Medium-Term Outlook and Policy Challenges

A. Macroeconomic prospects for 1996

1. Modest grounds for optimism 108. The prospects for Africa's economic performance in 1996 will be strongly influenced by the out-turn in a number of domestic and external factors, such as the weather, progress in implementing effective policy reforms in the domestic economy and developments in the international economic environment. As in previous years, the vicissitudes of the weather and insect infestation always cast a cloud of uncertainty over future prospects in Africa, in view of the importance of the contribution of agriculture to Africa's aggregate output, export revenues and employment. But, overall, there are modest grounds for optimism regarding the African regional economy in 1996.

109. On the domestic front, total agricultural production is expected to increase by more than 3 per cent in 1996. According to FAO forecasts, total cereals production could reach nearly 108 million metric tonnes in 1996. This encouraging prospect is based on the good distribution of precipitation observed on the continent as a whole, in particular, since the beginning of 1996, the easing of drought conditions in North Africa, drought-prone Southern Africa and the countries in the Horn of Africa. Despite the expected good harvests, the per capita food production index for the region is expected to drop slightly from 94.5 in 1995 to 93.9 in 1996. Moreover, food prices in the first quarter of 1996 were 13.5 per cent above the level in the corresponding period in 1995. 110. The industrial sector and, more so, the manufacturing and mining subsectors, are expected to register growth in 1996, provided there is political and macroeconomic stability, further diversification of production structures and expansion of markets through regional and subregional cooperation, improvements in critical infrastructural services and the strengthening of competitive capacity to take advantage of liberalized trade. Both the expected good performance in agriculture and the gradual increase in private sector participation in economic activities offer brighter prospects for greater industrial growth in most countries. Given the changes in the operating environment and the substantial reforms that have taken place in the mining sector in many African countries, a considerable boost to foreign investment seems likely in the sector. In

particular, the strengthening of subregional and regional cooperation in mining should result in new invest-ments in exploration, the transformation of ores as well as in downstream activities, if cooperative efforts, such as the entry of South African mining companies (i.e., Anglo-American Corporation, Randgold, Anglovaal and Gencor) and Ashanti Goldfields Company of Ghana in mineral development projects in other African countries are anything to go by.

111. The problems of external trade, debt and financial resource flows are so closely interwoven that none can be effectively resolved in isolation; and it is by now clear that there can be no substantial progress on one front without a corresponding headway on other fronts. In 1996, a lot will depend, on the one hand, on the evolution of commodity prices and world demand and, on the other, on weather conditions and the resolution of civil conflicts and the problems of refugees and internal displacement which have had, and con-tinue to have, severe repercussions on the social and economic conditions in some countries of the region. Progress towards the restoration of peace and economic rehabilitation in 1996 should launch countries previously embroiled in conflict towards recovery and sustainable development.

112. Despite the recovery in Western Europe, which is Africa's traditional market and major development partner, the outlook regarding demand and prices for some key commodities remains uncertain in 1996, although the probable out-turn would depend on the effectiveness of protective measures pursued by producing countries. The increase in the prices of primary commodities in 1995 emanated mainly from lower stocks, a condition which has now been reversed and is expected to have a negative impact on prices in 1996. Thus, metal prices fell by 6.1 per cent in the first quarter of 1996 led by a 12.3 per cent decline in copper and a 11.4 per cent decline in aluminium prices. With cotton prices falling by 13.3 per cent in the first quarter of 1996, prices of agricultural raw materials edged slightly lower - by 0.6 per cent - during the same period. According to the International Cocoa Organization (ICCO), the prospects for cocoa prices are likely to be brighter in 1995-1996 compared to 1994, although in real terms they will still be below the average for the last three years. Coffee prices are expected to fall by over 20 per cent in 1996, on account of declining consumption and the ineffectiveness of the retention programme of the Association of Coffee Producing Countries (ACPC). As a result, the ECA commodity export price index (excluding fuels) shows a 8.9 per cent fall in commodity prices in the first quarter of 1996, while the terms of trade based on unit values showed a decline of 1.86 per cent over the same period in 1995. Clearly, if the trends in the first quarter were to continue, it will not augur well for Africa's commodity exports in 1996. 113. On the other hand, the global demand for oil is expected to rise from 69.6 milliom barrels a day in 1995 to 71.2 million in 1996, and OPEC countries are expected to increase their production beyond the 1995 official limit of 24.52 million barrels a day, augmenting demand sourced pressure on prices. While Brent crude oil traded at $US16.99/barrel during the last quarter of 1995, it rose to $US21.78/barrel since the beginning of 1996 (Fig. 7). However, current projections suggest that it is unlikely that prices will remain at this level in 1996, even if they are higher than in 1995. 114. The prospects and outlook for resource flows to developing countries, including Africa, are discouraging owing to a combination of factors. First, budgetary constraints and the demands for greater cost-effectiveness continue to dominate aid policies of industrial coun-tries. Secondly, the demand for foreign aid resources by the countries of Eastern Europe and the former Soviet Union are likely to "crowd-out" African countries from acquiring anything more than their historical share. These sets of conditions make it more difficult if not impossible for African countries to mobilize more external financing in 1996 than in 1995, especially ODA. In addition to the declining ODA flows, the distribution and quality of aid are also causes for growing concern. The distribution of ODA is markedly inequitable and unbalanced, as was fully indicated in the 1994 UNDP Report on Human Development. Ten nations in which 66 per cent of the world's poorest people live receive only 32 per cent of total bilateral aid. Furthermore, only 7 per cent of bilateral aid (representing 70 per cent of total ODA) is earmarked for "human priorities". These and other shortcomings in external aid including questions about the effectiveness of technical assistance programmes, the use of aid as an export promotion instrument, the lack of adequate supervision and verification procedures, etc., have been acknowledged by the Organization for Economic Cooperation and Development (OECD) Committee for Development Assistance and underlined at the World Summit for Social Development. It is hoped that the donor community would re-evaluate and take appropriate measures to make their assistance more equitable and robustly effective in favour of Africa.

115. A closely related problem requiring immediate resolution is the heavy debt burden of the continent. While the December 1994 Naples' initiatives on external debt are very important steps in the search for durable solutions to the debt crisis of low-income countries (see box 4), the Naples Terms that were offered by the Paris Club contain a number of significant drawbacks, judging by the limited number of African coun-tries that have benefitted since its launching. Only 11 debt reschedulings were carried out under the Naples Terms during the first seven months of 1995, as a result of which seven African countries - Chad, Guinea, Guinea-Bissau, Mauritania, Senegal, Togo and Uganda - were able to cancel debts in the order of $US1 billion. In addition to the bilateral debt burden, African countries need respite from multilateral debt which has become massive but up to now has not attracted sufficient attention.


