Could Third World Debt Relief Pay Off?

According to the International Monetary Fund (IMF), there are 156 economies that could be considered "developing." Calling a country "developed" as opposed to "developing" is a charged topic: no one wants to be told that they aren't as good as someone else. Being a developing country, however, doesn't mean that the country is some backwater nation that time forgot. Quite the contrary; many developing nations are sitting on veritable goldmines of natural resources and with investments in modernizing the economy, these nations could see rapid growth in GDP.

Getting Funds from the Kitty

Countries seeking to modernize their economies face a daunting task. The projects that will push their economies forward - infrastructure, education, healthcare - don't come cheap. For example, China's Three Gorges Dam cost an estimated US$26 billion. Building roads to shuttle products and people around requires materials and engineering expertise; hospitals require expensive electronics. Developing countries often cannot afford to take on these projects without having to significantly sacrifice spending on other priorities.

There are several ways that developing countries can obtain funds from outside their borders. They can get direct loans from other countries, through funding provided by private companies or through loans provided by international lending organizations. Obtaining loans from private lenders is a difficult proposition for the poorest of countries, since they tend to be economically and politically riskier. A significant amount of developing debt comes from organizations such as the International Monetary Fund and the World Bank, which pool funds from multiple countries and use their financial clout (and good credit ratings) to obtain low interest rates.

The World Bank lends funds to countries based upon their Gross National Income (GNI). The poorest countries - those with per capita income of less than $1,195 - borrow from the International Development Agency (IDA) because they lack the ability to borrow from the World Bank's other fund, the International Bank for Reconstruction and Development (IBRD). The IDA charges little or no interest on the funds it lends out, typically allows repayments over longer-than-normal periods of time and also provides grants to countries in extreme financial distress. The amount of annual funds committed by the IDA - approximately $15 billion per year - is on par with the amount provided by the IBRD.

How Much Debt Are We Talking About?

The World Bank estimates that developing countries owed $4 trillion dollars in external debt as of the close of 2010. That number seems huge, but when compared to the debt owed by developed countries, it's fairly small. The United States and the European Union owe more than $25 trillion between the two of them.

Bleeding hearts and boisterous world leaders lament the oppressive burden that external debt (and the rules that often accompany it) has on developing countries. The evidence points to the opposite, however; debt forgiveness already exists. Debt is as much a political tool as an economic one. Leaders of developing nations, just as leaders of developed nations, want to keep their populations happy (at least happy enough to not cause trouble), and it's much easier to wag a menacing finger at foreign debt holders than it is to fess up to years of profligacy.

The World Bank, for example, operates both the Heavily Indebted Poor Countries (HIPC) Initiative and a Multilateral Debt Relief Initiative (MDRI). The MDRI was a 2005 pledge by G8 countries to cancel the IDA debt of countries that have gone through the MDRI program. The total pledge was $37 billion to an initial set of 19 countries, most of which are located in Africa. The International Monetary Fund (IMF) and Africa Development Fund (ADF) kicked in funds as well, bringing the total to $50 billion.

So what about wholesale debt forgiveness? What if the developed world and the financing institutions they run offer everyone a clean slate? It would be a disaster. It's one thing to offer the most struggling countries debt forgiveness: it's a small number of countries, it's a comparatively low amount of funds and it makes much more sense developmentally (a country in political and economic chaos could cause a humanitarian disaster at home and potentially spark lots of problems for its neighbors). It's a totally different thing to wipe the debt clean for 156 countries that the IMF considers to be "developing."

Lending countries could feel less inclined to shell out development money in the future, since there would be a precedent for not getting paid back. Debtor countries could balk at future commitments because they were allowed to start from scratch once before. The signals would be perverse. Additionally, while developing countries are net debtors - they often owe more to others than they are owed by others - many developed countries are owed money by others. If the money they are owed is suddenly wiped clean, then there would be multi-billion-dollar holes in countries' finances.

Next Time Will Be DifferentThe key to not getting into the debt forgiveness quagmire is to lend smart. Just as many individuals had lived beyond their means leading up to the financial maelstrom of the 2000s, so too did developing countries spend too much. The first taste of debt trouble came from the 1970s and 1980s, on the back of global commodity demand. Countries borrowed huge sums after finding natural resource bonanzas and crowded out private development. When commodity prices tumbled, those developing countries faced steep debt payments and had no funds with which to pay them. This was not totally the fault of debtors, as donors also provided expert advice that wound up not working out.

