The African Development Bank (AfDB) faces a peculiar situation: most of its African members cannot use the bank's loans. Only 13 out of 53 countries in the region fulfil the criteria of eligibility for borrowing; the rest are too poor, too indebted or too war-torn. But Donald Kaberuka, the AfDB's new president, promises to turn the bank into the foremost development institution for the continent.
Kaberuka was, until last month, the Rwandan finance minister. He now faces a formidable task. As the candidate preferred and backed by the US, Kaberuka came to power after a highly politicized election this July – a process which also showed up a deep rift between the bank's African and non-African members. It will take considerable diplomatic tact to overcome such tensions.
Then there's the issue of the bank's sphere of influence: as more agencies look to take part in Africa's most promising development projects, the AfDB is facing increased competition in its own backyard. The European Investment Bank, for example, is stepping up its push into North Africa, a region, say analysts, that's also home to some of the least risky projects on the continent. "No one really wants to go to places like the Congo," says Eric Paget-Blanc, international public finance analyst at Fitch, the ratings agency.
Kaberuka also has to walk the tightrope of helping some of the world's poorest countries support their citizens while not endangering his institution's own finances. After a year of unprecedented promises by donor governments, as well as Nigeria's success in securing a huge chunk of debt relief, the new president is well poised to build on the positive momentum.
Politicized Elections
The first attempt to find a successor to outgoing president Omar Kabbaj, whose second term finished this August, ended in deadlock at the AfDB annual meeting on May 18. An irresolvable stand-off between Kaberuka and the Nigerian candidate, Olabisi Ogunjobi, meant that the election had to be postponed until July.
On July 22 however, Kaberuka emerged decisively as the winner. The 54-year-old secured around 80% of the total votes. There was less enthusiasm for him among the African voters, 70% of whom backed him for president.
"The second vote was very quick; he got a strong majority, which gives him a strong mandate," says Konrad Reuss, managing director for sovereign ratings at S&P. The Rwandan's francophone background coupled with his English education meant that he was a good compromise candidate.
Born in Rwanda in 1952 in the northern town of Byumba, Kaberuka left the country at the age of eight. He later completed an economics doctorate at the University of Glasgow and worked at Lloyd's Bank [where?]. He was appointed Rwandan finance minister in 1997 and is credited with reforms that led to the successful recovery of his country's economy.
Since 2002, Kaberuka has co-chaired the ministerial committee of HIPC, the debt initiative for heavily indebted poor countries.
The Bank
The AfDB, created in 1964 by 29 African countries, is the largest financial institution in Africa. It is the continent's only bank with a triple A rating from all major rating agencies. "The triple A rating rests on the members' willingness to support the bank in a crisis," explains Reuss. "An institution that only lends to a small number of its members raises questions about how strong this support would be." S&P downgraded the bank in the mid-nineties when conflict erupted between African and non-African members (to whom the bank only opened in 1982), and the latter threatened to withdraw funding.
But in terms of financial stability, the bank has moved in the right direction under the 10-year leadership of Kabbaj, says Reuss. "It is a very strong institution. Governance has improved and the balance sheets are strong. The bank is very conservative with its liquidity policy." S&P restored the triple A rating two years ago.
Strong criticism is levelled against the AfDB from African civil society groups, who accuse the bank of dancing to the tune of western interests. "The bank has failed in its mandate to take Africa out of its quagmire, despite spending billions of dollars on development projects," says the African Forum and Network on Debt and Development (Afrodad), a Zimbabwean-based organization working on Africa's debt and development crisis. "The foreign shareholders, although only owning 40% of the bank, dictate the policies and operations due to their financial muscle."
Afrodad demands greater civil society participation at the bank, a reform of governance structures to promote democratic decision-making and an examination of the root causes of the debt crisis. The AfDB's close relationship with the Bretton Woods institutions has led to the dominance of neo-liberal development plans, which, says Afrodad, should be replaced by more home-grown solutions.
