade of the 1980s, the so-called adjustment decade, thus witnessed the introduction of various adjustment and reform programs in several African countries—broadly speaking, to correct policy shortcomings wherever they may exist, to reduce external disequilibria, and to launch these economies on the path of recovery and growth. The rationale underlying these programs was simply that since the observed disequilibria were neither temporary nor self-correcting, merely financing them would not in any way represent a long-term solution. There was simply no alternative, since a policy of financing without adjustment quickly results in larger and larger external debt, and the further erosion of a country’ s creditworthiness. Adjustment was therefore inescapable, and those countries that acted more swiftly and effectively were more likely to reverse the economic decline that had set in.
It is now more than a decade since the first structural adjustment program was introduced into Africa. And it has now become a feature of most economies on the continent, though the results of these adjustment programs have been, at best, mixed. Some progress has undoubtedly been achieved in the areas of policy and institutional reforms. But, in a paradoxical sense, going hand-in-hand with these efforts are a rising debt burden, relatively reduced capital inflows, declining per capita incomes, and increasing poverty. Indeed, the adjustment decade saw the emergence of rapidly rising external debt and increasingly burdensome debt-servicing difficulties. From a level of about $109 billion in 1980, Africa’s external debt is now estimated at a level of $250 billion, about 70 percent of which is owed to official creditors. Debt service, as a percentage of exports of goods and services, now stands at 30 percent, compared with 13 percent in 1980. Thus, while Africa’s external debt is relatively small, compared with other developing regions, its burden and the toll it exerts in terms of human suffering, reduced per capita incomes, and income forgone, is no less great—and is indeed higher. Africa’s external indebtedness has evolved to impede economic recovery and growth—particularly in the low-income countries where it is now estimated to be about 100 percent of gross national product (GNP) and represents close to 600 percent of exports.
Options and Constraints in the Future
Given these clearly unacceptable developments, and while readily acknowledging the individual exceptions to this aggregate picture, two questions readily come to mind. For how long and at what cost will the present situation continue? What are the issues and options before Africa and the international community, as the continent tries to cope with its economic difficulties?
It is not easy to predict how long the present situation will last, nor to estimate the associated costs. What is certain, however, is that the time has long passed for Africa to examine, as dispassionately as possible, the feasible set of options available in dealing with the issues of economic adjustment and external indebtedness. In what follows, I will attempt to sketch the broad outlines of a few of these issues and options, in the areas of public policy management, trade policy and economic integration, and debt alleviation.
If one starts from the generally accepted premise that there is no substitute for sound economic management, then it is not difficult to urge African countries to persevere with those policy reforms and adjustment measures that are necessary for economic recovery and sustained development. They should continue to examine, and re-examine, existing policies and to take measures to correct macroeconomic and sectoral distortions, and institutional weaknesses, where they arise. The point needs to be made, however, that, realistically, in the current situation of heavy external indebtedness, adjustment of the extent required can be achieved only over a period of several years and must, therefore, become part of the broader development effort.
Indeed, while it is widely acknowledged that macroeconomic and sectoral problem identification and policy formulation are essential points of departure for the transformation of these economies, they are still no guarantee for sustained economic recovery and growth, as recent experience clearly demonstrates. The road from problem identification and policy formulation to recovery and growth is fraught with far too many difficulties, risks, and uncertainties. For instance, we still know very little about supply responses to producer price changes, or about the response of key macroeconomic variables to policy stimuli. Similarly, we have no firm and reliable estimates about the size of exchange rate elasticities and their short- and long-run profiles. In designing adjustment programs, therefore, it is essential that these uncertainties be recognized, and that programs be made correspondingly accommodating.
One major uncertainty facing adjustment programming relates to financing, as even the best formulated program could easily be derailed by inadequate funding. Adequate and predictable external financial support is thus essential, in order to give policies time to run their course and to insulate economies from the vagaries of temporary shocks, external or domestic, over which they have no control. It is then of utmost importance that reform efforts be reliably supported by the international community, including the multilateral agencies, so that these efforts can be resolutely pursued to their ultimate objective. It is because of this that the African Development Bank (ADB) stepped up efforts to increase finance to the African countries. In particular, the ADB has started policy-based lending.