The Bottom Line
"Lending smart" entails injecting funds to develop industries outside of commodities, and to do so at a pace that won't cause a shock if the means to repay the loans falls short. After all, not all countries that receive developmental aid fall short of repayment. Some of the biggest success stories include China, Singapore, South Korea and India, all of which used funds to diversify away from reliance on volatile commodity exports. You'd be hard pressed to find a world leader who wouldn't want to be at the helm when a country makes the jump into a modern economic juggernaut.

Source: Investopedia

Oil-Rich Angola Bids To Secure Future With $5bn Wealth Fund

Angola, Africa's second-largest oil producer, has launched a $5 billion sovereign wealth fund in an attempt to diversify its economy -- a move more associated with wealthy Gulf States like Qatar and the UAE.

The state-owned investment fund, known as the Fundo Soberano de Angola, will invest domestically and internationally, focusing on infrastructure development and the hospitality industry. These are two areas the Government of Angola believes is "likely to exhibit strong growth".

In an exclusive interview with CNN, Jose Filomeno de Sousa dos Santos, the son of Angola's longtime president who is on the board of the fund, said "now is a very good time."

He added: "The country has had around five years of steady growth, good growth, mostly based on oil production increases, and it plans to diversify the economy. The best way to do that is to do that is to intervene directly in the economy through investments."

More than 90% of Angola's revenue comes from oil production -- reaching around 1.9 million barrels a day -- and it is second only to Nigeria in its exports. But despite its oil wealth, the country remains largely impoverished.

Dos Santos says the aim of the fund is to invest profits accrued from oil to promote social development in the country.

"It is very easy to have oil money and spend it but it is very difficult to have a positive impact to improve people's lives on a daily basis," he said, "and that is an area we intend to invest on a lot with the sovereign wealth fund."

Critics of the government say that Angola's oil wealth has been used to enrich a small section of society -- dominated by allies of president Dos Santos and his family, along with generals associated with Angola's lengthy civil war.

"We don't see the money that is being generated from oil having a direct impact on people's lives" says Elias Isaac, Angola country director for George Soros' Open Society Initiative for Southern Africa.

"Just look at the schools, look at the hospitals, look at the issue of water, electricity. Angola makes a lot of money out of oil, there is no doubt about this, Angola really is one of the few countries that can pay its national budget without donor funding, which is great, but where this money goes, that's the biggest issue".

Isaac's also argues that a $135 million development project of the capital city's waterfront is a sign of the government getting its spending priorities wrong.

Luanda's once shabby waterfront has been transformed after land was reclaimed from the sea. Portuguese expats, many of whom have sought sanctuary here from the eurozone crisis, now jog past manicured lawns each morning.

But wedged between the shiny offices and apartments that line this new waterfront, Angolans often struggle to survive in a shacks and ramshackle houses.

Beyond the capital lies a large underdeveloped country with a widening income gap.

Only around one in three Angolans are literate and more than half drop out before finishing primary school.

Angola has faced huge challenges to develop a country decimated by the war for independence and lengthy civil war. But civil society and human rights groups say that institutionalized corruption has helped cause the widening gap between the very rich and the rest of society.

Critics of the fund also point to the its board being dominated by cabinet members close to president dos Santos. And the younger dos Santos says he -- despite being the president's son -- is qualified for the position because his financial background.

Transparency International recently ranked Angola a lowly 168 out of 182 countries in its "Corruption Perceptions Index" but Dos Santos says that the fund will be beholden to international best practices, and transparent.

"We are familiar with the fact that this perception exists and we are taking a lot of care to make sure all of our investments are within an approved investment policy and our accounts will be audited annually by an independent renowned auditor."

The pledge of transparency is a departure from Angola's often opaque oil wealth where oil receipts are withheld by strict confidentiality agreements with international oil companies.

"The way the government manages the oil receipts, we think we still have a lot of corruption" says Manuel Jose Alves da Rocha, Economics Professor from Angola's Catholic University. "We think the lack of transparency is also another situation we have to look at to understand why the oil income does not go to the majority of the people".

Angola's oil industry is dominated by Sonangol, the state-owned company that gives concessions to international oil companies and, over time, takes in the lion's share of the profits.

