Economic Development in Africa 2004

Debt Sustainability - Oasis or Mirage?

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In the context of the Millennium Development Goals (MDGs), the international community has set itself a target of reducing poverty by half by the year 2015. Many observers have now come to the conclusion that, on present trends, there is very little likelihood that this objective can be achieved at any time close to that date in the poorer countries, including in Africa. The continent’s debt problems and its resource requirements are inextricably linked to the capacity of African countries to generate capital accumulation and growth. The current study questions Africa’s debt sustainability and tries to put these and other related issues in perspective making a number of recommendations on how to deal with Africa’s debt overhang, either through the adoption of new approaches or a major revision and improvement of present debt relief policies.

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How sustainable is African HIPCs’ debt after debt relief?

The debt overhang literature does not provide conclusive answers or evidence as to what sustainable debt levels are. A recent IMF Working Paper supports the claim that, on the basis of current fiscal policies, debt levels will remain unsustainable in many African HIPCs even after they graduate from the HIPC Initiative (Fedelino and Kudina, 2003). Another recent study by Kraay and Nehru (2003), corroborated by the IMF staff’s empirical analysis (see IMF and World Bank, 2004b), finds strong evidence that institutions and policies, as well as external shocks, are important in determining the levels of debt at which countries experience distress. As discussed in the previous chapter, the assessment of debt sustainability is, by its nature, a forward-looking concept and inherently probabilistic.

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