ADB’ s Structural Adjustment Lending
The ADB has a relatively short history in policy-based lending. Until recently, project loans and lines of credit constituted virtually all of ADB group lendings. The onset of the current economic crisis in most countries and the subsequent changing needs of regional member countries entailed diversification of the lending instruments. Since the early 1980s, the bank group has started extending rehabilitation and sector loans alongside traditional project lendings. Sensing needs for quick-disbursing funding to support policy reforms, the ADB recently instituted structural adjustment lending.
In 1987, total sectoral and structural adjustment loans amounted to $763 million—constituting over a third of total lending. Of this amount, structural adjustment loans totaled $374 million. In 1988, structural adjustment lending dropped sharply to less than half of the 1987 level. Sectoral adjustment lending increased marginally in the same year. In 1989, the proportions of sectoral and structural adjustment loans changed significantly. Structural adjustment lending increased to $495 million, while sectoral lending dropped to $82 million. An increase in the number of loans approved and the large size of loans to Cameroon, Morocco, and Tunisia explain the high level of structural adjustment lending in that year. In 1990, structural adjustment lending fell by one third, while sectoral adjustment lending increased sharply. Policy-based lending constituted about one fifth of total lending—broadly in conformity with the targets set in the Five-Year Operational Program of the ADB for the years 1987–91. The objective of the ADB’ s structural adjustment lending is to assist regional member countries in creating a firm foundation for sustained self-reliant growth. The loans provide quick-disbursing balance of payments support that encourages and facilitates policy adjustment. In particular, they are intended to ease the foreign exchange constraint on the importation of foreign inputs.
This increasing role of ADB as a source of policy-based support makes it necessary that it have a broader view of the macroeconomic and structural problems of the regional member countries. To do this, it needs to considerably improve and expand its research and analytical capacities. Lacking the latitude for imposing stiff conditionalities on regional member countries, the ADB approach is to encourage the internalization of policy formulation and policy dialogue. Where the institutional mechanisms for policymaking and implementation are inadequate, the ADB provides technical and institutional support. Although it has yet to make a comprehensive assessment of policy-based lending, its internal reports reflect some satisfaction that the venture is worthwhile, despite its perceived risk. The reason for the satisfaction is that the financial support provided encourages countries to undertake policy reforms. By easing foreign exchange constraint, structural adjustment lending enhances the utilization of idle capacity, promotes growth, and further encourages countries to undertake policy reforms.
Human Dimension of Adjustment
A word of caution needs to be made. Policy reforms, with their emphasis on the alignment of domestic expenditure to domestic revenues, reduction of price and cost distortions, and various institutional changes, usually impose painful costs on the poor, in particular, and on the vulnerable segments of society. Thus, in pursuing the policies of adjustment and reform, it is important to bear in mind the fundamental point that the betterment of mankind is the ultimate purpose of development. Therefore, human resource development, in all its dimensions, should be given priority as a means of enhancing human welfare and, hence, of promoting development. The strategy requires greater support for poverty alleviation programs, such as the provision of minimum food requirements, basic education, primary health care, job opportunities, and so on. Indeed, one of the more deleterious consequences of the current adjustment efforts has been the decline in human welfare, as expenditures on social programs are reduced to meet fiscal, monetary, and other program objectives.
In order to unleash and harness human resource potential for the promotion of economic development, it is essential that greater attention be paid to the social costs of adjustment. In this regard, mention should be made of the Social Dimensions of Adjustment Program, launched jointly in 1987 by the ADB, the UNDP, and the World Bank, which is designed to address the adverse consequences of adjustment. For maximum results, this program too will need to be adequately funded.
The Global Economic Environment and Adjustment
Beyond the broad policy setting and taking into consideration the related issues of financing and the social dimensions of policy reform and adjustment, a crucial determinant of Africa’s success will be what occurs with regard to its own trade policy in the context of the global trading environment.