Many observers believe that Sonangol was already acting as a sovereign wealth fund by investing its profits in many areas outside of the oil industry -- including buying up key stakes in Portugal's biggest bank by assets, Millennium BCP.

The formation of a formalized fund was first announced by Angola's President Jose Eduardo dos Santos. But the global financial crisis caused the oil price to plunge, hammering Angola's economy.

The government had to offset the crisis by securing a loan from the International Monetary Fund (IMF) in the form of a Stand By Arrangement of around $1.4 billion.

With new deep water oil finds announced by the government, Angola hopes to outstrip Nigeria to become Africa's largest oil producer. But the revenue from Angola's black gold won't last forever. The government hopes the sovereign wealth fund will help diversify Angola's profits to secure its future.

Source: Marketplace Africa

Gambia Gov’t, ADB & FAO Ink US$0.8M Grant Agreement

The government of The Gambia Wednesday signed a US$0.8 million tripartite grant agreement with the African Development Bank (ADB) and the United Nations Food and Agriculture Organisation (FAO) at a ceremony held at the Office of the Vice President in State House.

The six-month grant is funded by the ADB, and will be implemented by the FAO. It is an emergency response to the Gambia government’s call for assistance in the aftermath of the 2011-2012 crop failure that resulted to food shortages across the country.

The minister of Finance and Economic Affairs, Abdou Colley, signed on behalf of the government of The Gambia while Leila Mokaddem, the ADB resident representative based in Dakar, and the FAO country representative, Babagana Ahmadu, each signed on behalf of their various institutions.

Speaking after the signing ceremony, the vice president and minister of Women’s Affairs who is also the chairperson Disaster Governing Council, Aja Dr. Isatou Njie-Saidy, on behalf of the government and people of The Gambia, commended ADB for the assistance. She reiterated government’s political will in all aspects of development including the agriculture sector.

The vice president told the gathering that last year’s crop failure ushered in difficult times for The Gambia; and acknowledged that partners like the ADB have always been there for the country. While appealing to the ADB to assist the Gambia government realise its long-term plan for Agriculture, the VP Njie-Saidy also stressed that sustainability remains government’s primary goal. She also advised the Ministry of Agriculture and FAO to ensure a smooth and transparent implementation of the grant.

Abdou Colley, the minister of Finance and Economic Affairs, explained that part of the grant will be used to provide social amenities and relief for farmers. He described the response to government’s appeal for assistance earlier in the year as very encouraging. He then called on FAO to collaborate with the Ministry of Agriculture in the implementation process, while promising to further strengthen the partnership with the ADB.

The ADB resident representative based in Dakar, Leila Mokaddem, said that the grant is a strategic support for The Gambia and is aimed at mitigating the impact of the food shortage on household food security as well as to reduce the cases of malnutrition, and depletion of assets, thus preventing the population from engaging in negative coping mechanism.  The ADB’s main priority, she went on, is to ensure sustainable productive economic and social opportunities for the poor and vulnerable sections of society and ensure equal access.

Madam Mokaddem pointed out that climate change poses serious threat to food security, and went on to disclose that the bank in collaboration with partners has mobilised an extra US$28M towards The Gambia’s food security plan, implementation of which, according to her, shall begin in mid-2013. She added that a programme for food security and resilience for the Sahel region will also be designed in 2014.

For his part, the FAO country representative, Dr. Babagana Ahmadu, noted that the grant will allow his organisation to extend the ongoing support to affected communities. He used the occasion to call on government to make a declaration of disaster on the deadly cattle disease that has hit the country.

The FAO boss then assured that his organisation will ensure effective implementation of the programme within the time frame.

The permanent secretary, Ministry of Agriculture, Sait Drammeh, described the grant as timely, saying it will also help address the current fatal cattle disease in the country.

The ceremony was chaired by the permanent secretary at the Ministry of Finance, Mod Secka.

Source: Daily Observer

The Most Costly Banking Mistakes You Can Make

Every bank has a slew of fees associated with opening and maintaining accounts, and those fees are on the rise. A recent study by Bankrate.com found that only 39% of non-interest checking accounts are free of a monthly charge. That's down from last year's 45% and a high of 76% in 2009. The average monthly service fee has jumped 25% from last year. Here are four of the most expensive mistakes you can make with your bank accounts.

