Securing Sustainable Solutions to the African Debt Crises

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Glossary of Terms

Adjustment A general change in the orientation of economic policies intended to improve a country’s long-term economic performance or to respond to changes in the international economic environment. Adjustment may comprise macroeconomic adjustment and/or structural adjustment. The IMF generally uses the term 'adjustment' to refer to the former, and the World Bank to the latter.

ACP countries The group of former European colonies in Africa, the Caribbean and Pacific that are eligible for preferential treatment under various European Economic Commission (EEC) arrangements, such as Stabex, the Common Agricultural Policy. (ACP is an abbreviation for Africa, Caribbean and Pacific.)

AID Financial or Technical Support for the economic development of poor countries. It is any flow of capital to Less Developed Countries (LDCs) that meets two criteria (i) Its objective should be non-commercial from the point of view of the donor, (ii) It should be characterised by concessional terms; that is the interest rate and repayment period for borrowed capital should be softer (less stringent) than commercial terms. The concept of foreign aid widely used is one that encompasses all official grants and concessional loans, in currency or in kind, that are broadly aimed at transferring resources from developed to less developed nations.

Amortisation (Liquidation of the principal). Gradual paying off of a loan principal or the gradual reduction of loans.

Arbitration - The procedures under which parties to a dispute refer it to a third entity for a final decision. It is one of the alternative methods of resolving disputes outside the traditional court system. It is a means of dispute settlement where a third party makes the final decision. Currently AFRODAD is working on a fair and transparent arbitration mechanism proposal that would see a neutral body (arbitrator) at the global level presiding over debt disputes between debtors and creditors. Debtor governments and citizens have called for debt cancellation of Third World debt because they believe it is illegitimate and odious. Creditors on the other hand, have argued that the debt is a result of economic mismanagement, and that cancelling it would encourage mismanagement and would also upset the international financial system. A neutral arbitration court is therefore proposed as a solution to this problem of debt.

Article IV Consultation - This refers to the regular consultation held by the IMF with member countries to discuss their economic and financial policies. IMF staff conducts the consultations and the Executive Board then discusses their report. Such consultations take place under Article IV of the IMF's Articles of Agreement.

Attachment - the legal seizure of assets belonging to a debtor by a creditor in the event of de jure default on the debt owed to the creditor, or the triggering of a cross-default clause as a result of de jure default on another debt. Attachment of assets by a creditor is limited to the value of the debt outstanding to that creditor. In practice however, attachment of assets is extremely rare, largely because of the practical problems and limitations of the mechanism which include the following: the requirement of a de jure default ruling delays the process substantially; only assets belonging to the debtor institution itself can be attached; most debtor governments have relatively few overseas assets and much of what they have is protected by diplomatic immunity; the remaining assets can be protected by financial manipulations (such as the transfer of nominal ownership to a new agency unencumbered by foreign debt); furthermore, the existence of cross-default clauses means that there would be considerable competition among creditors to attach what assets were available. Thus the benefits to creditors from attachment are very limited and are outweighed by the effect attachment would have on relations with the debtor concerned and other borrowers.

Arrears - refers to the backlog of debt payments that have not been made and are building up over time. For example, as of March 2002 Zimbabwe owed the IMF a total of US$282.4 million in arrears and in 2001 its arrears to various creditors amounted to US$70 million.

Balance of Payments - a country’s receipts and expenditure in international transactions. Balance of payments refers to the difference between a country’s merchandise exports and imports i.e. its net receipts of foreign exchange from international trade in goods.

Balance of Payment Accounts - a summary statement of a nation’s financial transactions that focuses on payment or receipts of foreign exchange. It is divided into three components - the current account; the capital account and the cash reserve account. The current account focuses on the export and import of goods and services, investment income, debt service payments, private and public net remittances and transfers. The capital account focuses on direct private investment, foreign loans (private and public), minus amortisation, increase in foreign assets of domestic banking system and resident capital out flow. The cash reserve account or the international reserve account focuses on increase or decrease of cash account and it is lowered whenever total disbursements on the current and capital accounts exceed total receipts.

Balance of Trade - a situation in which the value of a country’s exports and the value of its imports are equal. The supply and demand equation for a country’s exportable and importable products to trade is always at a balance.

Bank for International Settlements (BIS) - the worldwide organisation of central banks, which is one of the multilateral institutions that have extended loans to Third World countries. BIS played an important role in the early stages of the debt crisis after 1982, by providing bridging loans to major debtor countries whose IMF programmes had been delayed by negotiations with commercial banks for new loans. These bridging loans were repaid from the first drawings from the fund when the programmes came into effect. This was the first attempt to tackle the problem of financing assurances, but came to an end as the BIS became increasingly reluctant to provide such loans due to the risk attached to them.

Basket Case - a phrase used mainly in the Paris Club to denote a country which is totally insolvent (solvency means the ability of a country to meet its foreign exchange obligations in full over the long term as opposed to its liquidity) and based on current expectations, has no possibility of ever servicing its debt in full.

Bilateral Debt - is debt owed by one government to another. It usually results from aid loans or guaranteed export credits on which the guarantees have been called. For example, the government of Ghana can owe the government of Japan $300 million as a result of loans advanced to Ghana for its development projects and programmes.

Bond - a form of debt that is transferable between creditors and bears interest at a fixed or floating rate. For example the zero-coupon bond used in some debt reduction packages under the Brandy Initiative. Bonds are generally repaid in a single instalment and are often bought by individuals or by other financial institutions rather than by commercial banks, which have historically preferred other forms of lending, such as syndicated loans.

Brady Plan - a programme launched in March 1989 to reduce the size of outstanding Least Developed Countries (LDCs)’ commercial debt through private debt forgiveness procured in exchange for IMF and World Bank debt guarantees and greater LDC adherence to terms of conditionality. Named after former US Treasury Secretary Nicholas Brady, the initiative was to encourage voluntary debt reduction and debt-service reduction by commercial banks, through the provision of enhancements to the value of reduced debts in the form of rolling guarantees on interest payments and/or collateral for principal repayments and by financing debt buy-backs. The Initiative met, at best, with limited success. The negotiation process proved to be very slow, so in the end very few countries benefited. The resources available for debt reduction were limited, the percentage reduction in the debt under the enhancements approach was limited; the debt reduction which was achieved was partly offset by the increased official lending which financed it and the use of non-additional official lending and the debtor country's reserves further tightened the short-term foreign exchange constraint facing the country. In the longer term, there is a risk that the large volume of debt which needs to be reduced to achieve a given degree of debt reduction will reduce the base for new loans in future and limit the scope for any further efforts at debt reduction.

Bretton Woods Institutions - the Bretton Woods conference of 1944, brought together 45 countries to plan the terms of post World War II international economic co-operation, created the International Monetary Fund (IMF) and World Bank to rebuild international goods and capital markets, as well as the war-torn economies of Western Europe. At the time, it was felt that the stabilisation of international capital markets was essential for the resumption of lively international trade and investment. This concern led to the establishment of the IMF, to monitor and stabilise the international financial system through short term financing of balance of payments deficits.

The World Bank’s complementary role involved financing the reconstruction and development of member countries, primarily through the construction of national infrastructure. An attempt was also made to establish an international organisation to encourage the liberalisation of trade among countries, eventually leading to the creation of the General Agreement on Tariffs and Trade (GATT). The institutional structure provided by these organisations has facilitated the international flow of goods and capital, though there remains considerable dispute over the extent of their effectiveness. Although the policies of the IMF and the World Bank have changed considerably since the inception of the organisations, the institutional framework laid out at Bretton Woods remains intact and continues to exert tremendous influence over the global economy. This applies especially to Third World countries, whose ability to attract foreign capital is largely determined by the stance of the IMF and World Bank.