Following the G-7 Summit Meeting in Naples, Paris Club creditors agreed in December 1994 on new terms for the poorest and most indebted countries, the so-called Naples terms. These terms represent an improvement over the earlier Enhanced Toronto Terms in that they include an option to reduce debt or debt service by 67 per cent.

Thus, the Naples terms allow for a reduction, on a case-by-case basis, of either 50 or 67 per cent of the amount (or the equivalent present value) of the debt service - interest and principal payments - falling due during the consolidation period. In addition, unexceptional cases, "stock treatment" can be applied, whereby the stock of non-concessional debt owed by the debtor would be cut by 50 to 67 per cent. This is referred to as an "exit" option, as the beneficiary will no longer need to go to the Paris Club for rescheduling.

Eligibility criteria

In principle, the countries eligible for Naples Terms are the same as those that have received Toronto and Enhanced Toronto Terms.(1)

To qualify for a 67 per cent reduction, the countries must show either a per capita GDP of less than $US500 or a ratio of present value of debt to exports of over 350 per cent.

Countries receiving stock treatment will most likely be those that have a satisfactory track record with the IMF and the Paris Club, and that are viewed by the creditors as having the capacity to implement the debt agreement and to exit once and for all from the debt-rescheduling process.

Terms: A. Under the option of 50 per cent reduction of debt service:

Creditor countries can choose among the options already included in the Enhanced Toronto Terms:

- Debt reduction: reduction of 50 per cent of debt-service obligations, with the remaining half to be rescheduled at market interest rates over a period of 23 years, including a grace period of 6 years; - Debt service reduction: reduction of 50 per cent of the present value of debt-service obligations through rescheduling at reduced concessional rates, over a repayment period of 23 years, with no grace period. - Commercial option: for budgetary or legal reasons, creditors would choose to simply reschedule debt-service obligations over a period of 25 years, including 14 years of grace, at market rates. This option does not provide any reduction.

B. Under the option of 67 per cent reduction of debt service:

- Commercial option: for budgetary or legal reasons, creditors would choose to reschedule debt-service obligations over a period of 40 years, including 20 years of grace, at market interest rates. This option does not provide any reduction.

C. Stock treatment:

If there is sufficient consensus among creditors to reduce the stock of debt, reduction will be achieved through:

- Debt reduction of 50 per cent or 67 per cent, the rest being rescheduled over a period of 23 years, including 6 years of grace, at market interest rates; - Reduction of the present value of debt by 50 per cent or 67 per cent. Debt will be repaid at reduced concessional interest rates, over 23 years (including 3 years of grace) under the option of 50 per cent reduction, and over 33 years (including 3 years of grace) under the option of 67 per cent reduction.

D. ODA loans:

ODA loans are rescheduled over 40 years (including 16 years of grace) under the 67 per cent reduction option and over 30 years (including 12 years of grace) under the 50 per cent reduction option, at interest rates at least as favourable as original rates.

Scope of debt covered: The debt to be rescheduled is, as before, the medium- and long-term public and publicly guaranteed debt contracted before the cut-off date.(2)

The scope of debt covered will be determined on a case by case basis, depending, in principle, on the financing gap requirements of debtor countries. Normally non-rescheduled pre-cut-off date debt is considered first, with debt previously rescheduled on non-concessional terms (PRD) included if needed.

If the size of the financing gap so requires, debt previously rescheduled under Toronto Terms and under Enhanced Toronto Terms could also be included. The reduction on these categories of PRD would be increased so as to reach the same level of reduction as under the current rescheduling agreement. For example, under the 67 per cent reduction option of the Naples Terms, PRD under Toronto Terms and under Enhanced Toronto Terms would be further reduced by 50 and 34 per cent respectively. Moratorium interests could also be included. In the case of stock treatment, the payment of moratorium interest could be capitalized for the first three years.

116. African countries will no doubt continue to intensify their programme of economic reforms in 1996 in the direction of growth with stabilization and transformation. A good sign of that is the growing conver-gence evident in most national budgets and fiscal estimates for 1995-1996 towards reduced deficits. It is to be hoped that reform-induced economic efficiency and improvements in macroeconomic policy and in human, institutional and physical infrastructure in 1996 will put the African economy on a more sustainable footing, making it more competitive in the world economy.

117. In this respect, it is to be hoped that the United Nations System-Wide Special Initiative on Africa, formally launched in March 1996, will assist in arresting the continued deterioration of social and economic conditions. Under this Initiative, which is the result of consensus between Africa and its development partners on the necessary course of action to meet the major challenges on the domestic scene, including those connected with transformations in the global economy, the major agencies, organizations and entities of the United Nations system, including the World Bank, have come together to fashion and commit them-selves to the mobilization of resources for and the implementation of a number of theme-oriented priorities in Africa. These are: peace building, conflict resolution and national reconciliation; basic education for all; health sector reforms; enhancing food security with special emphasis on women; harnessing information tech-nology for development; capacity building for governance; strengthening civil society for development; assuring sustainable debt relief; poverty reduction through the promotion of the informal sector; sustainable livelihoods in environmentally marginal areas; trade access and opportunities; partnership with Africa through South-South cooperation; land degradation and desertification control; and soil quality improvement.

118. The implementation of the Initiative requires a financial commitment amounting to $US25 billion, spread over a ten-year period. These funds are expected to come from national budgets of African countries as well as funds provided by multilateral and bilateral donors. In addition to the substantive aspects, the United Nations system will lead in a number of fundamental reforms to improve the efficiency and impact of international development cooperation and ensure, through the Special Initiative, that the previous initia-tives on Africa - United Nations New Agenda for the Development of Africa in the 1990s (UN-NADAF) and the United Nations Programme of Action for African Economic Recovery and Development (UN-PAAERD) - are reinforced and given added practical expression. The totality of the reforms would focus on regional fora to create frameworks for cooperation; national sectoral programmes to base assistance in key sectors and key inter-sectoral goals requiring an integrated approach to agreed national plans of actions under government leadership; and broadening participation in consultative groups and/or round-table meetings to include private for-profit and non-profit leaders to enhance the quality and support of these exercises.

2. Better GDP growth rate in 1996

119. Based on the above considerations and assumptions concerning favourable weather and growth in agriculture, manufacturing and mining as well as expected performance in the external sector, the ECA secretariat estimates that overall regional GDP in Africa would grow by about 2.9 per cent in 1996.

