Welfare implications of external debt and capital flight in Sub-Saharan Africa (Evidence using panel data modelling)

The countries in Sub-Saharan Africa (SSA) have experienced a positive growth rate of over five per cent per year, on average, since their transition from the Heavily Indebted Poor Countries Initiative in 1996 and the Multilateral Debt Relief Initiative in 2006. Despite this growth, poverty and inequality are still very high. Employing the Driscoll – Kraay standard panel estimation method and dataset from 1990 to 2015, this paper sets out to examine the implications of external debt and capital flight on the general welfare of the people. The estimation results reveal that both external debt and capital flight have a welfare inhibiting effect, suggesting that increases in external borrowing or capital flight may lead to a reduction in the welfare of the people in the sub-region. The study, therefore, recommends to policymakers and government in the sub-region the need to tackle the revolving nature of external borrowing and capital flight and take steps to halt all channels through which deservingly acquired capital leaves the sub-region.

Sudan’s exchange rate reform opens path to debt relief

Significance The move opens the door to expanded international aid and debt relief under the Heavily Indebted Poor Countries (HIPC) initiative, but at the cost of increased economic pressures over the short term. Impacts Prices for imported goods will rise further, fuelling inflation over the short term and likely prompting new protests. Donor support coupled with an improved trade balance should augment foreign exchange reserves. Further reform challenges await, including improving management of state-owned enterprises and tackling corruption.

Determinants of External Indebtedness in Heavily Indebted Poor Countries: What Macroeconomic and Socio-Economic Factors Matter?

This study specifically examined whether macroeconomic and socio-economic factors such as corruption, foreign aid, government expenditure, external reserve, population growth, economic growth, and unemployment rate matter in increasing or reducing the level of external indebtedness in heavily indebted poor countries (HIPCs). Both static panel data and panel fully modified ordinary least squares (OLS) estimation techniques were employed. Using panel data set of all the 39 HIPCs covering period of 1996 to 2018, we found out that the factors that matter in increasing their external indebtedness are high rate of corruption that leads to mismanagement of public funds, high dependency on foreign aids, increase in government expenditure, population growth, and unemployment rate. However, external reserve and gross domestic product (GDP) has a reducing effect on their external indebtedness. In terms of causal relationship, only corruption, population growth, and GDP have a causal relationship with external debt, while other variables exhibited a zero causal relationship with external debt. JEL Classifications: F34, E6, E24

Somalia

This paper presents an assessment of Somalia’s eligibility for assistance under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The macroeconomic framework reflects the policy framework underlying the proposed three-year Fund-supported program. The debt relief analysis (DRA) remains largely unchanged, but some of the underlying debt data has been updated to reflect new information from creditors. In addition, this paper presents an assessment of debt management capacity in Somalia and a full Debt Sustainability Analysis under the Debt Sustainability Framework for Low-Income Countries. The DRA reveals that, after traditional debt relief mechanisms are applied, Somalia’s debt burden expressed as the net present value of debt-to-exports ratio is 344.2 percent at the end of December 2018—significantly above the HIPC Initiative threshold. Despite the challenging environment, progress on reform and policy implementation has been good and sustained reforms have translated into economic results. In addition to the coordinated support from the World Bank and the IMF, reforms have been supported by other development partners.

Somalia

This Joint Staff Advisory Note on the Poverty Reduction Strategy Paper discusses that Somalia has made noteworthy progress since 2012 to recover from decades of conflict and state fragmentation. The country has succeeded in rebuilding core state capabilities and organized two democratic national elections in 2012 and 2017. Somalia has now reached the stage where it seeks to fully reengage the international community and is requesting debt relief through the heavily indebted poor countries initiative. The authorities developed the Ninth National Development Plan (NPD9) through a highly consultative, participatory process that ensured full country ownership. The macroeconomic policy objectives of NDP9 are to promote economic growth in an environment of low inflation, sustainable fiscal and current account balances, and healthy foreign exchange reserves. The IMF staff recommends updating framework to incorporate greater support for poverty reduction and additional financing from development partners during the interim period. The IMF staff supports the authorities’ commitment to issuing new Somali shilling banknotes, while maintaining de facto dollarization.

Somalia

This paper discusses Somalia’s Second Review Under the Staff-Monitored Program and Request for Three-Year Arrangements Under the Extended Credit and the Extended Fund Facility. The three-year financing package will support the implementation of the authorities’ National Development Plan and anchor reforms between the heavily indebted poor countries Decision and Completion Points. Reforms will focus on a continued strengthening of public finances to meet Somalia’s development needs in a sustainable manner; a deepening of central bank capacity; improvement of the business environment and governance; and enhancing statistics. Risks to the program and outlook remain elevated, although there is also upside potential. The immediate political risks concern the upcoming elections, while frequent climate shocks continue to contribute to agricultural loss and human displacement. On the upside, greater-than-expected impact from reforms under the program and additional development financing, together with the development of new industries, could lead to higher and more inclusive growth than the baseline.