Africa and the International Monetary Fund : Papers Presented at a Symposium Held in Nairobi, Kenya, May 13-15, 1985

Chapter

External Debt Management in the African Context

Editor(s):
Gerald K. Helleiner
Published Date:
March 1986
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Author(s)
Eduard H. Brau

The widespread and prolonged debt-servicing difficulties among African countries are the financial reflection of the disappointments and problems encountered in many sectors of the real economy. Policies directed at achieving sustained improvement in underlying economic trends are therefore prerequisite to improving the debt-servicing capacity, and hence the creditworthiness, of many African economies. But such policies alone are insufficient to deal adequately with existing debt-servicing difficulties or to establish a framework for improved policy on external indebtedness. 1

This paper focuses on external debt management issues that also must be addressed, after first highlighting in a series of tables the distinctive features of external debt in the African context. It then discusses objectives, constraints, and operational problems in alleviating service payments on existing external debt. This discussion is followed by suggestions for improving the framework within which future credit flows should be managed. An annex lists technical assistance made available to African countries by the Fund and World Bank in external debt management.

Principal Features of External Debt in Africa

Statistical material on the external debt and debt service of African countries from a variety of perspectives is contained in the Annex. The key features that seem to define the African context may be summarized as follows:

  • In comparison with low-income countries in Asia, African countries have a relatively high share of debt to private financial institutions in their outstanding public external debt (Tables 1 and 2). The ratio of external debt to GDP and of external debt to exports of goods and services has been rising very fast for sub-Saharan Africa (Table 3), substantially because of a slow increase in export earnings by sub-Saharan African economies.

  • Substantial arrears on commercial payments, as well as on debt-service payments, are relatively frequent (Table 4), and a large number of African countries have already sought a rescheduling of debt-service obligations with commercial banks and with official creditors, mainly through the Paris Club (Table 5).

  • There is a sharp rise in scheduled debt-service payments on the existing stock of external debt for nearly all countries in 1985–86, mainly on account of principal repayments on borrowing from private markets. For Africa as a whole, the ratio of debt-service payments to exports of goods and services doubled to over 30 percent in 1984 from about 14 percent in 1980; for sub- Saharan Africa, the ratio reached 27 percent in 1985–86 (Table 6). At the same time, there is a decline in the amount of debt service eligible for rescheduling, as repayments to multilateral development institutions rise along with repayments of previously rescheduled debt service.

  • In addition, and reflecting relatively high recourse to Fund credit in the early 1980s, repurchase obligations to the Fund in 1985–87 will average $1.25 billion annually (Table 7).

Table 1. Africa’s External Debt, 1975–84 (billions of dollars)
1975 1980 1981 1982 1983 1984
Africa 1 22.7 77.2 83.9 94.5 101.3 104.3
Medium- and long-term 22.6 73.2 80.0 83.9 92.6 96.8
Of which (percent share):
Multilateral 14 14 15 16 17 18
Bilateral 41 35 36 40 40 41
Financial institutions 21 35 34 33 32 30
Other 24 16 15 12 11 10
Short-term 4.0 3.9 5.2 8.7 7.5
North Africa 7.3 29.9 30.0 30.7 30.5 30.7
Medium- and long-term 7.3 27.8 28.2 28.0 27.9 28.0
Of which (percent share):
Multilateral 7 5 6 7 9 9
Bilateral 35 26 28 31 32 33
Financial institutions 33 50 47 45 44 44
Other 25 19 18 16 15 15
Short-term 2.1 1.7 2.7 2.7 2.7
Sub-Saharan Africa 15.4 47.3 53.9 63.9 70.8 73.6
Medium- and long-term 15.3 45.4 51.7 61.4 64.8 68.8
Of which (percent share):
Multilateral 17 20 20 19 21 22
Bilateral 44 40 41 43 44 45
Financial institutions 16 26 27 28 27 25
Other 23 14 13 9 9 8
Short-term 0.1 1.9 2.2 2.5 6.1 4.8
Source: International Monetary Fund, World Economic Outlook, April 1985.

Excludes Libyan Arab Jamahiriya and South Africa.

Table 2. Average Terms of Public External Borrowing, Africa and Low-Income Asia, 1975–84
1975 1980 1981 1982 1983 1984
Africa 1
Interest (percent) 6.5 8.3 7.6 9.2 8.1 8.5
Maturity (years) 15.8 13.9 16.0 13.9 16.7 13.8
Grace period (years) 4.4 4.4 4.5 4.0 4.4 3.4
Grant element (percent) 21.6 12.0 17.8 8.3 15.9 13.0
Low-income Asia
Interest (percent) 4.2 5.2 4.5 4.8 4.2 3.0
Maturity (years) 23.7 20.7 22.6 25.1 28.1 30.9
Grace period (years) 6.1 5.5 5.8 6.1 6.6 7.2
Grant element (percent) 41.8 34.1 40.0 40.8 45.8 55.1
Low-income Asia
Interest (percent) 2.5 2.8 4.0 4.4 5.4 3.7
Maturity (years) 31.9 32.4 30.2 32.1 30.1 34.5
Grace period (years) 8.2 7.9 7.3 7.5 7.3 7.9
Grant element (percent) 59.5 58.3 49.5 48.8 39.5 53.5
Source: World Bank, World Debt Tables; and Fund staff estimates.