120. The GDP of oil-exporting African countries is expected to increase by 2.4 per cent in 1996, mainly because of a likely rebound in oil production and prices stabilizing at the 1995 level, following the net con-traction in 1994 and a slight increase in value-added terms in 1995. The situation in Central Africa will remain difficult if economic contraction in Zaire continues and poor growth obtains in the other countries of the subregion. In contrast, there is likely to be a strong recovery in Southern Africa, an area affected by severe drought in 1992/1993 and 1995. A 3.7 per cent rate of GDP growth is estimated for this subregion in 1996.

121. The African LDCs are likely to grow less rapidly than the African average, with a projected growth rate of 1.5 per cent, while in the franc zone, output is unlikely to grow by more than 2 per cent. The effect of the 1994 devaluation is likely to be dissipated and limited exclusively to the financial sector rather than to output, except in a few countries, such as Cote d'Ivoire, where adjustment in the real sectors is progress-ing, and a tremendous scope exists for production flexibility and positive supply response.

122. The projected slow-down in the African LDCs in 1996 is mainly on account of the further deteriora-tion expected in their economies. In the Sudan, which accounts for 12 to 13 per cent of the total GDP of the group, GDP decline is likely to intensify, falling from -2.8 per cent in 1995 to -5.8 per cent in 1996, due to the persistence of drought and civil conflict coupled with severe infrastructural problems. For Zaire, a country that accounts for more than 8 per cent of the total GDP of African LDCs, 1996 promises to be another year of recession, in view of the difficulties that have continued to face the Government for the past six years in restoring the productive capacity of the economy. A decline -2.2 per cent in GDP growth is projected for the country. The anticipated deterioration of the overall economy of the African LDCs in 1996 can be attributed to the raging civil war and disorder in Liberia, the stalemate in Somalia and the slow progress towards rehabilitation, resettlement and reconciliation in Burundi and Rwanda.

B. Medium-term policy challenges in the external sector

1. Overall external environment remains daunting

123. Many African Governments have begun the process of rehabilitating and rebuilding their human, physical and institutional infrastructure and have created modalities to exploit the synergy between public and private sectors. They have introduced market- and growth-friendly policies and have persisted courageously in the arduous and often politically risky reforms, some of which, no doubt, need to be deepened and broadened in order to create an enduring culture of efficiency and dynamism. There is need to undertake additional institutional reforms to improve management standards and raise the level of pro-ductivity, particularly in agriculture and manufacturing. Rehabilitation and, in some cases, privatization of public enterprises will need to be coupled with measures that stimulate investment capabilities and empower-ment of the private sector, so that the share of private sector enterprises in the development process could assume increasing proportions. Despite the fundamental and hopefully irreversible domestic reforms, the medium-term prospect continues to be threatened by exogenous factors. And no where is this more daunting than at the level of the external environment.

124. The current trends in the world economy, such as the globalization of production and markets, rapid technological change and the proliferation and intensification of regional trade blocs have, among others, further gathered momentum and only countries with a reasonable degree of global competitiveness stand to benefit. It is regrettable that African countries have the least leverage or influence on the out-turn in prices of primary commodities, the volume of resource flows and external debt. While adjusting to these externally mediated parameters in the medium term, they would need to mutate and modify their export mix through intensive diversification and rectify their dependence on externally generated resources and stimuli through intensive and extensive domestic resource mobilization and efforts at internal economic re-orientation. Although Africa's record in adjusting to the fast-changing external environment has been very poor in the past, current perceptions and efforts to attenuate their detrimental impact and take advantage of the unfolding opportunities provide strong grounds for optimism in the medium-term (see box 5).

2. Relatively static commodity structure and

declining shares in world trade

125. Most importantly, Africa has failed to take advantage of the dramatic growth in world trade. Between 1960 and 1990, world exports increased at an annual average rate of 12 per cent while the corres-ponding measure for Africa was a mere 3 per cent. Africa has also been by-passed by the conspicuous trans-formation in commodities traded globally. The income inelastic nature of demand for primary products has been such that there has been a noticeable shift in global demand. Demand for industrial inputs, such as minerals, has been declining because of the increased efficiency of synthetics in resource use as well as transformation of the nature of industries in the developed countries, while the demand for beverages and tobacco has been badgered by health-conscious consumers. In 1993, approximately 80 per cent of Africa's foreign exchange earnings derived from primary commodities, while imports of manufactured goods accounted for 74 per cent of the value of total imports. The comparable figures for 1980 were 93 and 72 per cent, respectively. Most African countries continue to rely on the same primary commodities they did in the 1960s and 1970s. Countries heavily dependent on the export of coffee and cocoa three decades ago continue to obtain their foreign exchange earnings from these commodities in the 1990s, as do exporters of petroleum and minerals. While the volume of primary commodities in world trade declined from 36 per cent in 1970 to 19 per cent in 1994, the structure of exports from Africa has remained more or less the same, with continued dependence on primary commodities as the sole source of foreign exchange earnings.

126. African producers have also been "crowded-out" by new producers of primary commodities in other regions. Countries in Asia and Latin America have now become major competitors in such products as coffee, tea, cocoa, timber and minerals. These countries were either importers or were very small players in the world market three decades ago but they have since made phenomenal success through strident diversification in production and trade. Inevitably, the static nature of the structure of exportable commodities has reduced Africa's share in world exports from 10 per cent in 1950 to 2.2 per cent in the 1990s.

127. World trade is expected to increase by $US210 billion annually in the post-Uruguay trading order, of which 30 per cent will be shared by developing countries. In the medium term, Africa stands to benefit the least of all the world's regions, given its weak capacity to respond to new opportunities created by the emerging international trading environment, and production structures that do not readily lend themselves to global competitiveness. To benefit from the post-Uruguay Round trading order and not lose $US3 billion annually - as anticipated by the IBRD/OECD study - it is imperative for Africa to reform and modernize its production structures to produce goods that are competitive in world markets. Even so, Africa might still find it difficult to penetrate highly protected markets as current indications are that the world trading system continues to be clouded with protectionist pressures, growing resort to discriminatory non-tariff barriers prompted by macroeconomic imbalances and increasing tendencies toward bilateralism and regionalism at the expense of multilateralism.