Capital account An account that tracks the movement of funds for investments and loans in and out of a country and makes up part of the balance of payments. The capital account of the balance of payments comprises all transactions in an economy's foreign financial assets and liabilities, including capital transfers and acquisition or disposal of non-financial items e.g. patents

Capital flight outflow of financial capital other than through legitimate channels – generally in contravention of capital controls. Capital flight usually involves the transfer of funds to a foreign country by local citizens or businesses and its sources include income from illegitimate sources, such as crime, drug dealing and tax evasion and it typically takes the form of bank deposits. There are also substantial sums of money expatriated by local residents who for political or economic reasons (e.g. expectations of currency devaluation, uncertain political environment) prefer to keep their money in overseas bank accounts or real estate. Capital flight is a serious problem for developing countries, especially the heavily indebted countries, as both the capital invested and the interest earned in foreign countries do not return to the country of origin. The major reasons behind capital flight include: restrictions on the international transfer of capital through legitimate channels; high tax rates and/or low real interest rates on domestic investments; expectations of a substantial exchange rate devaluation and fears of political instability or of expropriation of savings and investments held domestically.

Central Bank A bank, usually government-owned and operated, that controls a country’s banking system and is the sole money issuing authority. It acts as a banker to the commercial banking system and often to the government as well. In Zambia and Zimbabwe there is the Bank of Zambia and the Reserve Bank of Zimbabwe respectively. In some franc-using West African countries, because of the regional monetary integration, they have the Central Bank of West Africa operating at regional level.

Civil Society is a body of non-state development actors that includes but is not limited to the following groups (a) social groups representing women, youths, children, the elderly and disabled persons (b) professional groups and associations such as media and business organisations (c) non-governmental organisations, community based organisations and voluntary organisations (d) workers and employers’ associations. Civil society organisations are set up for various reasons including the eradication of poverty, upholding and promoting human rights and to enable the voices of the poor to be heard.

Collateral An asset used to guarantee payment of a loan or the interest on it. If the payment is not made, the ownership of the asset is transferred from the debtor to the creditor. Collateral is used as one form of enhancement to the value of debts reduced under the Brady Initiative.

Cologne Meeting Refers to the June 1999 G7 leaders meeting in Cologne, Germany, which is significant as it marked the birth of HIPC II. At this meeting, which was punctuated by civil society protests, the G7 leaders were pressurised to pledge to write-off $100 billion of poor country debts. They did this by introducing the HIPC II initiative, which was a revision of the first HIPC initiative. The review of HIPC I meant a broader, faster and deeper look at the debt relief programme and poverty reduction. At this meeting, the G7 governments committed themselves to cancelling 90% of all debt owed to them by HIPC countries and to write off $100 billion of debt owed by poor countries.

Commercial debt Debt owed to private sector creditors and the commercial banks. E.g. Arab Bank, Citibank, Deutshe Bank.

Commercial creditors These are largely commercial banks that issue loans and derive their profits from loan activities and fees charged for the provision of financial services. They make available loans or credit in the form of overdraft facilities.

Commercial risk The risk that a loan to a private sector company will not be serviced in full because of a deterioration in the borrower's financial position (as opposed to foreign exchange risk).

Common Market An agreement among a group of countries to have free trade among themselves, a common set of barriers to trade with other countries and free movement of labour among themselves. The European Union Common Agricultural Policy (CAP), Common Market for East and Southern Africa (COMESA) are examples of common markets. It is however difficult to operationalise a common market due to conflicting bilateral obligations among member countries.

Concerted lending An approach to new loans from commercial banks adopted in the early stages of the debt crisis immediately after 1982, under which a steering group representing all the banks with exposure to a particular country, collectively negotiated loans. The IMF promoted this approach and advised on the appropriate amount of such loans. Concerted lending is also referred to as involuntary lending.

Concessionality Refers to lending at lower than market interest rates, while non-concessionality refers to using market rates. Concessionality is also the extent to which the terms of a loan or rescheduling are more favourable to the borrower (in terms of the total cost of debt-service over the long term) compared to a loan in which commercial interest rates are charged. If the interest rate is below market rate, then the maturity of the loan also affects the degree of concessionality, as longer maturity enables the borrower to benefit from the lower interest rate for a long time. Concessionality of a loan or rescheduling can be measured by its grant element.

Creditworthiness The expected ability of a borrower to service their debts on time and in full. This depends on the borrower's solvency and on their liquidity at the time when debt-service payments are due. Zimbabwe was declared not creditworthy in July 1999 when it failed to service its debt to the IMF.

Creditors are those who lend and constitute official money-lenders, private and multilateral. The official lenders are the richest capitalist countries mainly US, Japan, Germany, France, England, Switzerland, Canada and Holland. Alongside them are the private commercial banks such as Citibank, Deutsche Bank and others. There are also the multilateral creditors such as the World Bank, IMF (International Monetary Financial institution), IDB (Inter-American Development Bank) and other regional development banks (Africa Development Bank and Asian Development Bank).

Cross-conditionality The principle of the World Bank to insist that its borrowers have an IMF programme in place as one of the conditions to borrow from the Bank. Cross-conditionality is strongly opposed by the borrowing members of the World Bank.

Cross-default clause A clause in a loan or rescheduling agreement which enables creditors to treat a default by a borrower under another loan or rescheduling as a default under that agreement. Because such clauses apply to most international loan and rescheduling agreements, this seriously limits the scope for debtors to differentiate between lenders in their debt management policies.

Currency Transaction Tax Sometimes referred to as the “Tobin tax” is named after James Tobin who introduced the concept in 1978. The Currency Transaction Tax is an international tax that Tobin proposed was to be levied on speculative foreign currency transactions. The tax, ranging from 0.1 to 0.5 percent, was to be levied on all foreign exchange transactions to keep in check hot money transactions such as ‘swaps’, ‘spots’, ‘futures’ and ‘forwards’ which are collectively known as derivatives. The tax aims to discourage overnight and short-term speculative currency movement without affecting production of goods, provision of services and employment creation. To date however, the tax has not been introduced anywhere in the world.

Current Account The portion of a balance of payments that portrays the market value of a country’s “visible” (for example commodity trade) and “invisible” (for example shipping services) exports and imports with the rest of the world. The current account records the flows of money resulting from a country’s involvement in the international trade of goods and services. The current account is traditionally divided into the trading account and the services account.

Debt buy-back An arrangement where a debtor government buys part of its debt from its creditors for cash (in foreign exchange) at a discount to its face value. To do this, it must first secure from all its commercial bank creditors waivers of the negative pledge clauses and sharing clauses in their loan agreement.

Debt-equity swap An arrangement where a commercial debt is in effect, converted into an investment in the debtor country. Essentially, the holder of the debt (either the original lender or a potential investor who has bought it on the secondary market) sells the debt back to the debtor government for local currency. The local currency is then used either to buy shares in an existing company (e.g. a public enterprise which is being privatised), or to buy property or productive capital (e.g. a factory) in the debtor country. Debt-equity swaps have been used extensively by some Latin American countries, most notably Chile.

Debt cancellation is writing off un-payable debts at a deep discount.

Debt Indicators are indices that depict the relationship between a country/continent’s economic production and its levels of indebtedness. The following are examples of these indicators:

•    EDT/XGS is the total external debt to exports of goods and services (including workers’ remittances).

