Foreign Aid, Debt and Development in Sub-Saharan Africa: Experiences and Challenges

The increasing integration of national economies into global markets has altered dramatically and promises to continue doing so, the volume and character of international resource flows -foreign aid inclusive. Globalization is carrying with it the threat of continued marginalization of Sub Saharan Africa (SSA) from the global development process. SSA faces marginalization in first, trade, as preferential trading arrangements are diluted by moves in the direction of multilateral trading arrangements and hence multilateral tariff reductions. As a whole Africa’s share in world trade the bulk of which is still confined to exportation of primary goods and importation of non primary intermediary, capital and consumption goods, has declined considerably in the last three decades. It varied from 4.1 to 4.9 percent during 1960 - 65, fluctuated around 4.4 percent during the 1970s declined consistently to 2.3 percent in the 1990s. Secondly, the region faces marginalization in investment, one of the critical ingredients of development, as Foreign Direct Investment (FDI) flows to regions with perceived higher returns. SSA received FDI flow worth US$1.8 billion in 1994 (the size of the flows to New Zealand), while North Africa received US$ 1.3 billion, implying that meagre flows of FDI in the continent continue to concentrated in a small number of countries endowed with resources, especially oil (Wangwe, 1997b). FDI inflows to Africa as a whole reached US$ 4.6 billion in the mid-1990s most of it being concentrated in a few countries (e.g. Egypt, Morocco, Nigeria). Total FDI flows have more than tripled in during 1991-95 reaching US$ 90 billion in 1995 (African Development Bank [ADB], 1997). However, over time the share of Africa in total FDI flows to developing countries has been declining countries has been declining from 16% in the 1970s to 10% in the 1980s and further down to 5% in the 1990s (ADB, 1997). Third, the region faces marginalization in rapid global technological advances due to the absence of requisite financial as well as human infrastructure to support such advances in the region. For instance, the global information revolution, and in particular, the communications sector, has by and large bypassed Africa given that Africa has only 2% of the world’s telephone lines most of which are in a few large cities.

At the regional level, significant changes in the socio-economic and political conditions have and are still taking place in Africa. Structural Adjustment Programs (SAPs) which have involved substantial reforms in national exchange, commercial and credit policies as well as various institutional arrangements are being undertaken in virtually all the region’s economies. SAPs, which are mainly attributed to the economic crisis in the continent which became apparent in the early eighties, had the following main goals: getting prices right, shifting from public to private ownership, from administrative controls to market orientation, from import - substitution to export orientation industries, and from import intensive industrialization to resource base manufacturing. On the political change there has been a notable trend towards multiparty systems and more accountable governments since 1990.

Since 1980s, improvement in economic performance in SSA countries has coincided with opening up of countries to foreign investments and efforts to increase participation in world trade. Political and economic reforms have created hope for Africa to enter a new millennium much more integrated to the world in the areas of trade, finance, investments and communications.

Foreign aid has been one of the most significant external links for much of SSA. This paper examines the trends of foreign aid the experiences of aid effectiveness and aid management, the debt problem and draws some lessons from these experiences.

Foreign aid, that is, the international transfer of funds (loans and /or grants) from one government to another or from multilateral agencies with the aim of facilitating and accelerating recipient countries’ development, appears to be losing its popularity to flows of private capital in filling the resource gaps in developing countries. Financial flows are increasingly being dominated by private capital flows to developing countries. For instance, in 1996, private capital flows exceeded US$240 billion which equalled six times its level at the beginning of the decade, and had in the preceding five years overtaken and dwarfed the levels of Overseas Development Assistance (ODA) (Stiglitz, 1997).

Africa has largely been by-passed by these expending private capital flows a situation which has not helped to offset the impact of the global decline in the volume of ODA flows (ADB, 1997).

Source: Africa Development Report, 1997. Figures have been rounded to 1 decimal point.

Prospects of future aid flows to SSA remain uncertain due to budgetary pressures in many donor countries, competing claims on donor resources and changes in the ranking of strategic and economic interests especially following the end of the cold war. The European Commission (EC), the traditional aid given to Africa has changed the distribution. Composition of ODA in favour of other regions. Although volumes of aid from EC to SSA have not shown any clear trend the region has cost its share from 70% at the beginning of the 1970s to 60% in the 1980s and further down to 44% in 1994-95 (Cox and Konig, 1997). The shift of EC aid flows have favoured Central and Eastern Europe and the New Independent States. All these accounted for about 25% if all EC aid disbursements for 1994-95 (Cox and Konig, 1997).