Excludes Libyan Arab Jamahiriya and South Africa.

Table 3. Developing Countries: External Debt 1 Relative to Exports and to GDP, 1977–86 (percent)
Estimates
1977 1982 1983 1984 1985 1986
Ratio of external debt to exports of goods and services 2
Indebted developing countries 126.7 148.0 157.9 151.3 148.5 141.5
Small low-income countries 207.7 315.5 330.8 341.5 349.1 346.4
Sub-Saharan Africa3 120.0 199.8 216.6 223.2 230.7 230.9
By region
Africa 112.2 145.6 160.4 161.7 162.8 154.6
Asia 87.5 85.7 90.4 85.5 86.3 84.7
Europe 117.8 121.5 129.1 127.0 121.4 110.9
Non-oil Middle East 165.7 151.4 173.6 175.6 183.6 181.9
Western Hemisphere 191.8 270.7 294.1 280.0 269.6 257.6
Ratio of external debt to GDP 2
Indebted developing countries 24.9 32.9 35.6 36.3 36.7 32.5
Small low-income countries 32.2 44.4 45.8 47.7 49.9 46.9
Sub-Saharan Africa 3 33.8 49.7 54.2 62.6 68.9 68.0
By region
Africa 31.4 37.2 38.8 39.8 39.9 35.8
Asia 17.2 21.3 22.6 23.7 25.4 24.9
Europe 21.6 29.2 34.4 38.4 35.7 33.5
Non-oil Middle East 53.0 60.0 57.7 58.3 57.9 43.4
Western Hemisphere 29.0 42.0 47.6 46.0 45.6 36.9
Source: International Monetary Fund, World Economic Outlook, April 1985.

Does not include debt owed to the Fund.

Ratio of year-end debt to exports of goods and services or GDP for year indicated.

Excludes Nigeria and South Africa.

Table 4. Estimated African External Payments Arrears, 1980–84 (billions of dollars)
1980 1981 1982 1983 1984
Africa 1
Amount 4.2 4.6 9.7 9.3 9.4
Number of countries 20 21 19 18 16
North Africa
Amount
Number of countries
Sub-Saharan Africa
Amount 4.2 4.6 9.7 9.3 9.4
Number of countries 20 21 19 18 16
Source: Country authorities; and Fund staff estimates.

Excludes South Africa.

Table 5. Official Multilateral and Commercial Bank Debt Reschedulings, African Countries, 1980–84 (millions of dollars)
1980 1981 1982 1983 1984
Central African Republic
Paris Club 72 13
Commercial banks
Côte d’Ivoire
Paris Club 356
Commercial banks
Equatorial Guinea
Paris Club
Commercial banks
Liberia
Paris Club 35 30 17 17
Commercial banks 30
Madagascar
Paris Club 140 107 89
Commercial banks 147 195
Malawi
Paris Club 25 26
Commercial banks 57
Mauritania
Paris Club
Commercial banks
Morocco
Paris Club 1,489
Commercial banks
Mozambique
Paris Club 404
Commercial banks 213
Niger
Paris Club 36 26
Commercial banks 26
Nigeria
Paris Club
Commercial banks 1,935
Senegal
Paris Club 75 74 72
Commercial banks 78
Sierra Leone
Paris Club 37 25
Commercial banks 25
Somalia
Paris Club
Commercial banks
Sudan
Paris Club 80 536 269
Commercial banks 498 55 790 838
Togo
Paris Club 232 300 75
Commercial banks 69 84
Uganda
Paris Club 30 19
Commercial banks
Zaïre
Paris Club 500 1,497
Commercial banks 402 58 64
Zambia
Paris Club 375 253
Commercial banks 73
Source: Fund staff estimates.
Table 6. External Debt Service, 1980–86 (billions of dollars)
Actual Scheduled
1980 1983 1984 1985 1986
Africa 1 10.9 14.1 17.4 19.2 18.9
Interest 4.7 5.5 6.5 6.8 6.6
Amortization 6.2 8.6 10.9 12.4 12.3
As percent of exports of goods and services 13.9 25.5 30.3 32.4 30.0
North Africa 5.5 5.7 7.4 8.3 8.2
Interest 2.1 2.0 2.2 2.1 2.1
Amortization 3.4 4.7 5.2 6.2 6.1
As percent of exports of goods and services 26.2 35.0 38.4 40.6 37.8
Sub-Saharan Africa 5.5 5.8 10.0 11.0 10.8
Interest 2.6 3.5 4.3 4.8 4.6
Amortization 2.9 3.9 5.7 6.2 6.2
As percent of exports of goods and services 9.5 20.6 26.2 28.1 26.0
Source: International Monetary Fund, World Economic Outlook, April 1985.

Excludes Libyan Arab Jamahiriya, and South Africa.