•    Debt/GNP ratio/ EDT/GNP is the total external debt to gross national product. A country’s external debt expressed as a percentage of its gross national product, widely used as a measure of its solvency. In practice, this ratio has some limitations since it takes no account of the rate of interest charged on the debt: a country with a debt/GNP ratio of 100 percent, with an average interest rate of one percent on its debt has a much stronger solvency position than a country with an identical debt/GNP ratio but an average interest rate of 10 percent.

•    TDS/XGS also called the debt service ratio, is total debt service compared to revenues from the exports of goods and services (including workers’ remittances)

•    INT/XGS also called the interest service ratio, is total interest payments compared to revenues from the exports of goods and services (including workers’ remittances)

•    INT/GNP is the total interest payments compared to gross national product

•    RES/EDT are international reserves compared to total external debt

•    RES/MGS are international reserves compared to imports of goods and services.

•    Short –Term/EDT is short-term debt as a proportion of total external debt.

•    Concessional EDT is concessional debt as a proportion of total external debt.

•    Multilateral/EDT is the proportion of multilateral debt to total external debt.

Debt overhang refers to a situation where the debt stock of a country exceeds its future capacity to pay. A country can slip into debt overhang when the high cost of debt servicing combines with a fall in the country’s trade and economic position.  In most developing countries experiencing a debt overhang, public debt service accounts for a significant proportion of government spending, resulting in worsening fiscal imbalances. Consequently there is a decline in public expenditure on social services, education, health and infrastructure, which puts the country in an even worse economic situation.

Debt reduction A transaction that involves a reduction in the face value of outstanding debt, either through a debt buy-back or through its conversion into a new debt instrument, still denominated in hard currency, such as an exit bond. Fifty percent of the debt service consolidated is cancelled; the remainder is rescheduled at market interest rates over 23 years with a graduated repayment schedule including a grace period of 6 years.

Debt relief A term used to explain restructuring, rescheduling or refinancing of the debt of heavily indebted nations. It also includes debt reduction and servicing. Debt relief ranges from a new allocation of special drawing rights (SDR) to restructuring (on better terms for debtor countries) of principal payments falling due during an agreed-on consolidation period. The HIPC initiative is a good example of debt relief to reduce, to sustainable levels, the debt burden of poor countries, which demonstrate sound economic and social policy reforms.

Debt restructuring refers to a method where low-income countries with outstanding debt obligations negotiate with their creditors to alter the terms of the debt agreements. This is to the advantage of the indebted countries since the interest rates they pay are reduced and they are given longer repayment periods, which help them to avoid defaulting.

Debt Relief is a method used by the international financial institutions to help low-income severely indebted countries to rid themselves of debt. This involves recalculating current debt payments, interest and repayment periods.

Debt Service is what a country spends on its debts, consisting of interest payments and repayments of principal. Most African countries spend up to four times on debt service what they spend on education and health care and up to 40% of their national budgets. The debt-service ratio is a measure of a country’s liquidity, although it does not fully capture its vulnerability to short-term credit lines drying up.

Debt-service reduction A transaction that involves a reduction in the interest rate of an outstanding debt, by converting it into a new debt instrument, still denominated in hard currency. (See also Brady Initiative, debt reduction.)

Debt stock Total amount of debt held by a country, including domestic and external debt. Total debt stock (EDT) consists of public and publicly guaranteed long-term debt, private non-guaranteed long-term debt, commercial debt, the use of IMF credit and estimated short-term debt.

Debt Tribunal A court of justice with procedural rules on debt issues. Many low-income countries have accumulated debts and now face obligations that constrain their ability to support poverty reduction programmes and to finance critical growth oriented investments. Civil society activists from third world countries held a debt tribunal during the 2002 World Social Forum in Brazil to “legally resolve” their countries’ debt crisis. During the Tribunal, the blame for the debt crisis in developing countries was placed squarely on the shoulders of the international financial institutions.  

Default The failure by a debtor to fulfil any of their obligations under a loan or rescheduling agreement. The term is used more specifically to refer to failure to make interest or principal payments when they fall due. There is an important distinction between de facto default – when a country actually breaches the conditions of its loans – and de jure default – when a court with jurisdiction over a loan makes a legal ruling that a default has taken place. This is rare and has more serious consequences.

Deflation A persistent fall in the general level of prices.  The price level is the average level of all money prices and deflation is measured in terms of price indexes such as consumer price index and producer price index.

Demonetisation A reduction in the use of local currency in an economy, as a result of a shift towards the use of other means of exchange (e.g. barter, dollarisation, etc.), and/or the reduction of the amount of local currency held by residents. Demonetisation is generally a result of high rates of inflation, low real interest rates and/or the expectation of a major devaluation of the exchange rate and is reflected in acceleration in the velocity of circulation.

Deregulation A removal or reduction of government regulations and restrictions that affects the operation of a particular market or the economy as a whole. Deregulation is part of the process of structural adjustment, at least for some sectors of the economy.

Derivatives are forms of financial risk investments in futures or options markets, which make ‘hedge’ operations possible. They are used to hedge against future prices of shares, stock exchange indexes, foreign exchange, gold, interest and commodities. A company that has owes money in dollars and fears foreign exchange rate appreciation buys contracts on the futures market to protect itself against such fluctuations. If at the end of the period the value of the dollar rises, it receives the amount required to buy the currency at the new price.

Devaluation A deliberate change in the exchange rate (under a fixed exchange rate system) involving official reduction in the value of a country’s currency in relation to foreign currencies or the lowering of the official exchange rate between one country’s currency and all other currencies. A country’s currency is devalued when the official rate at which its central bank is prepared to exchange the local currency for hard currencies is abruptly increased. Devaluation is often included in macroeconomic adjustment programmes, to improve a country’s export sector competitiveness and strengthen its balance of payments. However, it can also give rise to cost-push inflation, which, over time, erodes the effect of the devaluation. Devaluation has the immediate effect of raising prices of imported goods in terms of the local currency. In most cases, this operation is designed to eliminate the accumulated balance of payments deficit.

Disbursement Payment to a borrower of all or part of the sum borrowed under a loan.

Distortion A deviation of a market from the standard model of a free market, generally resulting from government policies or direct intervention in the market, which causes the market to perform in a significantly different way from that predicted by neo-classical theory. For example a subsidy gives rise to a distortion because it artificially reduces the relative price of one good compared with others and thus increases the demand for that good and reduces the demand for substitutes.

Dollarisation A shift towards the use of dollars (or any other hard currency) as a substitute for the local currency, usually in response to high inflation rates, low real interest rates and/or the expectation of a major devaluation.

Domestic debt/ internal debt Loans owed by government to creditors resident in the country and denominated in local currency – as opposed to external debt, which is denominated in foreign currency and owed to foreign creditors. The total debt incurred by the government with physical and legal persons resident in its country. When government spending exceeds revenue, money is needed to cover the deficit. There are three ways in which authorities can deal with the situation: (a) print money; (b) raise taxes (c) offer securities. Printing new money has an undesirable inflationary effect. Increasing taxes is politically unpopular and its impact may result in recession by reducing the money in circulation. Public bond offerings are generally linked to interest rate hikes, which cause the internal debt itself to increase.

Ecological Debt Refers to the responsibility held by industrialised countries for the continuing destruction of the planet due to their production and consumption patterns. It can be called debt accumulated by Northern, industrial countries toward Third World countries as a result of resource plundering, environmental damage and the disposal of environmental wastes such as greenhouse gases, by the industrial countries. The concept of ecological debt raised by the south underlines the point that those who abuse the biosphere, transgress ecological limits and practice unsustainable patterns of resource extraction must begin to discharge this ecological debt by cancelling the debt owed by developing countries to Northern creditors.