Going Forward
But Kaberuka is expected to continue with the strategies of his predecessor. Increasing the share of loans to the private sector to 10% of outstanding loans is a key objective, as is achieving better project quality. For the latter reason, the AfDB is moving towards large-scale decentralization and plans to open 25 field offices by the end of 2006. "The AfDB sees the need for a local presence to be able to respond quickly to good projects," says Paget-Blanc.
In his inauguration speech on September 1, Kaberuka stressed that African countries must not depend on aid, but should strengthen trade amongst themselves and attract more foreign investment. With regard to the bank, Kaberuka said that "the ADB must strive to become a knowledge institution, a first point of call for economic development issues on the continent."
But retrieving "knowledge" from the institution, which has been accused of lacking transparency, is not always easy. The AfDB's external communications department, for example, failed to provide Emerging Markets with any comment on the new president's plans, despite repeated requests – and numerous promises to do so.
The UK's minister for international development, Hilary Benn, suggested in May that the bank could play a leading role in managing a proposed $10 billion infrastructure fund. The last replenishment of the bank's concessional lending fund last December was 43% higher than the one before, reflecting strong commitment from donor governments.
"Harnessing support from donors is crucial," says Reuss, "We're at a critical stage; there is a huge window of opportunity." As long as poverty alleviation remains a priority in international politics, support for the AfDB is likely to continue.
Yet much depends on the bank's ability to extend its mandate to the African members, who are currently only allowed to borrow from the AfDB's concessional loan windows. "There has not been a real improvement for African countries," says Paget-Blanc, "and the bank operates in a very difficult environment."
Zimbabwe on the brink
While debt relief for Africa tops the development agenda, Zimbabwe faces an increasingly severe crisis. Its standoff with the IMF is symptomatic of its plight
With no end in sight to Zimbabwe's humanitarian crisis, the IMF's governing committee showed some leniency towards the country on September 9. The executive board decided to postpone Zimbabwe's imminent expulsion from the Fund – but only after the cash-strapped Mugabe administration coughed up $120 million to bring down its arrears.
Analysts wonder where the money came from. Meanwhile relief organizations are still denied access to many of the hundreds of thousands of Zimbabweans on the brink of starvation.
After receiving Zimbabwe's payment at the last minute before the crucial meeting, the IMF granted the country a six-month lifeline for the second time this year. "The decision provides Zimbabwe with a further opportunity to strengthen its cooperation with the IMF," says the Fund. The executive board also urgently called for an economic adjustment programme and for help for the victims of the government's recent programme of mass evictions.
Zimbabwe's central bank governor Gideon Gono was keen to express his government's will to cooperate: "This is a modest payment to demonstrate our sincerity with respect to our international obligations," he told Zimbabwean newspaperThe Herald.
But only a day after the IMF's favourable decision, Zimbabwe's President Mugabe adopted a defiant stance. "We have never been friends of the IMF and we shall never be," he said on a visit to Cuba. The president added that the "IMF is never of real assistance to developing countries."
Amid international puzzlement over where the $120 million materialized from, Gono said it was raised through exports as well as remittances from the Zimbabwean diaspora. But analysts expressed scepticism, as figures for foreign reserve inflows have been low recently. Instead, the source for the money could lie abroad, and both South Africa and China have been mentioned as possible creditors.
The dire situation of thousands of Zimbabweans deteriorated further this summer, when the government forcefully evicted some 300,000 people from their homes in informal settlements across the country. "There is no end in sight," said Audrey Gaughran, Amnesty International's researcher on Zimbabwe. "Zimbabwe lurches from one humanitarian crisis to the next." The government is preventing food and shelter deliveries by turning back aid agencies. "There is no signal that the government has the intent to support human rights," added Gaughran.
Zimbabwe has been in continuous arrears to the fund since February 2001 and has had its voting rights suspended. Outstanding payments now amount to $175 million, around 34% of its quota in the IMF.
