Can Africa Get Out Of Debt?

This piece on debt relief in Africa ran in Time.

It’s archived below.

Oct. 03, 2004
Can Africa Get Out Of Debt?
Loan forgiveness is finally becoming a reality — and it will help. But more needs to be done to get the continent on the road to growth and make a dent in poverty.

By Stephan Faris

Kampala – The sound of shuffling feet announces her entrance as dozens of youngsters rise from their seats to chant in unison: “We welcome our headmistress.” Jane Kansiime, who runs the Kamwokya primary school in the Ugandan capital, Kampala, silently reviews the students, who stand politely at attention, five to a bench. Most wear the navy-and-turquoise school uniform, but other colors speckle the crowded classroom: a yellow shirt, a red dress, a white blouse. “We are not rigid here, as long as a child can come,” says Kansiime, 40. “It’s not the clothes that make the child learn.”

Six years ago, before Uganda became the first country to have its debt burden eased under a World Bank–administered initiative, classrooms like Kansiime’s were half empty. Parents couldn’t afford the $40-$50 annual tuition. Then the World Bank program, called the Heavily Indebted Poor Countries initiative, reduced Uganda’s loan payments on the condition that the savings be channeled into health care, agricultural development and free primary education.

Over the past few years, debt relief has been touted by everyone from Irish rock star Bono to boxing champ Muhammad Ali as one of the best ways to help lift the world’s poorest countries out of poverty. According to the World Bank, even nations in the hipc program — which was extended last week — pay on average more than 12% of their revenues each year to creditors from the developed world. Loan repayments often exceed spending on health care and education, and governments continue to sink deeper in debt simply by paying interest on their loans. Last week Bono was at Britain’s Labour Party conference in Brighton, where Chancellor of the Exchequer Gordon Brown pledged $180 million a year to the cause for the next 10 years. Bono said that reducing Africa’s burdens “is not just heart; it’s smart.” In Washington last week, Finance Ministers from the G-7 nations met to discuss debt relief, and this week Prime Minister Tony Blair goes to Addis Ababa, Ethiopia, for a meeting of the Commission for Africa, which is examining ways to reduce poverty, including debt relief.

The industrialized world is finally waking up to what debt relief can do for the developing world. Thanks to lighter debt burdens, Burkina Faso has slashed the cost of AIDS drugs; Mozambique has vaccinated half a million children against easily preventable diseases and electrified rural schools and hospitals; Tanzania has built 32,000 new classrooms and hired 18,000 more teachers; and Uganda has filled schools like Kansiime’s by abolishing tuition fees. But in Africa, such limited relief may not be enough. Despite $29 billion in write-offs so far, the countries in the hipc scheme still collectively owe an estimated $90 billion to Western countries and organizations like the World Bank and the International Monetary Fund.

To many Ugandans, debt relief seems to be working. The hipc program cut Uganda’s loan payments by up to $90 million a year. The resulting windfall was used to hire hundreds of teachers and build new schools and health facilities. Enrollment in the nation’s primary schools jumped from 5.3 million in 1997 to 7.6 million last year. Immunization rates for tetanus, whooping cough and diphtheria jumped from 49% in 1998 to 83% this year, and the HIV infection rate was halved over the same period. “We’ve turned around a lot of things here,” says Francis Omaswa, director general of Uganda’s Health Services.

But there is plenty more to be done, and debt relief alone won’t make it happen. In Uganda’s case, debt relief was accompanied by a surge in aid, which funds nearly half the country’s $2 billion annual budget. This year, Uganda received $760 million in foreign grants, more than eight times the savings from reduced loan repayments. “Debt relief catalyzed donors to increase their spending,” says Keith Muhakanizi, director of economic affairs at the Ugandan Ministry of Finance. Still, Uganda’s needs far outstrip its ability to pay. In the past four years, the country has borrowed $1.5 billion to build schools, clinics and roads. Total debt now stands at $4.3 billion. Meanwhile, collapsing coffee prices have pummeled its export earnings, further undermining attempts to escape from the debt trap. “As long as we cannot balance our budget, we can’t avoid borrowing,” says Bright Rwamirama, chair of the Ugandan Parliament’s finance committee.

Debt relief gives countries a predictable flow of resources free from the whims of donors. But when it’s directed at poverty reduction, there’s little difference between the write-offs and other types of aid. “One dollar of debt relief is the same as one dollar of grants,” says a World Bank official. Last week at the G-7 summit, the U.S. Treasury proposed a plan to cancel the debt of about three dozen countries by using money that would otherwise have been earmarked for aid. By swapping aid for debt relief, the onerous repayments would be eased without costing donors anything extra. But another provision of the plan — that all aid should be in the form of grants — has the World Bank worried about bankrupting its aid funds.

Not every country is a good candidate for debt relief. In nations wracked by civil unrest, like Ivory Coast or the Central African Republic, there is no guarantee that the money will be wisely spent. And defaulters can drain a lot of resources away from other worthy recipients. Sudan is estimated to owe over $21 billion, $18 billion of which is in arrears, while Somalia has around $2.5 billion in debts and lacks a functioning government. “Countries that are most indebted are not necessarily the ones that have the best policies and institutional environment to best make use of aid,” says an economist working for a major Western donor. “Or indeed spend any money whatsoever.”

So even for countries that have benefited from debt relief, write-offs are only one step on the ladder out of poverty. And it’s a small step. “Frankly, debt relief should be put in the proper perspective,” says the World Bank official. “It’s not a magic bullet. The poor countries still need a lot of resources.” Writing off the remaining debts of the 27 countries that have qualified for the HIPC initiative would cost about $2.3 million a year, a small sum compared to the $50 billion in annual aid flowing to the developing world. Eclipsing both sums, the official adds, is the $300 billion a year the developed world spends on agricultural subsidies, money that locks the poorest countries out of the international marketplace. While Western governments offer aid and debt relief with one hand, they’re taking away Africa’s best chance at self-sufficiency with the other.

Uganda has tried to tackle the problem head on. The Ministry of Finance has advised the government to cap borrowing at $200 million per year, and has even suggested that grants be restricted. The country is also breaking free of its dependence on coffee exports, pulling up the beans in favor of flowers, tea, cotton, tobacco and vegetables. The next push, says Director of Economic Affairs Muhakanizi, is to turn raw agriculture products into processed goods. “If you’re exporting cotton, you can sell yarn,” he says.

For many, economic self-sufficiency can’t come soon enough. “A return on investment in health and education takes a long time,” says Paul Busharizi, business editor at Uganda’s New Vision daily newspaper. “Meanwhile, we’re not building capacity. We’re taking all these kids to school, but they’re going to come out and have no job. At the end of the day, where are these guys going to work?” Maybe Uganda will have an answer by the time Headmistress Kansiime’s students get their diplomas.

With reporting by J.F.O. McAllister/Brighton

This entry was posted in Publications, TIME, Uganda and tagged , . Bookmark the permalink.