Enhanced Structural Adjustment Facility (ESAF) An IMF facility that provides concessional financing to low-income countries, in support of macroeconomic and structural adjustment programmes. ESAF was introduced in 1988 to supplement the Structural Adjustment Facility (SAF). The adjustment programme under SAF or ESAF is set out in a Policy Framework Paper (PFP), negotiated by the recipient government jointly with the IMF and World Bank. It is accompanied by a Public Sector Investment Programme (PSIP). ESAF is financed from voluntary contributions mainly by creditor governments in loans and interest subsidies and is separate from the Fund’s own resources.

Enhanced surveillance A form of IMF support for an adjustment programme that does not entail the use of IMF resources or any real input into the programme design. Enhanced surveillance has been used where a Fund member’s new money and/or rescheduling agreements with its commercial bank creditors required it to maintain an arrangement with the Fund but the Fund did not consider it appropriate to provide a programme e.g. because there were no balance of payments needs. In practice, adjustment under enhanced surveillance has often been limited. As a result, this type of arrangement has been used in very few cases.

Exchange rate The rate at which central banks will exchange a country’s currency for another (that is, the official rate).

Exports Credit Agencies (ECAs) These are governmental or quasi-governmental entities of developed countries that subsidise and promote the country’s exports and investment abroad. They do so by providing government-backed loan guarantees and insurance to private corporations to operate in developing countries. Most industrialised nations have at least one Export Credit Agency that is usually an official or quasi-official branch of their government. ECAs are now the world’s biggest class of public finance institutions supporting private sector projects. Export credit financing is in the form of loans most of which are on non-concessional terms designed to make profit for the export credit agencies.

External debt The amount a country owes to other countries or foreign banks and to international financial institutions. Sometimes referred to as multilateral and bilateral debt. This is debt denominated in foreign currency and owed to foreign creditors, as opposed to internal or domestic debt, which is owed to creditors resident in the same country as the debtor and denominated in local currency. Most loans are on concessional terms (low-interest) and for the purpose of development projects and expanding imports of capital goods.

External liabilities External capital that penetrates an economy and must be restituted. They stem from foreign investment in production or in capital markets, among others. The external debt is also an external liability. But in referring to external debt and external liabilities, a distinction is drawn between debt resulting from foreign loans or lines of credit on the one hand and direct investments and investment in the capital markets on the other. Debt requires that principal (amortisation) be paid, plus the ‘cost of money’ or price of renting money for a given period of time (interest). Investments generate profits and dividends, which are reinvested or remitted to the capital’s country of origin. The net result for the country is that external liabilities entail decapitalisation. The decision on inflows of foreign capital into a country must therefore result from an evaluation of the costs and benefits to long-term national development and not from expectations for immediate, opportunist advantages.

Face value of debt The notional value of debt, corresponding to the total amount of principal repayments scheduled to be made on the debt by the borrower. In most cases this also corresponds to the amount originally lent to the borrower, but this is not always the case. For example, in the case of zero-coupon bonds there is a considerable difference, reflecting the absence of interest payments on the debt and the need to offer lenders large capital gains instead.

Fiscal Adjustment Focuses on government taxation and expenditure. Most developing countries have had to rely primarily on fiscal measures to stabilise the economy and to mobilise resources. With their rising debt burdens, falling commodity prices, growing trade imbalances and declining foreign private and public investment inflows, third world governments had little choice but to undergo severe fiscal retrenchment. This meant cutting government expenditures (mostly on social services) and raising revenues through increased or more efficient tax collection.

Fiscal deficit The difference between total government spending and total government receipts (including aid grants, but excluding loans). Fiscal deficits can be financed in any combination of three ways: borrowing from abroad; borrowing from domestic commercial banks and borrowing from others in the domestic economy. The first of these results in the accumulation of foreign debt, the last two in the accumulation of domestic debt. Financing through the domestic banking sector results in an increase in the money supply and is inflationary.

Floating Exchange rate A system where the value of a currency is allowed to respond to market forces without interference from central banks or other authorities. Letting the exchange rate float freely to correct payments imbalances and to prevent continued capital flight. It is also a market through which trans-national companies repatriate their profits.

Foreign direct investment (FDI) Investment made by an individual or company resident in one country in the productive capacity in another country. For example this may be the purchase or construction of a factory or the purchase of a complete company. Foreign direct investment does not include the purchase of shares in a company, which is classified as portfolio investment. Many creditor governments see foreign direct investment as an important source of financing for debt problem countries. Its advantages being that its cost to the debtor (in terms of profit remittances) is directly linked to the performance of the investment, unlike interest payments on foreign debt. This means that payments are made only if the resources are there and it is the investor rather than the recipient country that bears the investment risks. This has led to strong pressure to include reform of foreign investment codes, to allow more favourable terms to investors, as part of structural adjustment programmes. FDI is also seen as a means of transferring technology from developed to developing countries. However, direct investment also has substantial drawbacks that tend to be under-stated. These include (a) the average rate of return on direct investment (and thus the cost to the recipient country) is higher than that for foreign lending, to compensate for the higher risk (since the investor bears the commercial risk as well as the foreign exchange risk); (b) while profits are remitted only if the resources are available to the company to make them, investments do not necessarily generate additional foreign exchange earnings, so that there may be a substantial net outflow of foreign exchange from the investment; (c) transfer pricing may considerably reduce the benefits to the recipient country of the investment; (d) the transfer of technology resulting from FDI is generally limited in practice; (e) the critical need of many developing countries for investment and foreign exchange is leading them to compete by offering ever more favourable terms to investors at their own expense.

Free Trade Area A grouping of two or more countries that agree that goods produced by themselves can be traded without payment of customs duties or charges of equivalent effect. Descriptions of goods that are eligible for duty-free treatment are agreed in a set of rules of origin. The countries also agree to eliminate all non-tariff barriers (NTBS) to trade between them. A Free Trade Area is believed to enhance economic efficiency by promoting cross-border competition and offering a wider choice of products to consumers. An example of this is COMESA’s Sudan, Djibouti, Egypt, Kenya, Madagascar, Malawi, Mauritius, Zimbabwe and Zambia which since October 2000 started trading duty free on all goods originating from their territories.

GATT The General Agreement on Tariffs and Trade that was established in 1948 as a framework within which to co-ordinate the international trade policies of member countries. GATT was a set of international rules governing the trade behaviour of governments. It was also a forum for trade negotiations between governments, and a court in which trade disputes between nations could be settled. It probed how to reduce tariffs on internationally traded goods and services. GATT’s objectives were to promote free international trade by reducing trade restrictions and production subsidies that discouraged imports. It did this through periodic rounds of multilateral trade negotiations (MTNs) among its members. The past round of MTNs were called the Uruguay Round, since the agenda was finally agreed at Punta del Este in Uruguay, in 1986. The World Trade Organisation (WTO) later succeeded the GATT. (See WTO)

Global North A term used for the rich and ‘developed’ countries like Europe and the United States that are in the Northern hemisphere.

Global South refers to developing or Third World countries that are generally impoverished and situated in the South. These countries cover all countries in Africa, Asia and Latin America.

Globalisation Refers to the opening up of the world economy. It is the deregulation of trade barriers that exist among different countries. This process facilitates a free movement of goods and services from one country to another. Different national economies will be integrated into one economy, through unrestricted economic activities. The deregulation of cross border restrictions through economic integration is expected to lead to the ‘free’ movement of investment, services, capital and technology, and hence the creation of an economic ‘global village’.

