/ 21 October 2010

Donors’ aid squeeze set to increase Africa’s debts

Budget crunches in rich countries are bringing cuts in aid spending and may mean a switch from grants to cheaper loans, sowing the seeds of future debt crises in Africa and other poor corners of the globe.

Most African states’ budget deficits ballooned as growth sputtered in 2009, even though they entered the financial crisis in relatively robust fiscal health due to a major round of debt forgiveness in 2005 and gradually improving economic policies.

Growth has picked up well this year — the IMF is forecasting 5% for sub-Saharan Africa — leading many governments to unveil double digit increases in spending at the same time as assuring donors and investors that deficits will fall to more manageable levels in a couple of years.

The as-yet-unquantified aid squeeze likely to hit this year is not going to help this cause, but in their budget sums, major recipients such as Zambia, Uganda and Tanzania have factored in cuts in the overseas assistance that has sometimes accounted for as much as half of state revenue.

Tanzania’s budget reflects a reduction in foreign aid from $840-million in 2009/10 to $534-million this year, a figure that still represents 25% of the East African country’s projected takings.

Similarly, donors are underwriting a quarter of Uganda’s current budget, although a group of them said in August that next year’s contribution would be down by at least 10%, ostensibly due to concerns about corruption.

And in Zambia, Africa’s largest copper producer, the proportion of overseas support for the 2011 budget is 7,7%, half the previous year, because of donor worries about graft.

Experts say an overall reduction in bilateral aid — of major donors, only Britain has pledged to ring-fence development spending, at 0,7% of GDP by 2013 — is only one worrying aspect of Africa’s financing equation.

Switching assistance to grants
Just as alarming is the potential for donors to inflate their aid figures by switching assistance from grants, which are in effect a gift, to concessionary loans, which have to be repaid albeit at cheap rates.

“You’ve got the double-whammy of African countries struggling because of the crisis, and then donors potentially switching more to loans than to grants,” said Daniel Coppard, an aid analyst at Development Initiatives, a UK-based consultancy.

No more free french lunch
In 2005, donors at the G8 summit in Gleneagles, Scotland promised to double aid by up to $50-billion in five years — an ambitious promise that has not been matched by reality.

Furthermore, a trend since then towards more aid delivered via grants risks going into reverse as cash-strapped rich-country finance ministers seek out cunning ways to make their development budgets go further.

For instance, by most definitions a bilateral loan qualifies as “aid” if a quarter of it is a grant, meaning donors can cut today’s cost of their aid bill by 75%, and then swallow the cost of a low lending rate over the duration of the loan.

“In 2009, France’s proportions of aid going in loans just rocketed,” Coppard said. “This theoretically will need to be paid back.”

The implications of such a switch by other donors would be dire, burying many African states under the same mountain of obligations that triggered the 2005 Heavily Indebted Poor Countries (HIPC) debt forgiveness initiative.

For example, if all its overseas grants became loans tomorrow, Tanzania would be running a budget deficit of a staggering 25% of GDP — a ratio that would leave its plans for a $500-million Eurobond dead in the water.

Similarly, 23% of the budget in Zambia, which also has ambitions to tap overseas capital markets, would be financed by debt rather than the 15,5% of domestic and external borrowing now in the finance ministry’s spreadsheets.

Overall, aid to sub-Saharan Africa was $38-billion or 5% of output in 2008, according to the World Bank, although this ratio jumps to 7,5% if South Africa, its biggest economy, is excluded.

The signs that donors’ austere response to their own financial problems may end up exacerbating Africa’s are already there. According to an IMF study, total public debt for low-income countries rose to 35% of GDP in 2010 from 30% in 2008.

“There is a feeling in the development world that somehow debt has been dealt with. But it really, really hasn’t,” said Jonathan Glennie, a researcher at Britain’s Overseas Development Institute.

“During the crisis, there was a lot of talk of getting the money out there to poor countries quickly, which is understandable. But it’s always relatively easy to get money out, and much harder to cancel debts.” – Reuters