Table 7. Use of Fund Credit and Scheduled Repurchases, 1980–87 (billions of dollars; end of period)
Scheduled Repurchases 1
1980 1983 1984 1985 1986 1987
Africa 2
Net purchases 0.4 1.4 0.6 1.0 1.3 1.4
Outstanding use of Fund resources 2.3 6.0 6.3
North Africa
Net purchases 0.1 0.1 0.1 0.1 0.3 0.2
Outstanding use of Fund resources 0.3 0.9 0.1
Sub-Saharan Africa
Net purchases 0.3 1.3 0.5 0.8 1.0 1.2
Outstanding use of Fund resources 2.0 5.1 5.3
Source: International Monetary Fund, Data Fund.

On purchases outstanding at end of 1984.

Excludes South Africa.

The recent and current debt-servicing difficulties of African countries are clearly widespread and reflect deep-seated economic and financial problems. Moreover, a significant increase in scheduled debt-servicing obligations is in prospect in the near term, at a time when decisive and immediate improvements in the debt-servicing capacity of the African economies are unlikely, even if necessary economic policy reforms are widely introduced. While it is not the purpose of this paper to trace the macroeconomic causes leading to past and present debt-servicing difficulties, a consensus seems to be emerging among observers that inadequate policies on resource allocation, relative prices, and demand management—aggravated by negative external economic influences—are at the root of the problem. In addition, weaknesses in external debt management policies proper were prevalent and often included the following:

  • absence of effective centralized control over the authorization of external borrowing by the public sector;

  • absence of adequate procedures to establish proper selection of projects financed by external borrowing;

  • absence of purposeful control over the maturity and other terms of debt incurred;

  • and for countries that had incurred relatively high shares of commercial debt, extraordinary rapidity in the rise of such commercial debt in a procyclical manner during periods of strong primary-commodity prices.

Issues in External Debt Management

The existing and prospective debt-servicing difficulties of African countries confront both creditors and debtors with delicate issues whose resolution will require a patient and long-term perspective on both sides. Creditors, for example, could be inclined to view the serious debt-servicing difficulties as largely a manifestation of basic underlying economic difficulties and to doubt the desirability of advancing additional net financial assistance to help resolve those underlying difficulties. Debtors, on the other hand, could feel inclined to view the necessity of honoring external debt obligations as hampering the recovery of their economies; in particular, they might doubt the practicality of their efforts to provide for some service on external debt if the prospects for further net financial assistance seem unpromising. The overall task is well described in the April 1985 World Economic Outlook (p. 14) prepared by Fund staff:

Debtors and creditors will have to work together, both bilaterally and with agencies such as the World Bank, to ensure that viable projects are identified, that suitable financing is made available, and that the adjustment efforts required for the poorest countries are not made unrealistically large by the debt-service burdens resulting from earlier borrowing at unsustainable rates.

Because achievement of the development aspirations of African economies will continue to depend on access to foreign savings, it is essential that African policymakers deal with their debt-servicing obligations in a manner acceptable to the international financial community. This does not mean, of course, full service of external debt when this is not possible; it does mean, however, the pursuit of policies promising ultimately to restore full debtservicing capacity. The whole range of economic policies to this end are considered in other papers in this volume. Only if there is a prospect of eventual improvement in the debt-servicing capacity of an economy could creditors be expected to continue to provide the new financial assistance (mostly on concessional terms), even while full debt service on existing debt is suspended. While, in the near term, the need for increased concessional financial assistance is paramount, it is highly important that policymakers in debtor countries keep in mind that actions unacceptable to the international financial community will jeopardize their access to credit markets in the long term. It cannot be in the African countries’ interests, by any actions in the current crisis situation, to cut themselves off from capital market access in the longer run. The aim is to grow out of aid dependency.

In this connection, and as noted earlier, for many African economies, debt rescheduling in the period ahead will be a significant, but declining, source of external financing, as an increasing share of debt-service obligations is ineligible for rescheduling by normal standards. A key aim in the numerous prospective refinancing or rescheduling operations relating to accruing debtservice obligations is to follow, to the maximum extent possible, procedures protective of new financing flows. In other words, the close connection between alternative modalities of debt rescheduling and the possibilities for obtaining access to new financing must be recognized. In particular, there are considerable costs associated with incurring arrears on short-term obligations and with seeking a rescheduling of short-term obligations falling due, or with pursuing unilateral rather than cooperative methods of resolving debt-service difficulties.

Debt rescheduling and new financing, on appropriate terms, will jointly be needed in many African countries to support policy reform. This paper does not comment on the needed size or the possible sources of such new financing flows, as these matters have to be considered on a country-specific basis. In any case, a World Bank report 2 outlines the key issues. Likewise, the paper will not address the related topic of the methods used to coordinate the elements of financing packages for African countries, namely, the sum of financial assistance made available from possible debt rescheduling, new bilateral and multilateral lending flows, and Fund assistance.

The central issue addressed below is the need to adopt financing procedures that are supportive of economic adjustment required and pursued in African economies, and to do so in a manner avoiding repetition of errors of past years in external debt management. Two questions are therefore addressed in the remainder of this paper. What implications for financing policy reforms arise from the existing stock of external debt and its rising debt servicing (how is any “overhang of debt” dealt with)? Within what improved debt management framework, embodying what principles, should new financing flows to African economies take place?