Governance UNDP defines governance as the exercise of political, economic and administrative authority in the management of a country’s affairs at all levels. Governance comprises of the complex mechanisms, processes and institutions through which citizens and groups articulate their interests, mediate their differences and exercise their legal rights and obligations. The key attributes of good governance are to promote participation, transparency and accountability. It also promotes the rule of law and the equitable distribution of resources. Donor countries and international financial institutions have in recent years used a country’s governance performance as a criterion to determine their assistance. The IMF has used it as a political conditionality and reason to refuse to provide balance of payments support to several African countries.

Grace period Under a loan or rescheduling agreement, the period during which no principal payments are made- that is, from disbursement (or the end of the consolidation period) to the beginning of the repayment period. In general, interest is payable during the grace period. The grant element is then the value of the notional grant as a percentage of the value of the concessional loan.

Grant element A measure of the concessionality of a loan or rescheduling agreement. In effect, a concessional loan is considered as if it were made up of a loan of similar maturity on commercial terms and a grant, such that the total of the two is equal to the amount of the concessional loan, and the net present value of debt-service payments under the two arrangements is the same. The grant element is then the value of the notional grant as a percentage of the value of the concessional loan.

Grant An outright transfer payment, usually from one government to another (foreign aid); a gift of money or technical assistance that does not have to be repaid.

Gross Domestic Product (GDP) The total value of output produced in the whole economy over a set period, usually one year. It is one of the two commonly used measures of the total output (or income) of an economy, the other being GNP. The difference is that GDP refers to the total final output of goods and services produced by a country’s economy, within its territory, by residents and non-residents, regardless of its allocation between domestic and foreign claims. It excludes net factor income from abroad (that is interest and profits from overseas loans and investments, less payments on foreign debts and investments in the country and net receipts of workers’ wages).

Gross National Product (GNP) Income earned by residents in return for contributions to current production, whether production is located at home or abroad. It is equal to GDP plus net property income. GNP is one of the two commonly used measures of the total output (or income) of an economy, the other being GDP. The difference is that GNP includes net factor income from abroad (that is, interest and profits from overseas loans and investments, less payments on foreign debts and investments in the country and net receipts of workers’ remittances).

Group of Seven/eight (G7/ G8) The seven leading industrialised nations comprise of the United States, Canada, Great Britain, France, Germany, Japan, and Italy), who meet annually to discuss global economic issues. A few years ago Russia was admitted to the group due to its still significant geopolitical influence and nuclear capability, thus constituting the G8. The G8 is an intergovernmental summit that meets frequently to formulate common economic policies and solve conflicts arising from political and economic disputes. It is the most influential group of developed countries in terms of its role in setting up of policies in the international financial system.

Growing out of debt The idea that a country will ultimately be able to service its debts, provided that its economic growth rate is faster than the real growth rate of its external debt. This formed part of the basis of the idea of ‘floating off’.

Guarantee export credit A loan to finance an export contract, usually made by the exporting company or a commercial bank, on which part or all the repayments are guaranteed against foreign exchange risk by the government of the exporting country. Such guarantees are issued by export credit guarantee agencies. In the UK, it is the Export Credit Guarantee Department (ECGD).

Hard Currency A term used to refer to any currency that is widely enough accepted internationally to be used in international transactions. The currency of a major industrial country, such as the US dollar, the German mark, the Euro, the Japanese yen, that is freely convertible into other currencies.

Heavily Indebted Poor Countries (HIPC) Initiative An initiative created by the World Bank and IMF to provide limited debt relief for the poorest countries with the goal of bringing the countries to a ‘sustainable’ level of debt.  According to the World Bank, there are 41 countries, 33 of them in Africa, with exorbitant, un-payable external debts. In 1996 they owed foreign creditors US$217 billion, most of it to governments of wealthy countries and multilateral agencies. HIPC benefited only a few countries and even these countries were subjected to intolerable conditionalities. Post-war Germany was granted a ceiling on its external debt service payments equal to 5 per cent of the value of its exports, while these countries are obliged to meet a ceiling of 20-25 per cent.

HIPC I Refers to the first HIPC initiative. In 1996, under the aegis of the World Bank, western government creditors launched a half-hearted debt cancellation initiative-the Heavily Indebted Poor countries (HIPC) initiative. A total of 41 countries were identified as effectively insolvent, Heavily Indebted Poor Countries (HIPCs). It was hoped that the initiative would help set the level for “sustainable “ debt after 1999 and would free resources for investment in education, health and drinkable water. But the initiative was ineffective. Mozambique, for example, received debt cancellation in 1998- but within a year it was back to where it started with an unsustainable debt burden. It ended up paying 1% less in debt repayments than before HIPC. It was unfortunate that the creditors squabbled for at least three and half years before providing any relief. By June 1999, only 2.6% of the debts of 41 countries had been written off and only four countries – Uganda, Mozambique, Guyana and Bolivia – had received any debt relief.

HIPC 11 A revision of HIPC I, which is better known as Enhanced HIPC.  By 1999 it was clear to the creditor countries that HIPC was ineffective and that few countries would qualify for debt relief. Under pressures from NGOs and other advocacy groups, the leaders of the G8 countries met in Cologne, Germany June 1999 and proposed significant revisions to the HIPC initiative. In reviewing HIPC1, the G8 members promised to cancel a higher percentage of bilateral and multilateral debt. To ensure that more countries were eligible for debt relief, the Cologne Debt Initiative lowered the export ratio to 150%.  The time frame for debt reduction was shortened by introducing the concept of a ”floating completion point” that provided some flexibility in deciding when a country would be eligible for receiving debt relief.  The number of countries expected to be qualify for the CDI is 33, up from the 26 under the original HIPC Initiative.

Human capital Refers to productive investment embodied in human beings. This includes skills, abilities, ideals and health that derive from expenditures on education, on-the–job training programmes and medical care.

Illegitimate debt Debt is considered illegitimate if it emanates from loans procured in a way deemed to be against the law, is unfair, improper, objectionable or infringes on public policy. The World Social Forum 2001 identified the following types of debt as illegitimate: debt that cannot be serviced without causing harm to people or communities; odious debt contracted to strengthen a despotic regime; debt contracted for fraudulent purposes; debt whose proceeds were stolen through corruption; debt for projects that were never built or from loans that were not put to the use for which they were contracted; debt incurred at usurious interest rates; debt that became unpayable as a result of creditors unilaterally raising interest rates and private loans converted to public debt under duress in order to bail out lenders. The notion of illegitimate debt dates back to the end of the 19th century when the United States gained control of Cuba after a war with Spain. The latter demanded that the victor take on the Cuban debt to the Spanish crown in accordance with international law. The United States negotiating commission refused to do so on the grounds that the debt “was a burden imposed upon the Cuban people without their consent”. (See also odious debts)

Intellectual property rights Refers to the rights of ownership of ideas, including inventions, literary and artistic works, signs for distinguishing the goods of an enterprise and other elements of industrial property that are legally admissible and protected. This ranges from copyright to such things as computer programs, sound recording and films; trademarks; industrial designs such as textile designs; patents for invented products or processes to layout designs of integrated circuits. Protections of such rights tend to confer a monopoly status of rights on the owner as other persons are excluded from using those granted. All members of the GATT are now obliged to have legislation that protects the owners of rights against counterfeiters, copiers, pirates and other unauthorised users, for a specified minimum period of time. Patents are protected for a minimum of 20 years and trademarks for a minimum of seven years. In many developing countries (e.g. India) patenting laws are designed not so much to protect the interests of patent holders as to encourage the transfer of technology for the benefit of the country as a whole.

Interest Payments is the price of renting money. It is paid to borrow a certain amount of money for a period of time.

