NewsWest AfricaWorld Bank: Graduate blues for middle-income countries

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Posted on Wednesday, 18 April 2012 15:17

World Bank: Graduate blues for middle-income countries

By Taimour Lay

Government planners need to adjust their strategies as the changing of a country's status at international financial institutions leads to new loan terms.

photo/ reutersGraduation should be a moment to congratulate yourself for achieving a goal, but moving up in the world can bring headaches too. Successful governments progressing from low- to middle-income status often find that the system of financial assistance does not necessarily reward those that make progress.

The continent's poorest nations, with per capita GDP below $1,175, qualify for concessional loans from the World Bank's International Development Association (IDA). Payback periods are up to 40 years and interest rates can be close to zero. Countries that graduate into the middle-income club receive loans from the International Bank for Reconstruction and Development (IBRD). These are non-concessional, and terms are only slightly less onerous than commercial ones.

Also Read: Hannibal: And the debt goes on...

What's more, the former IDA recipient then has to pay back the old cheaper loans at an accelerated rate. To put it into context, the biggest IBRD borrowers last year were India, China and Brazil –daunting company for some African countries that may be middle-income on paper alone. 

Take Ghana, which graduated to middle-income status much faster than anticipated, not least because its GDP was found last year to have been underestimated by 62 percent. "The economic data we have on Africa is often terrible,'' Todd Moss of the Center for Global Development tells The Africa Report.

"[Ghana] is one of the most studied countries on the continent and the figures were way off.'' But the problem is not just unreliable numbers. Ghana's graduation will take at least three years to manage with the international financial institutions. Accra may be able to adapt, with oil revenue beginning to flow, but other countries could easily find themselves sinking back into debt, especially if their growth is mainly due to a decade of high commodity prices. 

altZambia is one such case. Angola, Congo-Brazzaville, Cameroon and Djibouti are set to progress out of IDA lending in the next few years. 

The full picture 

"Their exact graduation dates will depend on a number of factors, but these countries are all technically on the cusp," adds Moss. "Nigeria is also going through a GDP rebasing exercise right now that will likely put it way over the limit."

Middle-income countries should also start to develop local capital markets, and be borrowing and financing in more diverse ways. The fiscal strain of graduating should not be too heavy, but global conditions and investor appetite for emerging market opportunities are hard to predict as the world economy continues to be reconfigured.

Also Read: Africa slow progress in human development

Critics say the World Bank has always missed the point by focusing too narrowly on GDP per capita and ignoring inequality. Sabina Alkire, director of the Oxford Poverty and Human Development Initiative who has designed an influential new human development index, says that headline numbers do not offer a true picture of how a country is doing and what help it needs.

"Sometimes countries with less GDP growth do better at alleviating poverty because they target interventions at the very poor instead of focusing only on GDP and the expanded middle class,'' she says.

This article was first published in the 2012 April edition of The Africa Report, on sale at newsstands, via our print subscription or our digital edition.



Last Updated on Wednesday, 18 April 2012 16:30

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