# **I Introduction**

One of the main criticisms often voiced against structural adjustment programs is the sustained increases in external liabilities during program implementation in the majority of countries in the developing world (Parfitt and Riley, 1989; Easterly, 2002). Across Sub-Saharan Africa, the debt burden of adjustments has been even heavier, with the stock of external liabilities growing to unsustainable levels (Nafziger, 1993; Elbadawi et al., 1997). In effect, expressed as a percentage of exports, the average stock of external debt increased continuously across low-income countries in the region, rising from less than 50 percent in the mid-1970s to more than 250 percent by the mid-1990s in numerous countries (Boote and Thugge, 1997).<sup>2</sup> The rising trend of external liabilities during the implementation of adjustment programs throughout SubSaharan Africa reflects both persistence of large structural deficits, especially balance of payments deficits, and increasing reliance on external financing to close the financing gap. Indeed, in order to secure a continuously stable stream of resource flows in a context of fiscal and balance-of-payment crises, most countries had to avoid falling into arrears. In practice, in the absence of domestic capital markets, the dreadful near-default option illustrated by a build-up of arrears was often aborted by further increases in the stock of sovereign debt owed to external creditors, particularly in countries with limited fiscal space.

Over time, the sustained accumulation of external liabilities resulted in debt overhang, when the level of external debt became unsustainable (Elbadawi et al., 1997; Pattillo et al., 2002).<sup>3</sup> Nevertheless, even before the debt-overhang status of countries, the costs and adverse effects of rising external liabilities were already hard felt across the region. Particularly affected were low-income and conflict-affected countries where public and private investment rates fell to all-time low levels (Akyuz and Gore, 2001).

The large scale of external liabilities acted as a deterrent and disincentive to private capital accumulation, especially as rational and risk-averse investors built into their expectations potential increases in taxes to service pre-existing debts. The adverse effects of debt overhang on public investments were also direct, as countries that faced severe revenue shortfalls often leaned on public capital expenditure programs, drawing on the fact that the benefits of public investments, especially infrastructure projects, have been spread over a longer term horizon (Bayraktar and Fofack, 2007; Ayogu, 2007).<sup>4</sup> Against this backdrop, debt cancellation under the Highly Indebted Poor Country (HIPC) Initiative emerged as a salutary option to broaden the fiscal space. For completion point countries, it reduced interest payments and expected tax burdens. Furthermore, the result of debt-relief-induced greater fiscal space has been the rise in public investments. Unlike the adjustment era, which was essentially characterized by anemic and negative economic growth, the post-HIPC era has been characterized by the resumption of positive economic growth fueled by strong investment rates (IMF, 2009b; Kasekende et al., 2010).

Economic growth rates across post-HIPC Completion Point countries within the region have averaged 5.0% over the past decade. Despite the adverse effects of external shocks, and particularly the second-round effects of the 2008 global economic and financial crisis, most countries still managed to achieve positive

> 2 The average across the subset of Sub-Saharan African conflict-affected countries is even higher. The stock of external liabilities exceeded 250% of GDP in these countries in 1995, though the scale of these liabilities has reduced significantly since the accession of countries to debt relief under the Enhanced HIPC Initiative (Fofack, 2010).

> 3 According to Krugman’s definition (1988), a country suffers from debt overhang when the expected present value of future country transfers is less than the current face value of its debt.

> 4 Of course, in Sub-Saharan Africa, where initial conditions were already characterized by the absence or poor infrastructure, the long-term costs of cuts in public investments were even more serious.

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