Difficulties in Meeting Debt-Service Obligations

Arrears on commercial payments

An essential priority, if commercial arrears exist, is to eliminate them as fast as possible. As is well known, commercial arrears are expensive to a country, as most imports will be priced with a significant risk premium whose annual aggregate cost to the economy may, in some cases, exceed the actual stock of outstanding commercial arrears. The methods of clearing commercial arrears range from cash settlements to refinancing through a loan or, in some cases, rescheduling. 3 The latter method is often employed in the Paris Club framework in the case of arrears on short-term commercial credits insured by official export-credit agencies. Nigeria, with the help of merchant bank advisors, rescheduled its arrears on uninsured commercial payments in 1984. Turkey adopted an innovative and successful scheme (in 1980) that was distinctive in tailoring options to the varied interests of foreign suppliers. Most other countries strive to clear uninsured commercial arrears through cash payments as rescheduling or refinancing often cannot be obtained, partly because of large-scale practical problems arising from the presence of many, at times small, uninsured suppliers. The benefit in clearing commercial arrears as quickly as possible is the opening of the way toward renewed access of the economy to regular short-term trade finance, including that insured by official export credit agencies in industrial countries. Fundsupported adjustment programs, in all instances in which commercial arrears are present, have as one of their aims the elimination of commercial arrears according to a defined schedule along with a reconstitution of gross foreign exchange reserves to levels adequate to cushion against short-term payments fluctuations.

Restructuring debt-service obligations

There are some similarities between the experiences of African countries rescheduling debt-service obligations falling due to banks and reschedulings in the major bank-debt countries, notably those in Latin America—broad coverage of medium-term debt service due, the exclusion of short-term trade-related debt when feasible, and avoidance of formally rescheduling interest payments due. But the African cases differ in one key respect. While there have been more than a dozen African reschedulings with bank creditors during 1980–84 (see Table 7), in only one case—that of the Côte d’Ivoire in 1984—could banks be persuaded in the context of a Fund-supported adjustment program to provide new money to the country and, in that case, only with great difficulty. In all other instances, the bank-debt rescheduling was confined to a rollover of amortization payments due, with interest payments normally to be made as scheduled without the help of new money. At the request of the member countries, Fund staff have explained the policies of African member countries to their bank creditors, as part of the negotiations leading to Fund-supported adjustment programs. As in other cases, the Managing Director has only presented a program to be supported by use of Fund resources for the consideration of the Executive Board after having received prior assurances that sufficient financing would be available, including, when needed, refinancing of obligations falling due to banks. In other instances, including those of Morocco and Madagascar, the Fund has, again at the request of the member country and with the consent of bank creditors, extended its good offices to help resolve particular issues arising between the member country and its bank creditors.

There has been, to date, no case of multiyear bank-debt rescheduling for an African country; nor does such restructuring appear to be under active discussion for any African country at this time. As exemplified in the cases of Ecuador, Mexico, and Venezuela, multiyear bank-debt restructurings have been agreed in principle only for those borrowing countries that have already achieved substantial adjustment in their external current accounts, thereby reducing their need for net new financing flows from private sources to relatively small amounts. At the same time, however, these countries face a “hump” in gross amortization payments to banks, and these payments cannot be refinanced in normal market fashion. The stretching out of this hump in amortization payments to banks through a multiyear restructuring paves the way for restoring more normal capital-market access for these countries.

In the African context, reduced indebtedness to private capital markets and increased concessional assistance are needed. Even if it is feasible to obtain new money from commercial banks in the context of rescheduling, which is highly improbable given the loan provisioning already made for many credits to African countries by commercial banks, such new money could aggravate debt-servicing burdens. Thus, the outlook is mostly for a continuation of rollover of principal, where necessary, with, in some cases, a gradual repayment of principal. As noted above, scheduled repayments of principal to banks will peak in 1985 and 1986 and continue at a high level in 1987.

Because the largest share of outstanding debt of most African countries represents official credits from abroad, the Paris Club has been the major forum for debt-rescheduling exercises involving African countries. As is well recognized, governments participating in the Paris Club have been willing to consider a rescheduling of arrears on debt-service payments or of principal and interest payments falling due only when the debtor country has in place a Fund-supported adjustment program. To a growing degree, Paris Club creditors have adjusted the scale of debt relief to amounts necessary to support adjustment programs, but, of course, only within limits. These limits are defined primarily by the desire of creditor governments to protect the financial integrity of their official export credit insurance agencies. Nevertheless, in some recent cases, de facto debt relief approached 100 percent, with the rescheduled debt to be serviced over a period well in excess often years. Actual experience with many recent reschedulings for African countries has been disappointing from the creditors’ viewpoint, however, because of failures by debtor countries to make timely payments as required under the rescheduling agreements. Partly in consequence, Paris Club creditors, in certain instances, have established special accounts into which they have asked the debtor country to make regular progress payments during the year. In a limited number of cases in which very extensive relief was agreed, creditors have been especially disappointed that even purely token payments under rescheduling agreements have not been made.