Rules of the game
by Taimour Lay
Nigeria's ground-breaking deal with a more "flexible" Paris Club sets important precedents for debt relief. Whether it will impact on the fate of Africa's poorest debtors is another matter
While the few African countries scheduled to benefit from the G8 debt relief deal continue to fret over costs and conditions ahead of this year's Annual Meetings, the continent's largest, and most indebted, nation is already about to begin a new chapter in its financial history. In a ground-breaking agreement with the Paris Club of debtor countries, Nigeria will effectively see $18 billion-worth of its foreign debt written off through an unprecedented discount "buyback" arrangement. Obstacles remain before the deal is finalized, but it's already raising important questions about the future direction of the creditors association.
The Paris Club comprises an informal grouping of financial officials from 19 of the world's richest countries. Founded 50 years ago in the wake of crisis talks over Argentine debt, it now meets every six weeks at the French Finance Ministry in Paris. Despite increasing transparency, it remains more of a process and mechanism than an institution, providing a means of managing and renegotiating combined creditor-debtor relationships. Its decisions have often been highly political, reflecting its original motivation to support indebted governments of strategic importance.
In his report for the Brookings Institution, Resolving Nigeria's Paris Club debt problem, economist Lex Rieffel, argues that the Nigeria deal is a sign of the Club's ability to "modify its rules when the reasons to do so become compelling". This has led to two innovations: debt reduction in stages for middle-income debtor countries and buybacks of outstanding debt.
Political pressures undoubtedly provided a spur to resolving the "embarrassment" of the Club's 19-year relationship with Nigeria: the $30 billion outstanding debt accumulated from a principal of only $19 billion, of which $11 billion has been repaid. Even after this deal, Nigeria will have paid $23 billion, with an additional $18 billion-worth of interest now forgiven.
In the context of an international effort to provide debt relief to Africa's poorest nations, Nigeria's anomalous position with regard to the Paris Club became more and more untenable over the years. The innovative proposal for a discounted buyback of the debt (Nigeria is in effect paying $12 billion in cash now to cancel all arrears) grew out of the UK and Nigerian government's lobbying for large-scale relief. Booming oil price revenues enabled Nigeria to make the offer; political pressure (and the realization that this was an excellent financial return) meant that the Paris Club agreed.
Until this year, the buyback of debt wasn't permitted at all, but 2005 witnessed not only Nigeria but also Russia and Peru negotiating buybacks (though the latter two were at par, not below). Moreover, the very idea of granting relief to a middle-income, oil producing country would have been anathema before the very political decision was taken over forgiving Iraq's debt in 2004. Nigeria benefited from that precedent: other countries may now benefit from Nigeria's in turn.
Outside the box
Todd Moss, research fellow at the Global Development Centre, argues that, while Nigeria's case is in many ways unique, it also provides an indication of the Paris Club's increasingly flexible approach: "The agreement of 'Evian terms' in 2004 allows the Club to take a case-by-case approach and to think outside the box. They realized they were being hamstrung by their own rules. The Iraq debt relief deal was a bad one financially for them and showed the need for more flexibility."
"This does, then, present something of a precedent to countries like Indonesia and Pakistan," he adds.
A key part of the arrangement, and an important source of strength to Britain's advocacy, was the success of Nigeria's domestic economic reform programme. Finance Minister Okonjo-Iweala's National Economic Empowerment and Development Strategy is designed to meet the IMF criteria that the Paris Club members stipulated for the deal. Her determination to improve Nigeria's foreign reserves position, impose fiscal discipline and delink the budget from oil prices, further emboldened supporters of a buyback and raised the country's leverage in negotiations. IMF approval of "a policy support instrument" should clear the way this month for the next stage of the deal: Nigeria has to clear its arrears with a cash payment of $6 billion and then meet the initial targets of the economic programme that will be the basis for the buyback in the spring.
Taken together, Nigeria was able to take advantage of a favourable political climate in favour of debt relief, at the same time as the Paris Club's more rigid "rules" were being loosened and innovative solutions sought in the wake of the Iraq negotiations. But this was debt relief on a quite different scale, and with different motivations, than the HIPC programme: ultimately, it was Nigeria's political clout and good economic performance that made debt relief possible. Quite the opposite is true for those receiving very limited assistance in sub-Saharan Africa.