128. The favourable price increases of primary commodities in 1994 and 1995 are by no means assured, as world prices may resume the cyclical pattern they have always assumed, under pressure of a longer-term downward trend in consumption of primary raw materials per unit of output. Since the adoption of the Inte-grated Programme for Commodities (ICP) and its centrepiece (the Common Fund adopted by UNCTAD IV in Nairobi in 1976 and other compensatory financing facilities including STABEX and SISMIN of the European Union), no real substantive progress has been achieved. The trend towards advances in technological progress in the production of synthetics and substitutes which depress demand and, hence, prices of major primary commodities has been reinforced.

129. The building up of commodity stocks and surpluses as one key element for containing inflation in industrialized countries is likely to continue as long as the monetary policies of these countries target price stability at the expense of employment. According to a study by the Petroleum Industry Research Foundation, every dollar drop in the price of a barrel of crude oil is, within a year, expected to raise GDP in the OECD countries by about one-tenth of one per cent on average, and to reduce inflation and interest rates by roughly the same amount. Most analysts of the commodity markets believe that depressed com-modity prices will continue well into the first decade of the next century and that the burden would disproportionally fall on the foreign earnings of the poorest region. It has been estimated that the trade losses of Africa may in the process be equivalent to about 3 per cent of GDP.

130. The external sector in Africa is likely to benefit however from the ongoing agreements to cut production to stabilize commodity prices. For example, the members of the ICCO have decided to abandon the buffer stock in favour of export retention schemes, and to keep production levels - at least until the 1998-1999 crop - down to 2.8 million tons, below the 3 million tons level projected by ICCO. The plan was to restrain production, so that world stocks would not be more than 30 per cent of annual consumption, a move which was found to be more suitable than the use of buffer stocks intervention to control prices.

Box 5


In order to address Africa's commodity problem in a comprehensive manner, African Ministers responsible for Trade, Regional Cooperation, Integration and Tourism, meeting in Addis Ababa from 14 to 16 February 1996, adopted the following Plan of Action for Commodities, to be implemented at national, subregional and regional levels:

At the national level, African countries were urged to take the following measures with a view to ensuring a wider export base:

(a) realign the agricultural products subsector to meet local needs and reduce the importation of food products;

(b) formulate and pursue horizontal and vertical diversification programmes with a view to widening Africa's economic base and creating the inter-sectoral linkages needed for sustained growth;

(c) adopt adjustment and economic policies capable of revitalizing growth;

(d) adopt incentives for commodity producers by way of improving the access of small producers to the factors of production, lowering production factor costs by granting customs exemption for the import of essential commodities and relaxing fiscal policies so as to reduce excessive dependence on export duties as a source of fiscal revenue;

(e) pursue appropriate reform policies to gradually shift economic activities towards the promotion of more attractive and competitive goods both to the domestic and external markets;

(f) formulate as part of a comprehensive strategy, an export promotion programme providing every measure of support for enhancing competitiveness both at the stage of product processing and export diversification. For this to happen, not only would productivity have to be improved but also the cost of such factor inputs as labour, energy, transport, credit and other costs relating to an unfavourable business environment should be reduced;

(g) shift industrial strategies for import substitution to an endogenous growth model based on the commodities sector;

(h) improve the efficiency of marketing structures by simplifying administrative formalities and eliciting the direct participation of producers in product marketing by encouraging the establishment of producers' associations and cooperatives with a view to ensuring regular and steady supplies.

(i) conduct a critical review of the possibilities for diversifying outlets to other developing regions so as to take advantage of South-South opportunities and to diversify African markets and make them more competitive and profitable;

(j) create the conditions for an improvement of the economic and financial environment both for national as well as foreign direct investment particularly through the institution of such reforms as would contribute to the effective allocation of credit to small farmers and businessmen; and

(e) strengthen African financial institutions which specialize in external trade financing operations. AFREXIMBANK could play a major role here in financing African exports.

At the international level, African countries should:

(a) evaluate, with the assistance of ECA secretariat, the implications of the final Act of the Uruguay Round of Multilateral Trade Negotiations including the additional provisions contained in the Marrakesh Agreement so as to see what synergy can be achieved in increasing revenue, employment and expanding trade;

(b) strengthen their negotiating position within such multilateral trade cooperation institutions as the World Trade Organization (WTO), EEC-ACP Convention and the Group of 77 so that their interests are taken into account in future negotiations;

(c) make use of international assistance to sustain their economic diversification efforts particularly within the context of the preparation of diversification projects and programmes under the General Assembly resolution 49/142; and

(d) encourage foreign direct investment and technology transfer so as to develop production capacities and increase export possibilities.

131. The oil market is now stabilizing at $US18.63 for Brent and $US16.7 and $US19.71 a barrel respectively, for medium and heavy crude. However, the current production of 1,450 million b/d is likely to increase significantly in 1997 onwards as a result of the expected entry of Iraqi oil into the international market and above-quota production by OPEC members. With excess supply in the international market, oil prices are expected to fall, depressing export earnings, while the lower prices would impact negatively on the oil exporting countries. In the short-run, most of the debt-stricken oil importing African countries are expected to benefit from the conjunction of lower oil imports bills and lower interest burdens on loans.

3. Durable solutions needed for debt overhang and resource flows

132. The prolonged debt problem would continue to pose a major challenge for Africa's development in the medium term. Debt has emerged as a development problem since 1986, when the rate of interest soared and commodity prices fell to unprecedented levels. By the end of that year, the very long-term nature of the debt-service problem for a number of African countries had become apparent. UNCTAD VII in August 1987 reached an understanding in favour of a more flexible approach to the debt strategy. Specifically, the Final Act underlined the need for a cooperative debt strategy which would take into account a number of factors bearing on an individual country's capacity to repay its debt without unduly hampering growth or the implementation of structural adjustment programmes (SAPs). Since then, and despite subsequent initiatives, the debt problem has accentuated to various unsustainable levels.

133. One of the major causes of the increase in external indebtedness of commodity-exporting developing countries has been the fall in real commodity prices. As such prices become more and more depressed in real terms, debt overhang is projected to accelerate further despite international strategies for debt reduction. The debt reduction/rescheduling initiatives, including the Toronto Terms and Enhanced Toronto Terms and, more recently, the Naples Terms, collectively fall short of what is required to alleviate the debt burden of the heavily indebted countries, particularly in light of falling export earnings occasioned by declining commodity prices. New approaches embracing effective mechanisms for dealing with the immediate issue of depressed prices, excessive price instability and the revitalization of growth in the affected countries are thus required.

