An Analysis of External Debt and Capital Flight in the Severely Indebted Low Income Countries in Sub-Saharan Africa

Over the past 15 years, the external debt burden in many of the severely indebted low income countries in sub-Saharan Africa has worsened. As the severity of external indebtedness has increased in this region, so has capital flight. This paper analyzes the external debt and debt burdens of the severely indebted sub-Saharan African economies, estimates capital flight and shows the relationship of external debt and capital flight to growth in these economies. It presents the policy implications of capital flight and international efforts to deal with the high levels of external debt in conditions of extreme poverty and of stagnant or declining exports, such as exist in these countries.. It then proposes a review of the theoretical foundation of the external debt strategy that has been followed in the past with respect to sub-Saharan Africa. This strategy is based on four assumptions: the external debt of debtor countries is a liquidity problem; given a buoyant international economy, debtors will grow out of debt through increased exports; there is no debt overhang; and the strategy applies a one size fits all approach to countries. The paper presents evidence that these assumptions are not well founded. Another policy implication explored in this paper is that debt rescheduling may not go far enough and that creditor institutions could demonstrate their commitment to fostering growth in the severely indebted sub-Saharan African countries by moving toward debt forgiveness . Policies that benefit the whole of sub-Saharan Africa need to be designed, but with the flexibility to address country-specific problems and situations.