Term papers writing service


The problem of debt burden in hipc countries like tanzania

Ibi Ajayi and Mohsin S. Khan It is generally expected that developing countries, facing a scarcity of capital, will acquire external debt to supplement domestic saving.

The rate at which they borrow abroad—the "sustainable" level of foreign borrowing—depends on the links among foreign and domestic saving, investment, and economic growth.

  1. Nyoni, focuses on capital flight from Tanzania during the period 1971—93. How can capital flight be stemmed or reversed?
  2. A second hypothesis, proposed originally by Khan and Ul Haque 1985 , argues that the perceived risk of investment in developing countries is higher than that elsewhere. The behavior of these indicators, under varying assumptions, are explored using a growth-cum-debt model.
  3. This process clearly needs to be strengthened and widened to cover other countries in the region, so that sub-Saharan Africa as a whole can see a sustained higher rate of economic growth and improved living standards for its population. What is the magnitude of capital flight?

The main lesson of the standard "growth with debt" literature is that a country should borrow abroad as long as the capital thus acquired produces a rate of return that is higher than the cost of the foreign borrowing. In that event, the borrowing country is increasing capacity and expanding output with the aid of foreign savings. In theory, it is possible to calculate the sustainable level of foreign borrowing, based, for example, on the terms, maturity, and availability of foreign capital.

In practice, however, the task is nearly impossible, since such information is not readily available. Thus, various ratios, such as that of debt to exports, debt service to exports, and debt to GDP or GNPhave become standard measures of sustainability. Even though it is difficult to determine the sustainable level of such ratios, their chief practical value is to warn of potentially explosive growth in the stock of foreign debt. If additional foreign borrowing increases the debt-service burden more than it increases the country's capacity to carry that burden, the situation must be reversed by expanding exports.

If it is not, and the problem of debt burden in hipc countries like tanzania do not change, more borrowing will be needed to make payments, and external debt will grow faster than the country's capacity to service it. Countries in sub-Saharan Africa have generally adopted a development strategy that relies heavily on foreign financing from both official and private sources.

Unfortunately, this has meant that for many countries in the region the stock of external debt has built up over recent decades to a level that is widely viewed as unsustainable.

The standard ratios reflect this huge buildup of debt. The region's aggregate debt-export ratio rose from 51 percent in 1975 to about 270 percent in 1995 excluding South Africa, the ratio was above 300 percent. For all low- and middle-income developing countries, the average ratio of debt to exports was less than 150 percent. Similarly, the debt-GNP ratio for sub-Saharan Africa was 14 percent in 1975, but by 1995 it had reached more than 74 percent.

Although debt-service ratios have remained relatively low because of the highly concessional nature of external financing provided to Africa, many countries in the region have been unable to service their debt without recourse to rescheduling under Paris Club arrangements or by accumulating arrears. The massive growth in external debt in sub-Saharan Africa over the past two decades has given rise to concerns about the detrimental effects of the debt on investment and growth, principally the well-known "debt overhang" effect.

Furthermore, there is now considerable evidence that the buildup in debt was accompanied by increasing capital flight from the region. In other words, sub-Saharan Africa was simultaneously an importer and an exporter of capital.

What is the relationship between foreign borrowing and capital flight? Two hypotheses have gained currency in the literature. First, there is the straightforward view that it is the government that engages in foreign borrowing while the private sector shifts its funds abroad.

This theory undoubtedly has some validity, since the bulk of financing to Africa has been contracted by governments and comes from donor countries and multilateral agencies. And of course capital the problem of debt burden in hipc countries like tanzania is purely a private sector activity. The drain of foreign exchange resources through capital flight creates a greater need for governments to borrow abroad. A second hypothesis, proposed originally by Khan and Ul Haque 1985argues that the perceived risk of investment in developing countries is higher than that elsewhere.

Residents of developing countries can expect risk-free compensation for the additional risk on their investment at home; Khan and Ul Haque 1985 describe this risk as "expropriation risk. An exogenous or policy-induced shock that raises the perceived level of risk could therefore result in capital flight; at the same time the government would be forced to go abroad to obtain financing to cover not only the original imbalance but also the loss of resources through capital flight.