134. In an environment of declining commodity prices, slow growth in trade and reduced capital flows, the prospects are that debt- servicing would continue to be a protracted problem and the interest due on rescheduled loans may need to be rescheduled several times in the foreseeable future if debt service is to be reduced to a level consistent with the availability of external resources. Until a durable solution is achieved within the framework of an integrated, growth-oriented strategy and mechanism, the debt overhang would persist at unmanageable levels to the detriment of growth in many African countries.

135. In recognition of the unsustainable situation in countries with heavy debt burden - most of which happen to be among the poorest countries - the leaders of the G-7 countries have agreed on the need to look for new initiatives on the debt issue and have consequently requested the Bretton Woods institutions to develop a comprehensive approach to assist countries with multilateral debt problems. In response, the World Bank and the IMF have undertaken a study entitled "A framework of action to resolve the debt problems of the heavily indebted poor countries" which hopefully will form the background to a new debt initiative. In the study, the Bank and the IMF have proposed the launching of a "Multilateral debt reduction facility" which will take the form of an international trust fund, geared to providing additional assistance to the heavily indebted poor countries on a case-by-case basis.

136. Innovative and comprehensive as the initiative drawn up by the Bretton Woods institutions for resolving the debt crisis and reducing debt stocks to sustainable levels may be, its financing provisions are not so clear and, at best, look rather inadequate, while the time-frame for its implementation is unnecessarily long and the eligibility criteria are rather stringent. There is a three-step approach in the IMF/World Bank proposal on debt management. The first stage will generally involve a period of three years of adjustment programmes, after which the IMF and the World Bank will prepare a debt sustainability analysis on a country to see what improvements there were in a country's debt profiles. If the analysis suggests that a Naples Terms agreement will not produce a sustainable debt profile, the country can waive immediate debt relief and opt for inclusion in the new initiative. The countries embarking upon step two will receive a guarantee that, after a further three years of track record with the IMF, during which they receive additional relief (of up to 90 per cent) on debt servicing from the Paris Club, and comparable treatment from commercial and non-Paris Club creditors, they will be provided with an exit strategy which will reduce their debt obligations below a sustainable threshold. The multilateral creditors could join with other creditors in providing grants and concessional loans. If at the "completion point", at the end of the third year, the country is still overburdened by its debt obligations, it may then be considered for the third phase when it will be eligible for 90 per cent of debt stock reduction from the Paris Club, and could also expect further assistance from the other categories of creditors.

137. The African region has also not benefitted much from the flow of external private capital that has become a major source of financing for developing countries. The flow of such capital to African countries rose only modestly, from $US3.8 billion in 1994 to $US5.1 billion in 1995. Africa's share of world total private resource flows amounted to a mere 3 per cent in 1994 and only rose to about 9 per cent in 1995. So far, only two countries - South Africa and Tunisia - have developed the requisite institutional framework and financial infrastructure and respectable credit rating that would allow for a high degree of integration between domestic and global financial markets, and a recourse to international capital through public and private bond offers and portfolio investment. The nascent stock markets in African countries are for the most limited in the value of traded shares and rather unstable in performance due to inadequate infrastructure and unreliable regulatory frameworks to earn the confidence of potential international investors.

138. It is to be hoped that, in the years ahead, the number of countries with the potential to attract foreign private capital will increase, given the dire needs of development financing and more so of the non-debt creating types. The opening up of transport, telecommunications, energy, mining and the financial services sectors - sectors that appear to be favoured increasingly by the international private capital markets - along with the gathering momentum of improved macroeconomic performance and environment for private investment in Africa and an ever-broadening readaptation and adjustment of the continent's institutional mechanism and financial structures - to investment market conditions are expected to create and sustain the interests of external investors. Some of the international investors that traditionally play in the market are already looking for ways and means to position themselves in emerging markets with potentials of high rates of return and are likely to see sub-Saharan Africa, which has one of the best realms on investment in the developing countries, as a fair opportunity for portfolio diversification. There are already very encouraging indicators on the horizon. Baring Asset Management is reputed, for example, to be planning to invest in nine sub-Saharan African countries as wellas in Morocco, Egypt and Tunisia. Mercury Asset Management envisages making small investments in Zimbabwe and Ghana, for a start, while Framlington, the UK fund owned by the French banking group, Crédit commercial de France (CCF), is launching a closed-fund to invest in the CFA zone countries. Other initiatives such as the West Africa Growth Fund are targeting companies scheduled to be privatized in countries like Cameroon, the Congo, Côte d'Ivoire and Senegal.

C. Mobilization of domestic financial resources:

The priority area for policy development in the 1990s

1. Need for new approaches

139. Mobilization of domestic financial resources has become a central issue in the current vision and strategy of African development. With the expected decline in external resource inflow and with little or no prospects for any major improvements in accessing external savings, particularly in the form of ODA and non-debt creating foreign investment in the short and medium run, African countries need to redouble their efforts in increasing domestic resource mobilization to the maximum extent possible. Indeed, increased dependence on domestic resources has become an integral component of Africa's development enterprise and of the stabilization and structural adjustment initiatives now under implementation in many African countries.

140. Closely connected with the effort to mobilize financial resources is the need to ensure efficient management and judicious allocation of these resources. Attainment of an overall rate of growth of 8 per cent per annum is presumed to double the per capita income over the next decade and is estimated to require an additional investment of about $US45 billion per annum at 1990 prices, over and above the present level of $US115 billion, raising the level of annual investment to $US160 billion. Most of this additional funding must be mobilized from domestic sources given the poor prospect of external resource inflows.

141. It is by now clear that to attract sizeable external resource inflows, particularly the non-debt creating type, Africa has to achieve considerable success in mobilizing its own domestic resources and build up its human and infrastructural capital. Consequently, the search for additional investible resources must be inward focused.

142. By minimizing their dependence on externally generated stimuli and resources, African countries would have made the conscious decision to assume the primary responsibility for financing whatever additional investment is required to propel their economies in the years ahead. By reducing inefficiency, creating an environment conducive to the retention of savings within their individual countries, reversing capital flight and, above all, encouraging savings through appropriate policies and necessary institutional mechanisms for its intensive mobilization, they could place themselves in a situation in which they would be able to provide the necessary resources to finance the additional investment. The challenges of initiating and fostering a self-reliant and self-sustained socio-economic transformation will not be an easy task, it must be fully realized, unless the present trends in savings can be substantially improved.

143. In view of the level of resource mobilization in the past, governments should be more aggressive in the mobilization of tax and non-tax revenue. The formal financial institutions were equally guilty of complacency in resource mobilization, focusing more on the lending end. A successful resource mobilization drive needs to be waged if additional investable resources are to be made available to enable economic growth. A concerted drive should target all the saving units in society, beginning with the savings of the government and including the business and household sectors.