The record of the last 50 years, from the Marshal Plan aid shows that the efforts of recipients to help themselves have been instrumental to their success. Development assistance has successfully complemented many achievements such as the green revolution, the fall in birth rates, improved basis infrastructure, improvement in health and reduction of poverty (DAC, 1996). Properly applied in conducive environment aid works.

Has aid to SSA been effective? The answer depends on what it was intended to achieve. As a tool of transferring resources, the results have been mixed. As a project funding gap filler, the answer would be positive. When aid was primarily intended to bridge the gap between the country's investment target and domestic savings, it did help to bridge that gap, in gross terms. An externally derived resources, aid also bridged the foreign exchange gap in import dependent economies of SSA. But over a long period, even those seemingly positive achievements started to be put to test. Indeed, the frequent resort to project rehabilitation and SAPs in the 1980s is an adequate testimony to this conclusion. Also when a yardstick of graduation is applied, unlike in SEA, no country in SSA has been weaned off from aid.

With the onset of the adjustment regime in the 1980s, the goals of aid became a lot more blurred and the effectiveness of aid much more complicated to evaluate. Both donors and SSA countries should address this issue through improved resource use planning and macroeconomic management, as well as accountability on the use of resources. Donors should recognise the importance of long-term investment commitment to assure sustained growth.

A study of the experiences of seven countries in SSA indicated that in all of them except Botswana there have been more failures than successes. However, the case studies also demonstrate that aid to Africa has some notable achievements to its credit. Alongside many disappointments, aid has financed many development projects and programmes which achieved very high internal rates of return, including schools, clinics, health posts, bridges, roads, manpower training programmes, etc. (Carlsson, Somolekae and van de Walle, 1997). While foreign aid has been decisive in helping certain countries and communities get through times of extreme stress there is evidence of futility and even perversity of outcomes of official aid (Sogge, 1996 :11).

A first factor that helps to explain the success of aid is the extent to which it is designed and implemented in the context of macroeconomic stability. The seven country case studies in Africa on aid effectiveness clearly demonstrate a perhaps even more important negative impact of macroeconomic instability on aid. Particularly when it is prolonged, economic and fiscal crisis undermines the quality of public sector management, which also has a negative effect on the quality of aid. Long-term economic disequilibrium results in a weakening of the government's planning and budgeting functions. (Carlsson, Somolekae and van de Walle, 1997). International assistance is only useful in supplementing domestic resources within the context of a disciplined national policy environment that encourages the efficient and equitable use of all available resources, both foreign and domestic. In the presence of such conditions the need for external assistance is greatly reduced. In their absence, aid is of little help and is usually counterproductive (Korten, 1991).

Burnside and Dollar (1997) have found that good policies are positively associated with aid. Aid was found to be effective where sound policies were followed. However, it was also found that allocation of aid, especially aid from bilateral donors, was not significantly influenced by the soundness of policies which recipient countries pursued. These and similar findings have led to proposals that allocation of aid should be more selective in favour of countries which pursue sound policies.

The selectivity proposal raises two other challenges. First, the question arises as to who defines good policies. In the recent past the donors and in particular the International Financial Institutions (IFIs) have exerted considerable influence in defining good policies in SSA. Adopted by Burnside and Dollar was constructed from only three variables (budget surplus, inflation and openness). These variables are rather too narrow. In proactive sound policies mean much more than the three variables cover. The policy index will need to be subjected to more critical discussion. The second challenge is the question of whether countries which pursue bad policies at present should be abandoned all together or where these are ways of assisting them to shift from bad policy regimes to good policy regimes. It is quite possible that even a country pursuing bad policies today may benefit from current assistance that increases the chances of developing the kind of society which can create conditions for good policies in future. The path taken from bad to good policies will be influenced by the nature of conditionalities adopted in aid administration.

In the context of SSA aid conditionality has been one sided largely determined by the donor. The way conditionality has been designed has not helped it to effectively improve policy. While this finding provides important caution, when properly designed, conditionality can enhance the chances of better policies and stronger private capital flows. Conditionality can be designed to serve both as a signal and as a commitment mechanism (Stiglitz, 1997).

Efforts should be made to shift the focus from disbursements to an assessment of results on the ground, and to tie incentives and penalties within the donor institutions to outcomes, rather than the level of financial aid disbursed.