Interest Service Ratio/Export of goods and Services (INT/XGS) Also called the interest service ratio, is total debt service compared to revenues from the export of goods and services (including workers’ remittances).

Interim PRSPs are policy documents prepared by governments when there is insufficient time to prepare a full PRSP. These describe the government’s commitment to poverty reduction and the main elements of its poverty reduction strategy; a three year macroeconomic framework and policy matrix; commitments to a timeline and a consultative process by which a full PRSP will be formulated with the IMF, World Bank and other creditors and donors. Interim PRSPs are prepared for a country to qualify for (a) its decision point relative to the HIPC Initiative or (b) Fund Board approval of the new IMF arrangements (through the Poverty Reduction and Growth Facility (PRGF) or the review of annual IMF programmes.  (See also PRSPs)

Internal debt/Domestic debt (see domestic debt).

International Bank for Reconstruction and Development (IBRD) The branch of the World Bank established following the Bretton Woods Conference of 1944. Its principal concern was rebuilding economies shattered during World War II. But now it is responsible for providing loans on commercial terms to borrowing governments or to private enterprises that have government guarantees. The World Bank is made up of three main divisions: the International Bank for Reconstruction and Development (IBRD), which lends mainly to the governments of middle-income countries while the International Development Association (IDA), lends only to governments of low-income countries and the International Financial Corporation (IFC), lends to and invests in private sector companies in developing countries.

International Financial Institutions (IFIs) Institutional system governing international transfers of resources, whether in the form of loans, investments, payments for goods and services, interest payments and profit remittances. The centre of the international financial system is in the IMF, that has the mandate to ensure its smooth functioning.

International Monetary Fund (IMF) One of the autonomous international financial institutions that originated from the Bretton Woods Conference of 1944, the other being the World Bank.  The IMF has played a central role in the debt strategy since 1982, primarily through its role of setting conditions for loans and debt relief. As an international agency, the IMF is responsible for the operation of the international financial system. Its main role is to supervise the policies of member states on international payments and, in effect, as a lender of last resort for the world economy. It regulates the international monetary exchange system, which also stems from that conference but has since been modified. One of the IMF’s central tasks is to control fluctuations in the exchange rates of world currencies to reduce balance of payments problems. All its loans are conditional on an adjustment programme designed to ensure greater mobility of international capital and to impose far-reaching cuts in areas strategic to the country development (health, education, etc). The IMF is run by its shareholders (member countries) whose percentage of vote is determined by the amount of money they put in. The US has the biggest percentage of votes and is therefore the largest shareholder and can exercise virtual veto powers.

IMF facilities The general term for the different types of lending offered by the IMF to its members. The main facilities are the stand-by-arrangement (SBA), the Extended Fund Facility (EFF), the Structural Adjustment Facility (SAF) or the Extended Structural Adjustment Facility (ESAF), and the Compensatory and Contingency Financing Facility (CCFF). In the IMF, a member country’s contribution to the IMF, determines its voting strength and the amount it can borrow from the fund.

International Reserves/Imports (RES/EDT) government’s holdings of foreign exchange, usually held by the Central Bank. International reserves represent a cushion against adverse external developments, such as lower export volumes or prices, higher international interest rates, or lower foreign lending than expected, allowing the country to maintain imports at a higher level than would otherwise be possible, on a temporary basis. In assessing the level of international reserves, the number of months of imports they would pay for is the most commonly used criterion.

Inflation is when there is too much money chasing too few goods resulting in general price increases and or rising production costs.

Insolvency Right not to pay debt due to the inability of a country to meet its foreign exchange obligations in full over the long term. For example, under the London Accords reached in 1953, Germany’s debt inherited from the Nazi regime was totally pardoned. Many Third World countries are in similar economic circumstances to post-war Germany.

Letter of intent Statement of economic policies negotiated by the IMF and the authorities of one of its members as a basis for an IMF programme. This takes the form of a letter from the authorities to the Managing Director of the Fund.

Liquidity Ability of a country to meet its immediate foreign exchange obligations (for imports and debt-service payments) from its receipts (from exports and new borrowing) as opposed to its solvency.

Loan Transfer of funds from one economic entity to another (government to government, individual to individual, bank to individual) that must be repaid with interest over a prescribed period of time. Hard loans are given at market interest rates; soft loans are given at concessional or low rates of interest.

Lome Convention Agreement signed between members of the EEC and the ACP countries in 1975 (in Lome, Togo), allowing for preferential access to the EEC for exports from the ACP countries and providing financial and technical assistance. Negotiations take place every four to five years.

London Club A concept rather than an institution. It refers to a general term, for rescheduling negotiations on commercial bank/private creditors debts. The term originated by analogy with the Paris Club, since bank negotiations at that time took place mainly in London. The London Club has no fixed membership and no permanent secretariat.

Long-term debt: Comprises the public debt, debt guaranteed by the public sector and the non-guaranteed private external debt. Long-term debt is associated with loans with original or rescheduled payback periods of over one year.

Long-term external debt is defined as debt that has an original or extended maturity of more than one year and that is owed to non-residents and repayable in foreign currency, goods or services.

Low-income Country A country whose gross national product (GNP) per capita is below a certain level. The most commonly used categorisation is that of the World Bank, defined in 1989 as a country with GNP per capita of $580 or less in 1989. The actual threshold between low- and middle-income countries varies somewhat over time (largely reflecting the effects of inflation and exchange rate changes). The categorisation of countries between income groups varies between institutions due to differences in estimates of GNP per capita.

Marshall Plan A massive programme of financial aid from the US and Canada to Europe, started in 1946 for the reconstruction of the war-torn economies of Western Europe, as well as to pull them out of their debt crisis and extreme shortage of foreign exchange. It is often argued that the Marshall Plan was also a means of containing the international spread of Communism. The Marshall Plan is frequently referred to as a precedent for proposals of large-scale financial assistance to developing countries in response to the debt crisis.

Maturity The total length of time between disbursement of a loan and the final scheduled payment on it. The maturity of a loan is generally divided between a grace period and a repayment period. Paris Club Agreed Minutes specify the first and last payment dates, but do not refer to the length of the grace period or to the maturity. Grace periods and maturity on rescheduled current maturities are counted from the end of the consolidation period. In the case of the rescheduling of arrears and late interest on arrears, they are measured from the beginning of the consolidation period.

Medium-term debt: debt with an original maturity of more than 12 months.

Medium and long-term debt is debt with an original maturity of more than 12 months. Normally no distinction is made between medium-term debt and long-term debt. The latter expression is often used in exactly the same sense.

Mexico Crisis Refers to the liquidity crisis faced by Mexico in August 1982, when the government announced that it could no longer make principal payments on its debts when they fell due. This is generally seen as the beginning of the current debt crisis, although some countries (several African countries from the late 1970s, and Poland in 1981) had already encountered debt problems. The Mexico Crisis was significant mainly as a psychological watershed. It demonstrated that even what was seen as a relatively secure borrower could turn out to be a bad risk. This led to a general loss of confidence among banks in lending to developing countries, which in turn caused the liquidity squeeze that precipitated the debt crisis.

Millennium Development Goals (MDGs) These are development goals that all the 189 United Nations Member States have pledged to work towards and attain by 2015.These include eradicating extreme poverty and hunger; achieving universal primary education; promoting gender equity and empowering women; reducing child mortality; improving maternal health and combating HIV/AIDS, malaria and other diseases. Most important are the goals of reducing by half the proportion of people living on less than one US dollar a day, reducing by two thirds the mortality rate among under-five children and reducing maternal mortality by three quarters.