It has frequently been suggested that the essentially year-by-year nature of Paris Club reschedulings is not suited to the needs of African countries where policy reform and its financing must be placed in a medium-term framework. Paris Club creditors should grant debt relief once and for all over the medium term, it has been suggested, with many possible variations of detail in the modalities, including the linking of debt service due after rescheduling to commodity-price movements. Creditors typically recognize the need of countries to seek debt relief for a number of years and agree that policy planning must be put in a medium-term framework, but they do not generally consider their procedures as standing in the way of such necessary and desirable planning. In fact, the documentation provided to the creditors by the Fund, World Bank, and UNCTAD makes the medium- or longer-term nature of many problem cases explicit. For these cases, creditors point to the fact that they have extended debt relief to a relatively large number of countries year after year, provided they were assured at annual intervals that the country in question continued to pursue appropriate adjustment policies. Creditors have expressed their continued willingness to refinance by explicitly indicating, during each annual rescheduling exercise, their readiness to meet again to consider a further rescheduling request. It would appear therefore that no procedural obstacles exist for debtor countries in obtaining debt relief over the medium term when this is necessary. On the contrary, a well-defined and credible economic policy plan, set in a realistic time frame, is welcomed by creditors as evidence of the debtor country’s commitment to adjustment and facilitates the extension of debt relief on an annual basis over an extended period.

The suggestion has also been made that in certain cases the rescheduling terms of the Paris Club are inadequate, and that both longer grace and maturity periods and lower interest rates are needed. Concessional rescheduling is complex. Many low-income countries clearly need increased concessional assistance. In rescheduling debt service due on development assistance loans, creditors generally maintain the original concessional interest rate; if more concessional terms are needed, an instrument for converting aid loan obligations into grants is readily available (see below). In addition, of course, the Paris Club procedures do not stand in the way of donors providing additional new concessional assistance. In rescheduling debt service due on commercial loans, creditors generally apply market interest rates. Paris Club procedures have evolved with debt service on commercial loans extended or insured by official export credit agencies in mind, and this continues to account for the vast bulk of the “eligible” debt service of the Paris Club. It is highly questionable whether debtor countries, if they were to gain concessional treatment of rescheduled commercial debt service, could regain access to commercial loans after a rescheduling, since a concessional rescheduling would involve considerable financial loss for the export credit agencies. Borrowers currently in difficulty must keep in mind that the resumption of commercial lending to the more creditworthy countries in Africa is normally only possible with the insurance provided by official export credit agencies.

Except in the case of the Côte d’Ivoire (1984), official creditors have not insisted that banks provide new money to African countries to establish comparability in rescheduling exercises. (Both principal and interest payments due are rescheduled in the Paris Club framework, whereas banks reschedule only principal payments.) In the African context, an issue of increasing importance to official creditors has, however, been the comparability of treatment for governmental creditors not participating in the Paris Club framework. Under usual Paris Club accords, the rescheduling country agrees to obtain rescheduling from governments not participating in the Paris Club on comparable terms and agrees not to grant more favorable terms to them. Especially in cases in which debt relief on generous terms (by Paris Club standards) was anticipated, a close examination of the prospective contributions of other governments has been made by the Paris Club creditors. In instances of apparent noncomparability revealed ex post, subsequent reschedulings have confronted serious obstacles.

Conversion to grants

A number of governments have converted existing developmentassistance loans into grants, sometimes in line with their more recent policy of offering mainly grants to low-income countries. This policy will continue to be of help in individual cases, but not all governments have adopted this policy, and those that have appear largely to have exhausted all scope for further conversion to grants, having already converted the bulk of existing loan obligations to grants.

Improved Debt-Management Framework for New Credit Flows

If debt service on the existing stock of debt is dealt with, new credit flows should take place on terms, and within a debt-management framework, that gives highest assurance that resources will be used effectively and that payments associated with the new flows will be made in a timely manner. It is not the purpose of this paper to discuss the general macroeconomic policy conditions that must be fulfilled in order for an effective external debt management policy to be feasible. Without realistic exchange rate and interest rate policies, however, effective external debt management is rarely possible. Indeed, evidence about the detrimental effect of inappropriate exchange rate and interest rate policies on efficient resource allocation is now persuasive. Likewise, the capital flight that was encouraged in the late 1970s and early 1980s by policies of maintaining overvalued exchange rates and negative real interest rates has been documented not only for certain Latin American countries, where it occurred in large absolute amounts, but also for some African countries. 4

The present debt-management framework in a number of African countries appears seriously deficient. The attainment of the development aspirations of African countries can be significantly furthered by sustained access to, and prudent management of, foreign savings. No one can make a credible case for additional financial assistance in instances in which even such basics as reasonably complete data on existing debt and scheduled debt service are unavailable. Yet, in a number of countries, a central unit to advise the authorities on external debt management, to control the contracting of loans, and to administer existing debt is either nonexistent, not fully functioning, or lacking in the appropriate powers. Such a central unit has three purposes: (i) to administer the existing public external debt and discharge debt service on it, monitor private sector borrowing, and keep information on all external borrowing readily available; (ii) to assist the authorities in centralizing approval authority for contracting new external loans by all public sector entities; and (iii) to provide the authorities with analyses and policy recommendations about alternative borrowing proposals.