2. Putting in place sound macroeconomic policies

144. The stabilization of prices and exchange rates so as to have a positive real rate of return on domestic assets is a precondition for the mobilization of domestic savings. A sound macroeconomic policy is necessary also even if it is not a sufficient condition for successful mobilization of savings.

145. In the pre-SAP era, interest rates usually remained fixed for long periods and were not revised in the light of inflation trends which sometimes kept the real rate below zero. The passive role accorded to the interest rate stemmed perhaps from the conviction that the major determinant of saving was income, and not the interest rate, and that this latter depended on the volume of investment. The implementation of SAPs reversed this logic in many countries and liberated the interest rate along with credit from the control and management of the central banks, leaving the determination of their level and the allocation of resources largely to market forces. The trend in several countries towards more liberal trade and exchange rate policies and the abolition of excessive regulatory and control mechanisms created a more market-friendly environment in which the private sector would play a greater role in the mobilization and utilization of domestic financial resources. These policy directions are expected to increase domestic savings, improve the efficiency of resource use, minimize and reverse capital flight and increase the volume of external resource inflows.

146. The liberalization of the financial and foreign exchange markets have been controversial. In many of the countries where these policies have been pursued, the values of domestic currencies have fallen precipitously and nominal interest rates have increased substantially, compared to the pre-SAP years. Whether the huge rise in interest rates has increased savings, contributed to stabilize the economy and led to the improvement in real GDP growth, remains debatable. One view is that the high nominal interest rate is in fact responsible for the slow growth of GDP, inflationary condition and deepening poverty in some of these countries by reducing investment and capacity utilization and employment. However, the other view points to the examples of countries, mainly from outside the region, where the policy has been relatively successful, in the sense that real positive interest rates have been achieved without a huge rise in nominal interest rates. Thus, it is necessary to examine each situation on its merits, since it is often inadequate to assess the impact of a single item in a policy package without considering the context in which it is implemented.

147. Fiscal policy, and especially tax policy, has an important role to play in the mobilization of financial resources. These policies should aim at increasing the rate of savings and investment, and encouraging the flow of investment into desirable channels. An increase in the proportion of national income devoted to capital formation should be one of the primary aims of fiscal policy. Resource mobilization could also be augmented through suitably designed and judiciously implemented monetary policies. Monetary policy plays its role in economic development by influencing the supply and uses of credit, combating inflation and maintaining a healthy balance-of-payments position.

3. Promotion of the savings habit

148. Since both the government and public enterprises have very low or negative savings rate in many African countries, most of the savings have had come from the private sector. However, shallow financial systems, lack of confidence in financial institutions and inadequate government policies have depressed private savings. An increase in domestic financial resources for the attainment of maximum growth is the responsibility of governments which, through its fiscal and monetary policies, can sharpen to a very large extent, the incentives for household and private enterprise savings.

149. The savings habit of African households has impressively demonstrated its resilience even under the most difficult of circumstances. These savings are usually oriented towards hoarding or easily inaccessible forms with only a small fraction being held as deposits in financial institutions. This apparent limitation on the mobilization of household savings can be altered through appropriate and innovative policies.

150. The capacity of a country to mobilize the savings of its population depends on the degree of monetization of the economy, the extent of development of the financial institutions and the range of financial instruments available. The development of the financial sector is therefore a prerequisite for the mobilization of savings and the availability of a wide variety of financial instruments offers savers an alternative to holding their portfolio in physical assets. The lower the level of development of the financial sector, the higher would be the proportion of savings held in physical assets and the more difficult and costly would be the effort to mobilize domestic savings.

151. Modern financial institutions are the sine qua non for effective resource mobilization and its productive utilization. Unfortunately, the development of these institutions in Africa has been very inadequate and often limited to the urban milieu. Because 60-70 per cent of the African population live in the rural areas where commercial banks and other formal financial institutions are not very active, many countries have attempted to reach this segment of society through specially designed banks. These banks (rural banks, post office savings banks, cooperative and community banks, among others) mobilize resources and provide credit to small borrowers. Two countries where rural banks are well developed are Ghana and Nigeria. In Ghana, the Bank of Ghana established commercially oriented unit banks across the rural countryside in the 1970s. These banks operate with share capital controlled by the residents and with the active participation of the central bank. The Board of Directors and the staff are drawn from the community. In the 1980s, the rural banks proliferated particularly in the cocoa-growing regions and were active in making payments to cocoa farmers. In 1977, the Nigerian Government launched the Rural Banking Scheme (RBS), with a network of branches in all parts of the country, to mobilize rural savings and provide credit. Rather than establish new banks as in Ghana, the Nigerian Government required all existing commercial banks to expand their network of branches in the rural areas. However, in 1989, the Nigerian Government established new banks - the People's Bank and the Community Banks - with public funding. These were eventually to be owned by the members of these institutions. These types of banks, if successful, are likely to access more easily the financial resources of the rural population, provide needed credit at reasonable interest rates and forge a closer link between the formal and informal financial institutions. Above all, the community-based banks of whatever genre should contribute to the development of the banking habit of the population and strengthen the resource mobilization drive.

4. Strengthening viability of formal and informal financial

institutions and their linkages

152. The extent to which financial institutions can contribute to the mobilization of private savings depends on their spread in the economy, among others, through the branch networks of commercial banks. Convenience and proximity of commercial banks to savers and their vigour in stimulating saving can have a positive effect on financial resource mobilization. A measure of the penetration of commercial banks (and other financial institutions) in the society is bank density, measured in terms of the number of branches relative to the population and their geographic spread throughout the country. Based on this measure and particularly their location, the evidence is one of considerable insufficiency. Even in countries such as Kenya and Nigeria, where the density is high relative to the other countries in the region, there is a marked bias for the large urban conglomerates, leaving the huge rural population to be served by a variety of informal financial arrangements.

153. Because of the failure of commercial banks to cater to the needs of the small savers and provide development-oriented long-term credit, specialized saving institutions have been organized in many countries, usually under the aegis of the central bank. These include the post office savings banks and credit unions and the specialized banks. Among the latter, the most prominent are the development banks which are created to meet the long-term credit needs of the investing public and are usually specialized sectorally to focus on agriculture, industry, services and construction, among others. While their primary function is to make financial resources available for projects whose needs are not served by other financial institutions, they could also stimulate the development of capital markets by selling their own stocks and bonds, helping enterprises float their securities and selling from the portfolio of their equity investment. On the whole, however, development banks have not been very successful in mobilizing domestic resources, but have usually served as a conduit for onward lending of public funds and externally mobilized financial resources to domestic enterprises. The issue for future policy is how to activate and sustain the capacity of these development finance institutions to contribute significantly to the mobilization of domestic financial resources to finance the investment needs of the private sector.