Moderately indebted A category of countries referred to by the World Bank, with a debt burden that is considered to be substantial, but less serious than that of the severely indebted countries. A country is considered to be moderately indebted if it meets three of the following four criteria: its debt/GNP ratio is between 30% and 50%; the ratio of its external debt to its exports of goods and services is between 165% and 275%; its debt-service ratio is between 18% and 30%; and the ratio of its interest payments to its exports of goods and services is between 12% and 20%.

Moral hazard This refers to the risk that a certain policy action will, in practice, give economic agents an incentive to act in a way which will make the policy itself ineffective, unworkable or counterproductive. Thus, for example, if a system were developed where a country’s debt was written off automatically if it reached a certain level, this would give governments an incentive to over-borrow in the knowledge that they would receive the benefit of the loan without incurring the cost of repaying it. The hard-liner creditor governments often invoke moral hazard as an argument against any attempt to cancel the debt of developing countries. To do so, it is argued, would be to reward irresponsible borrowing in the past and this would encourage similar behaviour in future.

Moratorium (plural moratoria) The temporary suspension of payments of interest and/or principal on external debt. A moratorium may be an immediate response to a critical foreign exchange shortage (e.g. Mexico in 1982) or part of a confrontational policy towards creditors (e.g. Peru in 1986); or it may take the form of an agreement with creditors that payments will be suspended pending negotiations on rescheduling.

Multi-lateral debt Refers to debt owed to a consortium of creditors like the World Bank or a regional development bank. Multilateral institutions normally extend loans to Third World countries, especially Africa for development projects and programmes. These multilateral institutions include the International Monetary Fund (IMF), the Bank for International Settlements, International Bank for Reconstruction and Development (IBRD), the European Monetary Institute, the Organisation for Economic Co-operation and Development (OECD) as well as regional organisations such as the African Development Bank (ADB) and the Asian Development Bank.

Neo-liberal economic paradigm is sometimes referred to in short as the “market paradigm”, the “free market” or the “Washington Consensus”. It is a set of economic values and institutions based on a belief that there can be ‘a totally free market” in which unregulated competing economic relationships of individuals in pursuit of economic gains can lead to optimum good under ‘the invisible hand’. The paradigm is preoccupied with economic growth but neglects issues of equity and ethics.

Net Present Value (NPV) A measure of the overall value of a stream of payments over time. There are two ways to measure debt and figures are reported both ways (1) ‘nominal’ being the face value of the money owed (2) NPV being the amount of the money that would be required to pay off the debt immediately. This includes all the future debt service obligations (interest plus principal), discounted at market interest rates. This is lower than nominal debt when the money has been lent on ‘concessional’ terms (i.e. below market rates), as NPV reflects the ‘grant’ element of the loans. It is estimated that NPV is about 54% of nominal debt for the HIPCs.  In effect, the NPV represents the amount that would need to be invested at a commercial rate at the beginning of the period of the payments, such that with accumulated interest, it would be just adequate to meet all the payments as they fall due. Thus, the NPV of the interest and principal repayments on a loan at a commercial interest rate is equal to its face value, while that for a concessional loan is less than its face value.

New Partnership for Africa’s Development (NEPAD) An economic policy development initiative, designed and driven by African leaders for the renewal and resuscitation of Pan-Africanism. The continental initiative is the brainchild of presidents Thabo Mbeki (South Africa), Olusegun Obasanjo (Nigeria) and Abdoulaye Wade (Senegal) to address Africa’s massive poverty and global marginalisation. Its primary objectives are to place African countries, both individually and collectively, on a path to sustainable growth and development by accelerating the eradication of poverty and inequality, promoting empowerment and economic integration of women, as well as halting the marginalisation of Africa in the globalisation process. Among its key principles is the redevelopment of the continent, the resources and resourcefulness of the African people and by creating conditions that make African countries the preferred destination for both domestic and foreign investors. It seeks to mobilise international trade, foreign direct investment, debt relief and aid to boost economic growth in the world’s poorest continent. Most of the resources required for this would be mobilised by the private sector. To receive this assistance, it is proposed that African leaders must commit themselves to good governance and democracy because sustainable development is not possible without these preconditions.

Odious Debt Debt resulting from loans secured through corruption, usurious loans, and certain debts incurred under inappropriate structural adjustment conditions.  The issue here is the nature of the regime, the appropriateness of its borrowings and usage of loans. For a debt to be considered odious: 1) the money must have been borrowed without the nation’s consent; 2) the funds borrowed must have been contracted and spent in a manner that is contrary to the nation’s interests, and; 3) the creditor must be aware of these facts

Official Creditors These are public sector creditors including creditor governments and multilateral agencies such as the IMF and World Bank. Africa depends more on official borrowing and less on commercial borrowing from international banks. Largely, creditor government’s agencies such as USAID, CIDA, DANIDA extend loans or ministry of Foreign Affairs or Development co-operation of some donor countries usually sign for loans during or after annual consultations.

Official debt is debt that is owed to public sector lenders.

Over-heating The growth of demand in an economy at a faster rate than supply, in a situation where there is little or no spare productive capacity and (usually) a foreign exchange constraint limiting the level of imports. This gives rise to excess demand in the economy and consequently to rising inflation and pressure on the balance of payments. Overheating most commonly arises from misjudgements by governments in macroeconomic policy and was the main reason for the failure of the Brazilian and Peruvian moratoria of 1985-86.

Overseas development assistance (ODA) The more formal expression for aid-grants or concessional loans from developed country governments or international agencies to finance development projects or relief programmes or for balance of payments support. The latter is generally referred to as programme aid.

Paris Club The forum in which creditor governments meet to negotiate the rescheduling of the debts owed to them – manly aid loans and guaranteed export credits. It is also a meeting place for lending and borrowing nations, hosted by the French finance ministry, to negotiate Third World debts to government lenders. The Paris Club originated in 1956 as an ad hoc group to discuss the rescheduling of Argentina’s debt. It remained a very informal arrangement until the late 1970s, with rescheduling terms decided on an ad hoc basis for each country, on the basis of the debtor country’s needs and the precedents established by previous cases. Since then, however, and as rescheduling has become more frequent, the Paris Club’s meetings have become more regular and its procedures and terms more standardised – although it retains the original principle of always reaching decisions by consensus rather than by voting. The Paris Club agrees on the basic terms of the rescheduling – the consolidation period, the cut-off date, the grace period, the repayment period and the coverage of the agreement – which are set out in the agreed minute. However, the agreed minute has no legal status and the rescheduling is actually put into effect by a series of bilateral agreements negotiated separately by each creditor some time after the Paris Club agreement. The bilateral agreements also set the interest rate on the rescheduling for the debts owed to each creditor. The agreed minute only states that a commercial interest rate should be charged.

Participation A collective sustained effort to achieve common objectives, especially more equitable distribution of the benefits of development. In its narrow connotation, it refers to the active engagement of citizens with public institutions, an activity that falls into well-defined modes of voting, election, campaigning and contracting/pressuring either individually or through group activity including non-violent protests. Participation can also be defined as a process of decision-making by citizens in development and related processes.

Poverty Reduction Strategy Paper  (PRSP) A national programme for poverty reduction that forms the basis for lending programmes and HIPC debt relief with the IMF and the World Bank.  A PRSP describes a country's macroeconomic, structural and social policies and programmes to promote growth and reduce poverty, as well as associated external financing needs. Governments prepare PRSPs through a participatory process involving civil society and development partners, including the World Bank and the International Monetary Fund (IMF). PRSPs outline a country’s progress in poverty diagnostics based on good indicators of poverty reduction, a shared societal vision on desired poverty reduction goals reached through a participatory process and participatory monitoring and implementation of poverty reduction programmes.