Aid programmes are more likely to be successful when the recipient government has the capacity to identify and articulate its own priorities and programmes, and the ability to implement, monitor, and evaluate the resulting programmes in the context of its own planning and budgeting. The case studies of seven countries in Africa showed that the capacity for harnessing and managing its resources effectively is generally deficient. In the absence of central state management capacity among recipients, donors try to fill the gap. For example, they resort to a host of parallel aid management systems to perform the tasks they do not believe available state structures are capable of undertaking. Over time, this becomes a self-fulfilling prophecy for donors, as capacities and resources are in fact transferred to these parallel structures, which come to attract the most skilled and ambitious local technocrats, to the detriment of even the strongest central state institutions. Soon, even the government prefers these parallel structures to its own structures for project implementation (Carlsson, Somolekae and van de Walle, 1997). Aid effectiveness rests on trained and experienced manpower as well as efficient aid channeling procedures. Though everybody recognises this dictum, there is need to put it into practice. Let SSA countries start with consolidation of economic management and research institutions as they form the foundation for generating ideas and programmes for running the economic system. Several issues are to be addressed : the role of expatriate technical assistance, training of staff, and sustainable office technology and remuneration. With respect to the TICAD theme, consideration should be given to strengthening trade, export, private investments and tourism promotion (Mutalemwa, 1998).

The nature of aid relationships between donors and recipients has critical influence on aid effectiveness. The results from the seven country studies in Africa suggest that the aid relationship between African governments and donors has been unequal and characterised by the passivity of recipients and the dominance of donors (Carlsson et al, 1997). The unequal nature of the relationship has probably contributed to misunderstanding, resentment, and quite often conflict between the partners (SIDA, 1996).

Critical deficiencies which explain the low level of effectiveness of aid to Africa. The main ones are lack of ownership of the development agenda, poor aid coordination, deficiencies in resource allocation and budget management and proliferation of aid projects.

SALs/SAPs fuelled substantial increase in aid to SSA. Aid reached 11% of GDP by 1994, compared with only 1% in other LDCs. The SAPs were fast disbursing. But high levels of aid in many SSA countries (provide data), undermined self-sustained development. In the end they engendered apathy on the part of recipients which in turn encouraged donor agencies to take over project planning and execution tasks, thereby jeorpadising long-term project benefits. The worst result of dependency has been the dependence syndrome characterised by abandonment of initiative and leadership to donors, especially the IMF and the World Bank. Recently both the donors and African countries have recognised the dangers of this phenomenon. Low ownership of the development agenda is common across Africa. Major policy formulations have either been done by donors or have been influenced by donors. In many African countries, the period in which SAPs were introduced has witnessed the lowest level of ownership of the policy agenda. During this period door influence has largely come through the substantial role played by donors (especially the IFIs) in the design of economic recovery programmes, policy framework papers and public expenditure reviews. The ownership by the recipient has been reduced even further by the lopsidedness of the system of conditionalities. African countries have been on the receiving end in the conditionality relationship. Aid conditionalities have been donor-driven rather than being a product of discussions, mutual agreement and genuine commitment. Once again aid conditions should be made simpler and more amenable to monitoring evaluation. Sanctions to bad performers should be meted out selectively in order to protect innocent groups and to ensure that past development gains are not wiped out by temporary aid stoppages. Important aid conditions that affect society's vital interest should be adopted after obtaining wide national support through suitable democratic machinery. Donors tend to dominate the aid process and to pay inadequate attention to the government's own preferences. This situation is aggravated by the weakness in the capacity for economic management and the degree of aid dependence.

Aid should not be used to undermine the responsibility of the recipient country to assume its role. To reverse the current degree of aid control by donors and the passivity of recipient countries, the latter should be encouraged to return to medium-term planning (e.g. 5 year plans) in which broad criteria for projects/programme spending of aid can be defined. The planning process can accommodate donors' views regarding areas of preference or concentration to be harmonised at RT or CG meetings. Thus the plans would form the basis of future aid allocation. As a reflection of this long range planning approach, donors should indicate tentative multi-year resource commitments. They would also have to agree to untie their aid and increasingly provide it as programme aid so that project by project allocation can be left to recipient country's Ministry of Finance to decide. Donors will feel assured if effective resource utilisation is guaranteed through strengthening of this Ministry as well as the auditing, central procurement and accounting organisations (Mutalemwa, 1998). In recent discussions on new partnership with Africa a consistent plea has been expressed for the self-articulated aspirations of Africans to be taken more seriously as a basis for building a new partnership with the donors. Issues of equality, mutual respect, transparency, reciprocity and willingness to learn from both sides have been stressed (Kayizzi - Mugerwa, Olukoshi and Wohlgemuth, 1998).