With respect to the second function of assisting authorities in authorization procedures, three aims should dominate: to centralize loan contracting authority, to help provide proper screening of projects, and to control the composition and terms of new credit flows. Experience strongly indicates that a lack of centralization of loan-contracting authority contributed not only to undisciplined contracting of external loans on inadvisable terms, but also to the initiation of projects of insufficient merit. Without effective central authority for approving public sector external borrowing and, in particular, borrowing by all public sector enterprises, there can be no external debt management.

Concerning the aim of project screening, it may be sufficient to refer to a key conclusion of the World Bank’s report on sub-Saharan Africa which states that “the heart of Africa’s economic crisis is the low rate of return on its capital investment. Much of this failure comes from investment programs that have been extensively financed from external sources.” 5 Because of the need to employ future external resources with much increased efficiency, improved procedures for screening externally financed projects are essential. World Bank expertise in this field will be of critical importance to African countries.

With respect to the control of the composition and the terms of new debtcreating flows, it is evident that a central authority is needed to help ensure an appropriate level and composition of debt-creating capital flows. The aim for most African countries at this juncture will be to secure adequate concessional assistance in support of their policy reforms and to contract commercial loans, when available, only after the strictest of checks. For this function, as for the previous ones, any debt-management unit needs the full support of the highest authorities who determine the guidelines under which the unit is to function. The rejection of external loans that promise short-run relief, but are offered on terms inconsistent with the economic interests of the country, is among the hardest of tasks.

As far as analysis and policy recommendation by a central external debt management unit is concerned, the aim is to provide authorities with advice on the medium-term implications of their borrowing plans. For this purpose, a comprehensive medium-term sectoral and macroeconomic analysis, with particular focus on balance of payments implications, needs to be undertaken and regularly “rolled forward” in light of experience and new information. For many African economies, a procedure distinguishing core and non-core external borrowing may be helpful. Core borrowing, financed from bilateral and multilateral development loan sources and perhaps, to some limited extent, through foreign official export credits and other commercial credits, would relate to the external finance of undertakings in a national development plan. Barring severe shocks, other policies of the government would seek to protect this core program from disturbance. Non-core borrowing (which may or may not be tied to projects) would relate mainly to smoothing out, to some degree, fluctuations in commodity prices or other temporary payments influences.

A key feature of the analysis to be provided to the authorities would be to establish a normative framework for taking on external loans, which, in light of medium-term aims of the authorities, is judged realistic and feasible. When developments deviate from this medium-term framework, economic adjustment policies would be initiated and no recourse would be had to external borrowing beyond that set in the normative framework by the authorities. One purpose of such a framework is the avoidance of procyclical borrowing on the strength of commodity price booms, as happened so often in the past at great subsequent cost to the African economies. Indeed, some noncore borrowing might be repaid during commodity price booms. A borrowing margin must be preserved for a time when the ability to borrow is needed most, namely in periods of temporarily increased payments deficits. All too often in the past, the ability to borrow abroad was nonexistent precisely when its contribution to maintaining high-priority development was indispensable.

Role of the Fund

To establish an improved debt-management framework such as that suggested above, technical assistance is available from several sources, including the World Bank and the Fund (see Annex).

The Fund has, for many years, attempted to assist African member governments in their external debt management. In regular Article IV consultations with members, continued attention has been paid to countries’ external borrowing policies before debt-servicing difficulties arise, and suggestions have been made for improving the management framework. In recent years, Fund missions have discussed explicit medium-term balance of payments scenarios with authorities in the context of consideration of adjustment and financing policies. Moreover, the Fund will continue to play a catalytic role in helping African member countries obtain the necessary financing for their adjustment efforts, in addition to the assistance made available by the Fund itself. For this purpose, the Fund has supported the rescheduling requests of countries in the Paris Club framework as well as those to commercial banks, and has participated in Donor Group meetings, usually chaired by the World Bank. It has also taken the initiative in mobilizing exceptional quick-disbursing balance of payments assistance to countries with adjustment programs.

Repurchase obligations to the Fund on the part of African countries will fall due in 1986–87 in amounts averaging about $1.25 billion per year (including Sudan). These repurchase obligations reflect the substantial net assistance, totaling some $4.4 billion, made available by the Fund in 1981–83 (Table 6). In 1981–82, net Fund flows to sub-Saharan Africa were equivalent to about a quarter of total official development assistance. Responding to drought conditions in Africa, nearly $1 billion was disbursed in 1983 under the compensatory financing facility. The gross repurchase obligations of African member countries must, of course, be seen in conjunction with the continued assistance the Fund will make available to African countries in accordance with its policies, if suitable adjustment policies can be agreed with the member countries concerned. Nevertheless, it is clear that a number of African countries may have to make net repurchases to the Fund in the period ahead. It is essential that the scheduled repurchases take place in order to preserve the revolving character of the Fund’s financial resources. Only if it is respected as a monetary institution rather than an institution offering development finance will the Fund be able to continue its function as a catalyst, inducing additional finance from official and private lenders, partly through reschedulings.

For a discussion of these issues, see External Debt Management, ed. by Hassanali Mehran (Washington: International Monetary Fund, 1985).

World Bank, Toward Sustained Development in Sub-Saharan Africa: A joint Program of Action (Washington: World Bank, 1984).