154. In this connection, the role of Africa's capital markets, which are still grossly under-developed, needs to be underlined. Although the development of these emergent markets in a few countries such as Nigeria, Kenya, Zimbabwe, South Africa and the North African countries, including Morocco, Tunisia and Egypt is encouraging, their role in intermediation between savers and investors is still very limited. During the pre-SAP era, the development of capital market was hindered by lack of both demand and supply. Existing companies and new investors relied more on own savings, retained earnings and most importantly on bank credit. On the supply side, the problem was one of weak or non-existent institutions that would provide legal safeguards and undertake the marketing of shares (stocks) at denominations sufficiently low to attract the small savers. These and other factors have limited the supply of savings flowing through the stock markets.

155. The extensive privatization of public enterprises under SAPs public sector and prudent borrowing from the private sector offers governments an opportunity to expand local capital markets. However, many governments are saddled with public enterprises for lack of buyers, mainly because they offer whole companies for sale rather than pursue the alternative of selling shares in small lots, which might be attractive to small savers. The disposition of public enterprises through the floating of shares has a number advantages. It fulfils the objective of privatization, spreads the benefits of share ownership among the population and contributes to the mobilization of domestic savings. Governments could shift their source of funding from the financial institutions and particularly the central bank by reaching out to the private sector through appropriately denominated bonds and treasury bills and other negotiable instruments tradeable in secondary markets.

156. Many African countries have a long tradition of well- articulated informal financial institutions providing essential services to the small saving and producing units whose needs are not catered for by the formal financial institutions. They are extensively spread, both the rural and urban areas across Africa. They not only exist side by side with commercial banks, post office savings banks, etc., but they do thriving business both in mobilizing savings and extending credit from and to their customers who include people with accounts in the formal institutions. While the exact number and nature of informal savings institutions as well as the number of participants are hard to come by and the volume of resources are difficult to quantify, their comprehensive outreach are nevertheless presumed to be extensive. While the variety of informal financial institutions are vast, the most popular and widespread are those engaged in savings, loans and mutual aid schemes. It is generally believed that a significant proportion of private saving is channelled through these well-developed informal institutions.

157. A closer examination of the workings of informal financial institutions reveal their user-friendly nature. In looking for ways of holding their savings or borrowing, people put a premium on convenience and confidence. Convenience includes attributes such as accessibility and proximity; simplicity of operations; liquidity; and security. The traditional savings institutions meet these requirements. No complicated and arduous paper work is involved for membership. Once engaged, the "compulsory" nature of the "voluntary" contributions often make them attractive to members since they are forced to save, as opposed to the situation with deposits in the banks. The informal institutions also enjoy qualities and characteristics that need to be emulated by the formal financial institutions: their cost of doing business is very small and consequently are much more efficient; the default rate and non-performing credit are also much lower than in banks; and they are not constrained by interest rate regulations, liquidity and reserve requirements, rendering their operations competitive.

158. This idealization of the informal sector should not mask their weakness, however. They are small, fragmented and often the resources they mobilize are insufficient to trigger long-term benefits. The policy challenge calls for developing these institutions to better serve the society and to bridge the gap between excess liquidity of banks and shortage of credit. Excess liquidity in the commercial banks co-exists with unmet demand for credit in the small-scale enterprise sector (both urban and rural areas). It also means that many households and small enterprises lack access to saving instruments. While the formal financial institutions remain the key to the mobilization of long-term savings, the need to forge a strong linkage between the formal and informal financial institutions becomes important considering the grassroots reach of the latter and their persistence and durability. Regardless of the degree of financial liberalization or the proliferation and geographical spread of formal financial institutions, the informal financial institutions will survive and exploit the niche. In addition to supporting the efforts of the formal financial institutions outreach, the linkages could further enhance the operations and contributions of the informal financial institutions. Besides organizational and managerial constraints which tends to keep them small and fragmented, the financial resources they mobilize are likely to remain small relative to the potential and may not be productively utilized. Secondly and equally important is the fact that savers do not benefit from interest on their savings. Despite these limitations, the traditional financial institutions are valuable complements to the modern financial institutions.

159. Therefore, forging a strong link between them should be an essential part of the strategy for improving the institutional framework for the mobilization of domestic resources. One way of forging the link is to institute a mechanism through which a two-way flow of financial resources could emerge. While the formal financial institutions serve in many cases as custodians of funds mobilized in the informal market, what is lacking is the reverse flow of resources in the form of commercial banks loans to informal sector operators, and the channelling of resources through the informal financial institutions for on-lending. Such an arrangement could bestow a number of advantages. Commercial banks, particularly those suffering from "excess liquidity syndrome" could find profitable uses for their resources, while creditors could enjoy lower interest rates and the informal intermediaries maximize their profit through higher volumes at lower interest rates. A successful networking between the formal and informal institutions would therefore minimize the fragmentation of the financial market, increase efficiency and maximize benefits all round.

160. Another approach that is worth looking into is the formalization of the informal financial institutions. Operators in the informal sector could be encouraged to graduate into more permanent institutions and their operations enhanced through technical assistance from the central bank and other financial institutions. Extensive and intensive training with the technicalities of book-keeping and modern management, assistance in organizational set-up could liberate them from the trappings of their transitory nature and diminutive size.

D. Mobilization of savings by the State:

Improving viability of the government budget

161. Financial resource mobilization is largely influenced by the monetary and fiscal systems and institutions operating in a country. Governments could play an important role in mobilizing domestic financial resources for economic development either indirectly by providing fiscal and monetary incentives for private savings, or directly through surpluses in their recurrent budgets.

1. Upgrading tax administration

162. On the revenue side, in many African countries, the tax structure has a narrow base. Taxes on imports, sales and excise taxes on a limited range of consumer items, such as tobacco, petroleum products, and beverages provide the bulk of tax revenues of most African countries. Since many African countries have been forced to restrict imports in recent years on account of unfavourable terms of trade and other factors affecting their foreign exchange earnings, the base for import taxes has correspondingly narrowed. Revenue from import taxes were further aggravated by the drastic reduction of the marginal rate. Therefore, any policy to expand revenue in the state budget will inevitably call for upgrading tax administration, expanding the tax base and introducing new taxes.