The large number of donors that African countries have to deal with and the proliferation of projects increase the risk of duplication and waste. A common predicament that affected aid delivery was the lack of aid coordination among the donors. It not only affected aid results, but also sabotaged national planning and added to the cost of aid administration Too often African governments have not effectively coordinate the aid effort (van de Walle and Johnston, 1996). Donor-aid coordination falls under three categories namely, intra-governmental coordination; inter-donor coordination; and government-donor coordination. Intra-governmental aid management is currently at its weakest with regard to the overall aid management process. The problem is exacerbated by the relative strength of donor aid management in form of parallel administrative controls and project management. There are two types of inter-donor aid coordination. First, donors may coordinate their own activities. Second, donor may be coordinated by the GOT. Of these two the former has a formal existence, the latter is very weak.

A major constraint to the achievement of aid coordination is the lack of demand for it. A local constituency demanding an improved aid co-ordination is only beginning to emerge. Also interest in the possibility of playing one donor against another and getting access to donor funds have delayed the move towards aid coordination. For instance, some recipients may know very well that aid coordination would demand a greater justification of their aid requests. Besides, on the side of the donors, there are indications that some donors are not keen to be co-ordinated as co-ordination is perceived to be constraining freedom of action on their part.

Over the years African countries have had to accept the necessity of adapting their methods and procedures to suit management requirements of donors (Valdelin, 1998).

Demanding national ownership by Africans has coincided with most donor demands on Africa to pursue a particular governance model. This situation is likely to present complications in practice. It will be challenging to reconcile demands for national ownership with the insistence on universal human rights, Western forms of multi-party election and political accountability as these are subject to varying interpretations (Engberg - Pedersen, 1998). Another tension arises between the longer process of development of capacity towards ownership and the urgency to achieve specific targets and outputs which do not include capacity building (Wangwe, 1997c, Engberg - Pedersen, 1998).

It should be emphasized further that aid coordination, however, remains a primary responsibility of the recipient. Effective aid coordination can be achieved by formulating a clear national aid strategy. Some of the key elements of a national aid strategy would include: the national objectives, strategies and priorities; an articulation of roles of the recipient, donors and implementing agencies; a stipulation of modes of disbursement and accountability; and areas of focus and concentration.

The inability of government to cover recurrent costs and counterpart obligations undermines the impact of aid in many African countries. Although the level of education and training has improved in Africa over the years the management capacity of public bodies has remained limited. A major factor which has been counteracting the positive effects of improved education and training in the economic crisis itself which has pushed governments to reduce various recurrent expenditures including public service salaries. In several countries salaries in real terms have been reduced up to a factor of ten over the past two decades (Carlsson et al, 1997). This situation throws a challenge to the civil service reform and to the redressing of the imbalances between recurrent and capital expenditures. This is a challenge to the quality of budget management. African governments and donors continue to plan inadequately for counterpart and recurrent expenditures. In most countries, aid activities are not fully integrated into national budgeting and planning exercises. For their part, donors often fail to recognize the problem and fail to plan for the withdrawal of aid (van de Walle and Johnston, 1996).

Aid too rarely contributes to effective institution building because local institutions are by passed in the design and implementation of projects. Although these arrangements appear to solve an immediate problem of capacity to manage projects it tends to undermine ownership and sustainability (van de Walle and Johnston, 1996). In addition, it even weakens the already weak administration and management capacity. Such projects become islands of development, increasingly isolated from the reality of the environment in which they operate and consequently become increasingly difficult to phase out leading to continued dependency and absence of sustainability (e.g. Catterson and Lindahl, 1998).