For a discussion of experiences in rescheduling the debt of several countries, see Recent Developments in External Debt Restructuring by K. Burke Dillon and others, Occasional Paper No. 40 (Washington: International Monetary Fund, 1985), Appendix III, pp. 34–39.

Glynn, Lenny, and Peter Koenig, “The Capital Flight Crisis,” Institutional Investor (New York), November 1984, pp. 109–119.

World Bank, “Toward Sustained Development in Sub-Saharan Africa: A joint Program of Action1 (Washington: World Bank, 1984), p. 41.

Annex

Technical Assistance on External Debt Management to African Countries by the Fund and the Bank

As pointed out above, the Fund has, for many years, discussed external debt with authorities of its members within the context of its regular Article IV missions, and the World Bank has assisted countries in establishing a data base on external debt as part of its work on the Debtor Reporting System. As the need for a comprehensive and systematic approach to external debt management has become pressing for many countries, however, both the Fund and the Bank have in recent years instituted technical assistance programs specifically tailored to the needs of member countries regarding external debt.

This assistance has been provided in three different forms, corresponding to different needs and objectives. First, both institutions have provided inhouse training for officials of member countries in seminars on external debt. Second, the World Bank has provided teams of professionals for short missions. Third, both institutions have assisted countries through the assignment to the host country of resident experts for longer periods of up to two years.

Fund assistance

The technical assistance programs of the Fund were extended to include external debt in December 1982. The program is administered by the Fund’s Central Banking Department. 1 The technical assistance provides experts from its panel of highly trained professionals. As shown in the attached table, seven experts on external debt were assigned to African countries in 1983. Another five African countries requested and received experts in 1984, and technical assistance in this field is expected to continue at this level over the next few years. The period of assignment was generally up to two years, with shorter assignments being the exception.

Table A1. Technical Assistance to African Countries by the World Bank and the Fund on External Debt, 1981-84
World Bank Fund
Field Advisor Advisor Lengrh
Missions Year Year of Stay
1981’84 Started Started (months)
Benin 2 1982
Burundi 1
Central African Republic 2 1981
Cameroon 5 1982
Cape Verde 1
Congo 4 1981
Côre d’Ivorie 4 1983 24
Equatorial Guinea ? 1984 1
Gambia, The 2 1984 6
Guinea 1 1985 2
Guinea-Bissau 1
Kenya 4 3
Liberia 3 1983 14
Madagascar 1
Malawi 4 1984 4 1984 1
Mali 2 1985 1
Maurirania 3 1983 6
Mauritius 1
Niger 1 1984 1 1983 16
Nigeria 3 1985 2
Rwanda ? 1983
Senegal 8 1981 1983 24
Sierra Leone 1 1984 6
Somalia 5 1984 12
Sudan 4 1984 28
Tanzania 4
Togo 3 1984
Uganda 4 1983 24
Zaïre 1 1981 5
Zambia 3 1983 12

Credit signed.

In preparation.

Financed by the United Nations Development Program (UNDP).

Second credit.

Originally funded by UNDP; by World Bank since 1982.

Bank assistance

During the past four years, the number and scope of regular debt missions from the World Bank has increased rapidly to an average of 19 missions each year. Twenty-eight countries have been visited. These missions were generally of short (two to four weeks) duration and were usually designed to assist countries with the solution of a particular problem, such as the preparation of debt rescheduling negotiations. The Bank has also provided credits for and assisted in the selection of resident experts in 14 countries. 2 This level of technical assistance is expected to continue over the next few years.

Most assignments aim to set up permanent machinery for the collection, classification, and analysis, as an integral part of the host country’s institutions, of data on external debt. Since a reliable and up-to-date data base is essential for the analysis and management of external debt, the first steps toward such a system consist of making a complete inventory of existing debts, setting up an accounting framework for the collection and centralization of debt statistics, and establishing regular reporting procedures to keep the data base current. The expert can assist the country in this task by tailoring to the specific institutional arrangements of the host country procedures that have proved useful elsewhere. The computerization of debt statistics is often an integral part of such a system. Here technical experts can advise on options for putting in place the appropriate information system. In many cases, technical assistance has expanded upon this basic need for data and has included support in the design and the implementation of analytical procedures and information systems needed to adequately manage external debt.

A crucial element in the expert’s assignment is the training of local counterparts. The expert’s terms of reference almost always include a clause emphasizing this important aspect of his responsibility. The need for an assignment is considered to last until a local officer can take over without relying on further outside support. This training aspect of technical assistance has proven to be the most valuable contribution to many member countries in their efforts to improve the management of external debt.

Comment

C.M. Nyirabu

I find Mr. Brau’s paper interesting, although its scope is somewhat limited. It is less a discussion of African external-debt problems than a discussion of some limited aspects of management of the debt problem.

There is little to disagree with in what he says. His figures on debt, however, are official figures that underestimate the debt, particularly short-term debt and arrears; even the Fund debt is excluded from the data in his paper. Some analysts have concluded that total debt is in the order of $130 billion in sub-Saharan Africa, perhaps about $190 billion for the entire African continent, excluding South Africa.

On the relationship between creditors and debtors, I think creditors in other contexts usually take the view that helping to overcome debt-service difficulties is prudent and that providing new money to pay interest is a way to minimize losses.