Since the 1980s, most African currencies have undergone significant real devaluations, one rationale for this being the potential contribution to greater export earnings and hence an easing of the external debt burden. Unfortunately, these policies have not been rewarded with significant export renewal. Major nonprice constraints continue to limit the supplies of traditional exports, while their international prices continue to fall. At the same time, nontraditional exports have taken a much longer time to develop than originally expected—a situation that cannot be entirely divorced from the policies of voluntary export restraints, quotas, licensing, and so on that effectively restrict entry of developing country exports to the industrial country markets.
It follows that one of the critical issues that needs to be addressed in the current recovery effort is the export-earning capacity of Africa. In the short run, the dependence of Africa on commodity export earnings would need to continue. But the adverse effects of declining and fluctuating commodity prices must be mitigated through improved funding of schemes established for that purpose, such as the European Community’ s STABEX (system of stabilization of export earnings), the IMF’ s compensatory and contingency financing facility, and UNCTAD’ s (United Nations Conference on Trade and Development) Integrated Program for Commodities. In a longer-term context, the way out of the current dependence on primary commodities is the diversification of the production base through, among other things, local processing. But for this policy to succeed, not only must the broader domestic policy framework be appropriate, but the restraints to global trade we have seen emerge in the 1980s must be quickly dismantled.
And beyond what assistance is offered in the international context, African countries need to move aggressively toward a policy of effective economic integration, in all its dimensions, if they are to nurture and exploit trading opportunities within the continent itself. This strategy closely integrated with broad policy reform efforts, and encompassing all corners of the continent—from the Mediterranean to the South Atlantic—will, perhaps, provide a more lasting solution to the current problems of weak export earnings, mounting external debt, and the associated debt-servicing difficulties.
With regard to the issue of debt alleviation, since the inception of the debt crisis, as is known, many proposals have been advanced to address this problem. Some, such as the Venice and Toronto initiatives, are targeted toward the low-income countries, and others, such as the Baker and Brady proposals, are aimed at the middle-income, highly indebted countries. While many low-income African countries have benefitted from initiatives such as those made in Venice and Toronto, the same cannot be said of the Baker and Brady initiatives. The debt problems of the middle-income countries thus remain largely unaddressed.
To date, African countries have relied on a combination of debt forgiveness, debt reduction, and reschedulings to address the issue. While some progress has been made, the debt problem still remains stubbornly difficult. From the nature of the problem, it is obvious that there can be no lasting solution until there is significant debt and debt-service reduction, and until economic growth resumes on the continent. Without significant debt relief, in whatever form, available resources would continue to be diverted to debt servicing. But we must simultaneously bear in mind that, without growth, even if all of Africa’s current debt were forgiven and the slate wiped clean, it would not be long before a new debt crisis emerged, as countries would be required to incur additional debt if the challenges of economic and social development are to be addressed in an effective manner. The resumption of growth, however, is not automatic; it has several elements.
One such critical element is the continuation of policy reforms, as I have just discussed. And adjustment, as noted, must be adequately supported by external financing, to tide a country over the interim period and to provide a breathing space during which necessary policies can be executed to their ultimate conclusion. Needless to say, without adequate external financing, the reform efforts themselves could be undermined by political and social unrest. A further element in the recovery process, as noted earlier, is that the international trading environment must be sufficiently open to permit African countries to earn their way out of the present crisis. Indeed, it is for this reason that it is important that the present deadlock over the Uruguay Round of multilateral trade negotiations be resolved quickly and in a way that guarantees a fair and open world-trading system.
To conclude these brief remarks, it should be emphasized that the restoration of economic health to the economies of the continent will take time and will require bold measures by all concerned. It will also call for continued sacrifice on the part of Africa in terms of the burden of adjustment. But for the adjustment efforts not to be undermined, there must be reasonable hope that, before long, economic growth will resume again. This resumption of growth itself calls for bold measures in the area of international trade and trading arrangements, external capital flows, and the resolution of the current debt crisis. In other words, the domestic efforts of Africa must be complemented by those of the international community; if they are not, the sacrifices that Africa is required to make will be in vain.