Using Overdraft ProtectionAt most banks, you can choose to allow your account to go into negative territory to allow a purchase to go through. Banks charge dearly for that service. The average overdraft fee is $31.26, and many banks charge upwards of $35 per item. Federal consumer protection law now requires that you have to choose this service. If you have done so, the danger lies in running your account close to the zero line if you have an unexpected charge go through. The overdraft fee adds to your negative balance and can cause more transactions to trigger the overdraft. For example, you may have thought there was $100 in your account and forget that your car insurance is charged automatically. Each additional transaction will trigger further overdraft fees, and your negative balance can grow quickly. Monitor your account closely to ensure that the funds are there to cover your transactions.

Not Maintaining the Minimum BalanceMany banks reduce or even eliminate monthly maintenance and other fees if you keep a certain amount of money in your account at all times. This fee break can often outweigh any interest you receive in a savings account. It's often worthwhile to keep the minimum in your checking account to bring the fees down. According to the Bankrate.com survey, the average balance to avoid the fee for non-interest checking accounts is $723. That's higher than the previous year by 23%.

Writing Post-Dated ChecksIn the United States, a personal check is nothing more than a promise to pay someone. It does not represent actual payment until it is presented at a bank and the money is withdrawn from your account. Post-dating a check to a future date indicates your intentions to the recipient to wait until that date to present the check to the bank. However, banks have the upper hand and are legally allowed to honor checks when presented. If the recipient is not someone you trust, it is safer to hold on to the check until the future date to avoid having it create havoc on your bank balance. The convenience of providing post-dated checks is outweighed by the risk to your account.

Using Other Banks' ATMsAlmost all banks charge a fee when users who are not customers use the ATM. Some also charge a fee when their own customers use another bank's ATM. These fees are also on the rise. The average charge for non-customers is $2.50 per transaction, and the average cost for customers using another ATM is $1.57. The easiest way to avoid these fees is to plan your cash flow more closely so that you do not need to hit up the ATM or that you can use your own bank's machine. Some banks refund other institutions' transaction fees, so look for accounts with this feature.

The Bottom LineWith bank fees going up year after year, it is more important than ever to ensure that you know the ins and outs of bank fees, are paying the least amount, and keeping the money in your pocket. Know what your bank's policies are, and be on the lookout for lower-fee accounts.

Source: Investopedia

Middle-Income Africa in Sight

The day when Africa becomes a middle-income continent — at least by the World Bank’s yardstick — could be in sight if growth trends continue and the global economy stabilises.

"We can look to the continent being middle-income," Shantayanan Devarajan, the World Bank’s chief Africa economist, said yesterday.

The economies of sub-Saharan Africa’s 48 countries are expected to grow by an average of 4.8% this year, the World Bank said in a report yesterday, slightly down from last year’s 4.9%. Officially, 22 states with a combined population of 400-million have now achieved middle-income status, meaning per capita annual income in excess of $1,000.

If the economic growth trend of the past decade is sustained, another 10 will reach the target by 2025, Mr Devarajan said in a video conference broadcast from Washington to African capitals.

Seven more will join the list if they average 7% growth in the coming years.

The biannual World Bank report, called Africa’s Pulse, analyses key economic and social developments. The last one forecast average growth for this year of 5.2% but trimmed the estimate because of slowing global economic activity.

The projected average was brought down by SA, the continent’s biggest economy and its most sophisticated. Excluding SA, this year’s African growth was forecast to rise by 6%.

The continent’s mineral resources have powered the past 10 years of expansion, much of it driven by booming exports of raw materials to China.

This year’s fastest-growing economy is Sierra Leone’s, which is heading for a 25% rise in gross domestic product compared with last year. The reason is a huge jump in iron-ore exports from a West African country that was devastated by civil war in the 1990s and held up as a basket case. Second is Niger because of uranium and oil exports.

Earning revenue from mineral resources is one thing, sharing it with the populace and the national treasury has proved much harder for many African presidents and their governments.

"People don’t feel this growth. As a taxi driver once said to me — I cannot eat growth," Mr Devarajan said.

The World Bank report referred to the central African state of Gabon, whose oil and timber wealth allied to a small population account for a per capita income of more than $10,000. Yet it has the lowest child immunisation rates on the continent, according to the World Bank.

Asked whether $1,000 per capita should qualify a country as "middle income", Mr Devarajan said: "Even if you earn more than that, it doesn’t mean you won’t have a huge poverty problem."

Source: BDlive