Total outstanding debt for Africa stood at US$ 270 billion in 1990 of which SSA accounted for US$ 163 billion (Mistry, 1997). By 1996 the total African debt had increased to US$ 321 billion and a debt service ratio of 25.06% amortization payments on long-term debt and interest payments and total debt of GDP of 57% (IMF, 1996). Total external debt for SSA increased from US$ 84.1 billion in 1980 to US$ 226 billion in 1995 with a debt service ration of 14.5% (up from 9.8% in 1980), debt GNP ratio of 81.3% (up from 30.6% in 1980) and a debt to exports ratio of 241.7% (up from 91.7% in 1980) (World Bank, 1997). Compared to the whole of Africa the debt stock in SSA has been growing more rapidly. Its outstanding indebtedness to bilateral creditors grew by over US$ 23 billion during 1986-90 despite cancellation of concessional debt while its indebtedness to multilaterals grew by US$ 14 billion (Mistry, 1997). Between 1983-1990 African countries paid back over US$ 180 billion an amount exceeding total debt stock in 1982 by US$ 40 billion (Mistry, 1997). The debt burden is enormous in relation to the SSA economy and debt servicing capacity. A total of 16 African countries were categorized as unsustainable and possibly stressed (ADB, 1996). These countries are eligible for debt relief under the Heavily Indebted Poor Countries (HIPCs) initiative. But the real challenge has been to meet the HIPC conditionalities and access the facility in reasonable time.

SSA debt is mainly official creditors. In 1990 out of the total debt (disbursed and outstanding) of US$ 162.9 billion the bulk of it was official bilateral (US$A 4.6 billion) and multilateral (US$ 42.9 billion) while private (including guaranteed) debt stood at US$ 54.8 billion (Mistry, 1997).

The implications of the debt burden on development in SSA are far reaching. At a time when budgetary constraints have become more binding under SAPs considerable are amounts of budgetary expenditure are allocated to external debt servicing (e.g. 30-35% in Tanzania). These allocations have very high social opportunity costs. In the case of Tanzania, for instance, debt servicing siphons away funds of times as that spent on basic health and 9 times allocations to basic education (Oxfam, 1998).

Several initiatives have been put forward to address the African debt problem but they have not brought significant relief to date (Mistry, 1997). Conditionalities for accessing the various facilities (e.g. HIPCs) have made it difficult to effectively access some of these facilities. Most SSA countries have not been able to meet scheduled debt obligations (both official and private creditors) resulting in mounting arrears. Most of these countries remain dependent on continued reschedulings. This more of procrastination than progress in solving the debt problem. The debt problem will ultimately be resolved through revival of growth in the economy and exports. But the debt overhang has become a major inhibiting factor for the realization of recovery of growth and exports. There is need to devise new and more effective ways of reducing the African debt burden dramatically (bilateral, multilateral and private).

The adoption and implementation of Trinidad Terms which proposed 2/3 reduction in the stock of official bilateral debt of SSA should be the immediate objective of creditor governments. The Trinidad Terms should be enhanced by reducing interest rates (Mistry, 1997).

For a number of countries, the debt is unrepayable, thus putting at stake future borrowing from abroad. Debt initiatives so far advanced have not dented the root of the problem as they consisted mainly of debt rescheduling exercises. Recipient countries have also not participated fully in driving the debt reduction efforts for fear of jeorpardising forgiveness for their individual countries.

The HIPC initiative has been generally welcome though reservations have been raised with respect to criteria for selection, the depth of the measures and the sequencing of eligible countries.

It is not certain also whether most SSA countries have learnt useful lessons to guide their future borrowing behaviour.

SSA creditors should consider providing serious debt relief so as to at least maintain net aid flows. Paris Club members as well as non Paris Club creditors should collaborate on this matter. At the same time, the HIPC initiative should be expanded; the eligibility conditions made more flexible and the completion point of the HIPC criteria advanced. While debt relief effort rests mostly on the donor community, SSA countries should demonstrate a new and more rigorous attitude in selecting projects for further borrowing in order to avoid unnecessary or more expensive new borrowing operations as well as to reduce rampant corruption.

The main challenge is to make foreign aid more effective for bringing about development and to have a strategy to graduate from aid dependence. The inhibiting force of the debt burden needs to be addressed urgently so as to release resources for development. The following specific challenges need to be addressed:

• ownership of the development agenda.

• management of the conflict between short term imperatives and the longer term objective of attaining sustainability.

• build the capacity for policy analysis and development management.

• conditionality needs to be redefined to link more appropriately with agreed upon criteria of performance by all partners.

• redefine the structure of aid relationships and address the perverse incentive structures which govern prevailing bureaucratic behaviour and procedures on the part of both donors and recipients.

• devise new and more effective ways of reducing dramatically the bilateral, multilateral and private debt to allow allocation of resources for development and in particular for recovery of growth of the economy and exports to be realized.

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