On the question of arrears, I find the discussion admirable in principle, but somewhat unreal. The paper suggests how commercial arrears can be paid off quickly. It assumes that the clearing of commercial arrears would automatically open the way to renewed access to regular trade finance, including that insured by export credit agencies. While this sounds theoretically logical, in practice care should be taken not to assume that new money will be advanced in all cases where arrears are cleared. Many export-credit agencies are not providing new cover to exporters to restore that previously offered when arrears are paid. Therefore, rather than merely paying off all short-term arrears, methods of reducing trading arrears in exchange for incremental support should be seriously considered. In this context, paying arrears, which in some countries are equivalent to a whole year’s export earnings, within a short time is impracticable. Using the whole of the Fund’s drawings for this purpose would be a questionable allocation policy and would not suffice to clear arrears anyway. In any event, three years later it would be likely to cause the emergence of either commercial arrears or arrears in Fund repurchases. I do not have an answer to these problems, but I think the proposal by Mr. Brau is not possible. Perhaps selective payments tied, if possible, to prior agreements with suppliers of potential imports might be a priority. Perhaps also conversion of arrears into local currency for investment in the country may be an alternative—or even allowing creditors to purchase some nontraditional exports to promote new items.

I agree that the Paris Club reschedulings have, in general, provided adequate relief for sufficient periods for stabilization and export recovery to have a reasonable chance of success. Typical balance of payments projections have had three characteristics: optimistic export growth forecasts, assumed import growth rates well below those of GDP, even though GDP was constrained by import levels, and large “other items,” which in effect might more accurately be entitled “resources yet to be located.” A rolling annual rescheduling is not an adequate substitute for, say, five-to-seven-year rescheduling for the following reasons. First, we are constantly asked to make medium-term plans. As a prudent banker, I feel unable to budget future reschedulings dependent on future negotiations. I believe many of my colleagues feel likewise. Second, the amount of time high-level staff of central banks and economic ministries have taken up by the annual debt reschedulings is a serious misallocation of scarce resources. We in Tanzania sometimes find that we spend infinitely more time—weeks on end—negotiating with the Fund, the World Bank, and creditors than with working to put things right. To increase still further the allocation of time to negotiations, leaving less time for formulating and implementing policy, cannot, in my view, be efficient.

Few reschedulings in Africa can hope to succeed without injections of new concessional loans or grants. Creditors have powerful leverage over the performance of debtors through year-to-year rescheduling. They can cut off the new money. Thus the year-to-year approach seriously misallocates our scarce personnel time and gives scope for additional surveillance or leverage powers to the creditors. Surely, these are the hallmarks of a cost-inefficient approach or a negative sum game. Paris Club negotiations have, in general, not been adequately focused on a total improvement in resource availability, from rescheduling plus new grants or new money, sufficient for stabilization and adjustment programs to succeed in Africa. Of course, in principle, they can. My concern is that they usually seem not to do so.

Mr. Brau’s paper mentions central coordination and approval of external borrowing as having been weak—a missing link in African external-debt management. I think this is an important but insufficient condition to avoid overborrowing. We in Tanzania have practiced centralization of this type for over 20 years. Also weak is the analysis of the viability of macroeconomic projects, that is, whether a project can pay for itself in terms of foreign exchange. Another problem is our inability to forecast how global economic swings might affect the viability of any project by imposing constraints on the rate of growth of the economy as a whole. A third problem is adequately forecasting how rapidly the external environment can improve and therefore when and to what extent our use of external credit to sustain private and public fixed investment in a downswing was prudent.

In my view, the worst problem has been a forecasting failure, and I am not sure we know enough to avoid it again, except by assuming all downswings will be so long and severe that virtually no additional medium-term external credit should be drawn on. I fully agree that debt on unsustainable terms or conditions should not be incurred, whatever the source. I agree that prudent debt management requires avoiding the use of moderate or higher interest rate, short- to medium-term loans, except on specific projects that generate net foreign exchange earnings year by year equal to debt service once they enter production. General use of money at, say, 9 percent, and the repayment of three years of borrowing over the subsequent three to six years is excessively imprudent; but this leads me to wonder whether Fund drawings beyond the first credit tranche and perhaps the compensatory financing facility themselves are consistent with prudent debt management in a low-income country, when a reasonable estimate of the length of the period required for stabilization or adjustment is about seven or eight years. Certainly, if we used other sources of credit, such as export or suppliers’ credits, on similar terms, we would rightly be accused of grossly imprudent debt management and virtually disqualified for consideration for World Bank structural-adjustment lending on these grounds alone. I quite agree that when the economy and external balance are strong, one should reduce, rather than increase, external borrowing, and should build up external reserves. As noted earlier, however, we are no longer sure we can accurately enough forecast how long a downswing will last to know when and to what extent it is prudent to raise external borrowing above budgeted levels.

A description of technical assistance by the Fund can be found in Technical Assistance and Training Services of the International Monetary Fund, IMF Pamphlet Series, No. 43 (Washington: International Monetary Fund, 1985).

In the case of the assistance by the Fund, the financial costs are largely borne by the Fund.