It is useful to consider what governments can do in a situation of foreign borrowing and capital flight. Obviously, providing a stable financial and macroeconomic environment would reduce domestic uncertainty.

Experience has shown that foreign borrowing and capital flight were most pronounced in those countries that had higher and more variable rates of inflation, larger fiscal deficits, and overvalued currencies. These factors produced the incentives for governments to overborrow and for domestic investors to shift their funds abroad.

Adopting sound macroeconomic policies would thus seem to be a key element in reducing reliance on foreign savings and in inducing capital flight. The international economic community can also play an important role in lowering the debt burden of sub-Saharan African countries.

Recognizing this, the IMF and the World Bank in late 1996 implemented the Heavily Indebted Poor Countries HIPC Initiative, to help remove the debt overhang and restore the sustainability of the debt of eligible countries within a reasonable time frame. The HIPC Initiative stipulates that, after a three-year track record of effective economic reform under an IMF-supported program, the international financial community, including the IMF, the World Bank, and official creditors, will provide sufficient debt relief to reduce the external debt to sustainable levels, subject to the recipient country completing a further three-year period of strong policy performance.

Once the process is under way, it is expected that eligible countries will exit from debt rescheduling and be in a position to tap global capital markets. To address the twin issues of external debt and capital flight in sub-Saharan Africa, it is necessary to understand the nature of the problem at the country level. The chapters in this volume represent an attempt to provide such an analysis for a selected group of sub-Saharan African countries at different times in the 1990s.

All of these studies were sponsored by the African Economic Research Consortium AERC and are brought together here to compare and contrast the experiences of different countries. The chapters are grouped into two parts. The five chapters on external debt cover Nigeria, Ghana, Uganda, Kenya, and the sub-Saharan African countries as a group.

The other four chapters, on capital flight, examine the experiences of Nigeria, Uganda, Tanzania, and Kenya.

  • The mechanisms of capital flight identified include monetary instruments, bank transfers, precious metals and collectibles, misinvoicing of trade transactions usually involving the local affiliates of multinational companies , and transfers by business owners engaged in international trade through the black market and through commissions and agents' fees;
  • What emerges from the studies on external debt is that the authors generally consider the size of the debt, in all the countries considered, to be so high as to be unsustainable;
  • These factors produced the incentives for governments to overborrow and for domestic investors to shift their funds abroad.

The chapters on external debt deal with the following common set of questions: What is the size of the external debt, and how has it evolved over time? What is the composition of the debt, particularly between official and private sources?

  1. What is the magnitude of capital flight? Various definitions of capital flight and their implied measures are used in the study.
  2. References Khan, Mohsin S. The chapter analyzes the indexes for measuring the debt burden and examines alternative debt scenarios.
  3. From the estimates, eight variants of capital flight measurement are derived, four of which are based on the concept of normal capital outflows whereas the other four are based on the concept of unrepatriated external earnings. What are the conduits of capital flight?
  4. Unfortunately, this has meant that for many countries in the region the stock of external debt has built up over recent decades to a level that is widely viewed as unsustainable.
  5. The chapter also assesses the sustainability of the external debt and evaluates its impact on the country's economic growth.

What were the causes of the buildup in the debt? What are the effects of the debt on domestic economic performance? In a similar vein, the chapters on capital flight look at the following questions: How is capital flight measured?

What is the magnitude of capital flight? What are the conduits of capital flight? What are the causes and consequences of capital flight? How can capital flight be stemmed or reversed?

External Debt Chapter 2, by S. Ibi Ajayi, examines Nigeria's external debt, including its size, structure, source, type, and composition. The chapter analyzes the indexes for measuring the debt burden and examines alternative debt scenarios. It distinguishes between the internal and external factors influencing external debt accumulation, identifies the changes in the international environment necessary to alleviate the debt burden, and examines the relationship between export performance and the debt burden.

After reviewing the structure of the Nigerian economy and its political history, the chapter concludes that Nigeria's debt crisis is the result of structural defects inherent in the economy since independence.

