What next for Africa?

Debt: What next for Africa - at Moneyweek.co.uk - the best of the week's international financial media.

The principle of debt relief for poor countries has been accepted by all major Western governments. But the poverty is still with us, says Simon Nixon

How poor is AfricaIn 2003, the United Nations (UN) spoke of the previous ten years being a lost decade' for Africa. Much of sub-Saharan Africa has actually got poorer in recent years. Africa's share of world exports fell from about 6% in 1980 to 2%in 2002 and its share of world imports fell from 4.6% to 2.1%. In 2000, the UN held the Millennium Summit, at which world leaders agreed to aim to halve the incidence of poverty in Africa by 2015, which meant raising per capita consumption to a dollar per day. To reach that level, its GDP would have to grow on average by 8% a year over the period. But according to the IMF, next year growth will be 5.8%.

How did Africa get so poor?

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War, corrupt government and lack of education have all played their part. Africa has witnessed 186 coups d'etat and 26 major wars in the past half century. This combination of conflict and failed economic policies have left it deeply in debt. Most of the world's poorest 30 countries are in Africa and together owe about $200bn. Today, this debt has become a major barrier to development. Many countries are technically insolvent, relying on aid to pay just the interest on their debts, the value of which keeps rising due to the effects of compound interest. Some pay more in interest than they spend on health or education. Taken as a whole, Africa's external debt exceeds 350% of its exports.

How did Africa become so indebted?

The origins of the debt crisis go back to the Cold War, when the West and the Soviet Union were happy to lend vast sums to corrupt African dictators to secure their loyalty. Much of this money was used to buy arms that were needed to fight wars against their neighbours. Thus, the US lent billions of dollars to President Mobuto of Zaire (now Congo), despite IMF warnings that there was no prospect of being repaid and in the knowledge that the money was being used to line his own pockets, because it needed Zaire as a base for operations against the Communists in Angola. The Mobuto years have left Congo saddled with debts of $9.3bn. Nigeria, which suffered similarly at the hands of former President General Sani Abacha, today owes $30bn.

What has been done to relieve Africa's debt so far?

In 1996, the World Bank and IMF launched the "Heavily Indebted Poor Countries" initiative (HIPC) with the aim of eliminating $100bn in debts from poor nations. To date, 27 countries have received some $31bn in debt relief. Progress on the HIPC initiative has been slow due to the conditions that countries must meet before they qualify for debt relief. Last week, Ethiopia finally qualified for $758m of debt relief, which will save it $100m a year in debt servicing. But critics argue the HIPC initiative aims only to reduce debt to sustainable levels. The real aim, say campaigners, should be to relieve 100% of the debts of the world's poorest countries.

What more can be done?

The principle of debt relief is now broadly accepted by all major Western governments, but securing a deal is proving easier said than done. At the September meeting of the IMF and World Bank in Washington, both Britain and the US put forward proposals for debt relief that went much further than previous plans. The US plan - which appeared at the 11th hour and took other creditor countries by surprise - seems to have been inspired by President Bush's goal of securing substantial relief of Iraq's debts. Not surprisingly, many other countries asked why they should be asked to relieve the debts of a country with the world's second-biggest oil reserves and not those of poor countries in Africa. President Bush, therefore, responded with a proposal for 100% reduction in the debts of the world's poorest countries.

Why was there no dealThe plan also ran into opposition from the IMF and World Bank, both of which would have been obliged to write off their debts, but would not have received any new funds to compensate, which would have restricted their ability to issue new loans in the future. The Gordon Brown plan, also presented in Washington, called for 100% debt relief for the world's poorest countries, but required creditor countries to compensate the IMF and World Bank. But this plan ran into opposition from the Germans in particular, who were reluctant to finance a bail-out. Nonetheless, Gordon Brown showed that Britain meant business by announcing a unilateral plan to relieve $180bn of debt per year. Meanwhile, most commentators agree that some form of agreement is now likely to be struck next year.