163. Many countries in Africa lack an effective and efficient tax assessment and collection mechanism. In countries where the tax administration is weak, sources of revenue that impose heavy burden on administrative resources are less intensively exploited focusing on those sources that are easier to administer. The system of administration needs to be drastically upgraded by instituting an effective tax authority, manned by the necessary personnel to properly and honestly execute the task and backed by appropriate tax laws that are simple to administer with severe penalties for evasion.

2. Spreading the tax net

164. While improved tax administration is necessary, it is nevertheless insufficient to maximize government revenue. In addition, the tax net needs to be cast widely enough to capture all potential tax payers, including operators in the informal sector. The informal sector in Africa has two distinct characteristics that are important from the standpoint of tax coverage. Firstly, it is vast in number of operators and is involved in practically all types of activities. From an already large base the sector has been growing at a fast rate in recent years partly because of the failure of the formal sector to expand at a rate fast enough to accommodate and capture the growing population. Secondly, they are neither registered nor accountable to the authorities and do not pay taxes. Given the growing importance of this sector, their large number and their potentially extensive revenue base and for reasons of equitable tax administration, it is important to bring them under the tax net. The process of inducting these operators into the tax net could take two forms, based on their size and activities. The relatively large operators could be required to formalize their operations by obtaining licences, keeping records where this is possible and obliging them to pay taxes.

165. The formalization of the bigger informal operators is bound to leave out a good proportion of the informal sector outside the tax net. To draft these operators into the tax net and further widen the tax base, governments could design special methods. The easiest and the most common approach is the imposition of the presumptive tax whereby lump-sum taxes are levied on all small-scale activities based on standard assessment using simple indicators or proxies to estimate their taxable income. Where these methods are difficult, as is likely to be the case, the tax authority could impose a flat lump-sum tax based on some assessment of capacity to pay.

3. Reforming the structure of taxes

166. In addition to reforming the process of tax administration and expanding the tax base, it may be necessary to change the tax structure and consider the viability of applying consumption tax in order to minimize tax evasion. The multiplicity of indirect taxes such sales tax, transactions tax, excise tax, etc., that are currently in use in many countries could be simplified by lumping these into a single rate. Secondly, the nature of the tax could also shift to consumption tax as well as value added tax (VAT) to facilitate collection and eliminate the cascading effect. The shift from multiple tax to a single consumption tax, particularly those targeting luxury goods, has extra advantages in that it reduces the burden on tax administration and encourages savings by deterring consumption. These measures taken as a whole are likely to expand the tax base and help to increase government revenue.

4. Introducing new taxes

167. Some few specific areas for general policy consideration can be suggested in addition to a review of the indirect tax and tariff structures with the aim of increasing tax revenues from these sources. These include the introduction of taxes on unearned income in the form of wealth or property taxes, capital gains taxes, gift taxes, real estate and inheritance duties which either do not exist or are insignificant as a proportion of total tax revenue. The immediate introduction of sales and excise taxes on such services as hotels, restaurants, banking, insurance and construction which either are non-existent or yield only modest revenues are likely to yield considerable revenue.

168. Governments could also introduce taxes targeted at financing specific infrastructural developments including, for example, education tax, health tax, and tolls on roads where feasible. State pension schemes into which wage and salary earners may pay a portion of their incomes with matching contributions by employers could be expanded to include the private sector.

5. Making taxes more progressive in nature

169. Tax structure of a highly progressive nature is recommended not only to enhance the effect of taxation, but also to ensure a more equitable distribution of income. The propensity to save among the upper income groups of people is very low in most African countries and equitable income distribution through highly progressive taxation could enhance the scope for increasing the rate of saving.

6. Improving income from public enterprises

170. Public enterprises are important sources of government revenue. In many countries, these enterprises have been established and managed less with the objective of maximizing profit and more to meet other public policy goals, including employment creation and price stabilization. Poor management coupled with corruption and embezzlement arising from lack of transparency and accountability have contributed to the erosion of the financial position of many of these enterprises, often necessitating transfers from the central government with adverse consequences on public sector saving.

171. There is a growing perception and appreciation that public enterprises could serve as the vehicle for increased revenue. To that end, governments have restructured, reoriented and recapitalized public enterprises to improve their efficiency and strengthen their competitive position. In many countries these reforms have paid off handsomely, as a result of which public enterprises have managed not only to cover their costs and make profits but also to contribute to the government treasury.

172. The process of reform should continue to deepen and broaden the efficiency and profitability of these enterprises. Concomitant with their reform governments should also consider the most opportune mechanism to spin them off as private concerns. One possible avenue for their divesture with positive impact on resource mobilization is to convert them into limited lability companies with shares made available to the wider public, especially the small savers. Such a process of governmental disinvestment would lead to an increase in government income relative to what it would be under the wholesale privatization, beside spurring the development of capital market as a means of mobilizing domestic financial resources.

7. Rationalizing government expenditure

173. On the expenditure side, a rise in state revenue constitutes a powerful incentive to step up public expenditure. During the last few years, expenditures have been rising in many African countries because of: increased outlay for social services; general government administration; defence and security, subsidies to public enterprises and utilities, debt service payments, etc., without a concomitant rise in revenue. In some African countries efforts are being made to limit recurrent expenditures by streamlining administrative services, making public enterprises self-financing and through cost-sharing in social services. In spite of these measures the fiscal potential for mobilizing developmental resources in African countries has not yet been fully exploited. Therefore, government should design and adopt a program of austerity with efficient use and strict control of budgetary expenditures to eliminate internal leakages in the form of wasteful expenditures, and shift savings to finance investment. In this connection, African Governments need to introduce and further enhance cost-effective operations and revise their defense and security related outlays. Although significant strides have been made by a number of countries, more needs to be done to divert resources from these lines of expenditure to more productive uses. 174. Overall, it is essential to underline once again the imperative of domestic resource mobilization in fostering and sustaining enduring socio-economic transformation in Africa. African countries urgently need to develop appropriate modalities and policies for tapping into the huge potentials of domestic resources.

1. *These countries are the following: Benin, Bolivia, Burkina Faso, Cameroon, Central African Republic, Chad, Cote d'Ivoire, Equatorial Guinea, Ethiopia, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Senegal, Sierra Leone, Tanzania, Togo, Uganda, Viet-Nam, Zaire, Zambia.

2. *The cut-off date is the date before which loans must have been contracted in order to be considered by the rescheduling agreement. Usually the cut-off date is determined at the first rescheduling and will remain unchanged in subsequent reschedulings.