The chapter finds that the indicators of the debt burden have been relatively high. The behavior of these indicators, under varying assumptions, are explored using a growth-cum-debt model. The external and internal causes of debt accumulation are tested econometrically, and the results show the most important variables to be the real effective exchange rate and the terms of trade. The chapter ends with some policy prescriptions for dealing with the debt crisis. In Chapter 3, Barfour Osei focuses on the implications of Ghana's external indebtedness for sustained economic growth.

The study attempts to provide a better understanding of Ghana's external debt problem in order that adequate and effective debt measures can be sought. The chapter contains a description of the main features of Ghana's external debt, including its size, type, sources, structure, and terms.

The chapter also assesses the the problem of debt burden in hipc countries like tanzania of the external debt and evaluates its impact on the country's economic growth. The focus of the analysis is on external debt in the period 1983—90, during which Ghana pursued an economic recovery program and adopted an IMF-approved structural adjustment program. Using various indicators of the debt burden and concentrating on two of these, the debt-service ratio and the debt-GNP ratio, the author finds that the external debt burden has been at critical levels since 1983.

This situation can be attributed directly to the country's inability to generate sufficient foreign exchange through export earnings, and to the low rate of return on investments to which borrowed funds are applied. Although it has continued to service its debt, Ghana has maintained an unstable fiscal stance. The chapter concludes that debt is one of the factors constraining the rapid growth of the Ghanaian economy.

To continue to service its debt, Ghana needs to pursue programs of export expansion, widen the base of its nontraditional exports, and introduce measures to increase domestic saving.

Chapter 4, by Barbara Mbire Barungi and Michael Atingi, analyzes Uganda's external debt problem and its implications for sustainable growth. The chapter examines the size of Uganda's external debt, empirically assesses the internal and external factors influencing external debt accumulation, and analyzes the country's debt-servicing capacity and the sustainability of its external debt.

A special effort is made to link debt to economic growth. Major findings are the acuteness of the debt-servicing obligation of the country and the fact that a large proportion of Uganda's debt is not eligible for rescheduling. Of great concern is whether the economy can sustain a growth rate of 5 percent per year while maintaining adequate domestic investment, given the heavy reliance on foreign capital inflows.

Debt payments have been identified as the fundamental cause of slow economic growth. Debt relief is not enough, and continued government commitment to structural reforms and sound debt management is essential. Although the need to continue with the ongoing restructuring of the economy and promote further growth is clear, whether Uganda can keep to this challenging path without accumulating more external debt is not so apparent.

In Chapter 5, N. Ng'eno analyzes the case of Kenya, focusing on the extent of the debt problem, including the size, structure, and sources of the stock of debt.

The causes of the external debt problem are separated into external and internal factors. Additionally, the available debt management strategies are discussed, and the sustainability of Kenya's debt is highlighted. The chapter notes that the external debt of Kenya and the indicators of the debt burden have been very high since 1980. The external causes of the debt burden are identified as the deterioration in the terms of trade and the worldwide recession, whereas the main internal causes are public sector deficits and exchange rate misalignment.

To calculate the sustainability of Kenya's debt, two solvency indexes were calculated using the debt-export and debt-GNP ratios. The chapter claims that the external debt of Kenya is sustainable. Chapter 6, by Milton A. Iyoha, begins with an analysis of the poor performance of sub-Saharan Africa since the onset of the external debt crisis in 1982.

After an analysis of the scope, nature, and severity of sub-Saharan Africa's external debt, the chapter uses a simulation approach to investigate the impact of external debt on economic growth for the region.

Heavily Indebted Poor Country (HIPC) Initiative

In particular, it undertakes policy simulations using alternative debt reduction scenarios to analyze the effect of the external debt on investment and output in sub-Saharan Africa for the period 1970—97.

The chapter concludes that there is a significant debt overhang as well as a crowding-out effect. In other words, the large stock of external debt and heavy debt-service payments have had depressing effects on investment. From the policy simulations under alternative debt stock reduction scenarios, the chapter concludes that debt reduction measures bring about corresponding reductions in the total debt stock, the debt-GNP ratio, and the debt-service ratio and have positive impacts on investment and growth of real GDP.

Capital Flight In Chapter 7, S.