The PRSP is closely linked to the Bretton Woods Institutions’ Anti-Poverty Framework of 1999 that highlighted the consensus on prioritising poverty reduction in development lending to correct the limitations of past economic structural adjustment funding. A PRSP provides the basis for assistance from the Bank and the Fund as well as debt relief under the HIPC Initiative. PRSPs should be country-driven, comprehensive in scope, partnership-oriented and participatory. The PRSP has become the pre-qualification condition for multilateral debt relief.  For a country to reach Decision Point, it must produce a PRSP. Among other things, the PRSP is expected to clearly demonstrate how resources saved from debt relief are going to be spent.
Private debt Debt owed by private sector borrowers. (This should not be confused with commercial debt, which is owed to private sector creditors.)

Private non-guaranteed external debt An external obligation of a private debtor that is not guaranteed for repayment by a public entity, i.e. by the government of the country in which the private debtor lives.

Privatisation the sale or transfer of state-owned enterprises, or shares in them, from the public to the private sector. In the context of adjustment, privatisation has two objectives: to increase the efficiency of the economy (based on the assumption that private sector companies are more efficient than those in the public sector) and to reduce the fiscal deficit by producing capital revenue for the government. In practice, while the proceeds from privatisation reduce the deficit in accounting terms, it is questionable whether they have this effect in economic terms or whether they represent a source of financing of the deficit, since their sale does not actually increase the government’s net assets.

Principal Repayments The amounts of principal (amortisation) paid in foreign currency, goods or services in a specified year.

Public debt Debt owed by public sector borrowers to international creditors. This should not be confused with official debt, which is owed to public sector creditors.

Public expenditure The total spending of all branches of government – national, regional and local – and of other agencies in the public sector (e.g. health and educational institutions or authorities), including the net losses of state-owned enterprises (rather than their total expenditure). Public expenditure as a proportion of GDP is often used as an indicator of the importance of the public sector in the economy. Adjustment programmes generally aim to reduce real public expenditure, except where it has already been eroded to an unsustainable low level in the pre-adjustment period.

Publicly guaranteed debt Debt originating from loans made to state-owned enterprises or private companies, the servicing of which has been guaranteed by the government of the debtor country.

Regional integration Refers to the unification of neighbouring states working within a framework to promote the free movement of goods, services and factors of production and to co-ordinate and harmonise their policies.  This might involve convergence of trade, fiscal, debt management and monetary policies as a prelude to integration. It can also be defined as a process and a means by which a group of countries strive to increase their levels of welfare – reduction of poverty, indebtedness and economic malaise.  It recognises that partnership between countries can achieve this goal more efficiently than unilateral or independent pursuance of policy in each country. In Africa, regional integration was also introduced to promote development among African countries as well as help reduce indebtedness and dependence on western countries. Sub-regional integration structures include organisations such as the Southern Africa Development Community (SADC) and the Economic Community of West African States (ECOWAS).

Repudiation A situation where a country refuses to pay its debts. Most African governments fear that if they refuse to pay their debt they might lose access to credit and international trade. However, many NGOs in the South have been calling for indebted countries to come together in ‘debtor cartels’ and repudiate the debt as a group. If they are refused access to trade and credit they would be able to relate among themselves.

Rescheduling Deferment of payments of principal and/or interest due on loans by agreement with creditors.

Restructuring A general term for alteration of the terms of a debt by agreement with creditors.

Severely indebted A country classification used by the World Bank, representing those countries with the heaviest debt burdens. A country is considered to be severely indebted if it meets at least three of the following criteria: - its debt/GNP ratio is more than 50%;  the ratio of its external debt to its exports of goods and services is more than 275%; its debt-service ratio is more than 30% and the ratio of its interest payments to its exports of goods and services is more than 20%.

Short-term external debt is debt that has an original maturity of one year or less.

Solvency The ability of a country to meet its foreign exchange obligations in full over the long term – as opposed to its liquidity.

Special drawing rights (SDR) The unit of account used by the IMF. The SDR is a currency basket, made up of the US Dollar, the Pound Sterling, the Japanese Yen, the French Franc and the Deutschmark. The relative weight of each currency in the composition of the SDR is up-dated periodically. The SDR generally fluctuates in value between about US$1.00 and $1.40.

Stolen Wealth Refers to funds secured by a government or ruler and appropriated illegitimately by the ruler or his officials. The issue here is the wrongful use of state coffers/funds for personal gain. An example of this has been the Abacha case in Nigeria in which the former military ruler stole huge sums of money and banked it in his personal accounts overseas.

Structural Adjustment Programme (SAP) A programme or a process to make the economy of a developing country more efficient, more flexible and better able to use resources. It has two important features: trade liberalisation and the reduction of government expenditure. Within these two lies the conditionalities imposed on countries that seek to use the bank’s resources. Some of the conditionalities are decontrolling prices, economic deregulation, and removal of subsidies, privatisation, wage restraints and currency devaluation. The goals of a structural adjustment programme are to reduce state intervention in the economy and increase the production of goods for export. According to the World Bank and IMF a structural adjustment programme seeks to even out the balance of payments and improve national competitiveness. Structural Adjustment Programmes became a dominant feature of economic management in Africa from the early 1980s. They were also perceived to be a means of solving the debt crisis but unfortunately they worsened fiscal problems for most developing countries.

Subsidy A payment, generally by the government or a public sector agency, to the producer or consumer of a good or service, to encourage its production and/or to reduce its cost to consumers. The IMF and the World Bank argues that subsidies reduce the efficiency of the economy (they distort the market for the good concerned); and are an inefficient use of government resources. Where an economy has subsidies therefore, structural adjustment programmes strive to eliminate them, reduce them or improve their targeting.

Syndicated loan A commercial bank loan in which a number of banks participate. The loan is negotiated by a small group of lead banks, which then sell parts of the loan to other banks. Syndicated lending was the most common form of commercial bank lending to developing countries in the 1970s and early 1980s and represents virtually all of the outstanding debt of the debt-problem countries to the commercial banks.

Trade liberalisation An important component of most structural adjustment programmes aimed at opening up economies to increased international trade, particularly by reducing protectionism. The main elements of trade liberalisation, in the usual order of implementation, are: reducing, and ultimately removing, taxes on exports; reducing, and ultimately removing, quantitative restrictions on imports; increasing the uniformity of tariff rates applying to different imports and reducing the overall level of import tariffs.

World Bank One of the autonomous international financial institutions that originated from the Bretton Woods Conference of 1944, the other being the IMF.  It is the main international agency responsible for providing development finance. Initially its main role was post-war reconstruction, particularly in Europe, but as this task was accomplished the emphasis shifted to financing development projects in developing countries.

World Trade Organisation (WTO) An organisation formed in 1995 to succeed and take over the functions of the GATT. The WTO regulates the multilateral trading system by providing a framework of rules within which member countries conduct trade and other commercial relations among themselves. This has contributed to a measure of stability and predictability as contrasted to an alternative scenario in which arrangements are dominated by unilateral policies and bilateral arrangements.

The WTO has emerged as an important agency, whose rules and operations have a major impact on the development policies of its developing-country members. The issues of transparency and the limited ability of developing countries to participate in decision-making in the WTO threaten its survival. Ascension into the WTO binds all members to all treaties and provisions within the treaties (subject to a few minor exceptions) although grace periods are granted to individual members states on when implementation of treaty provisions should start. The four main WTO agreements are the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), Trade-Related Intellectual Property Rights (TRIPS) and Trade-Related Investment Measures (TRIMS).