International Monetary Fund. Western Hemisphere Dept.
2019 Article IV Consultation, Second Review Under the Extended Arrangement, Request for Completion of the Financing Assurances Review, and Modification of Performance Criteria-Press Releases; Staff Report; and Statement by the Executive Director for Barbados
This paper develops and empirically tests a political economy model of sovereign debt. The main incentive for repaying sovereign debt is to maintain access to international capital markets. However, in a democracy, one generation may choose default regardless of its consequences for future generations. An old generation with little concern for its country's access to capital markets can force a default on debt if it has the majority of voters. On the other hand, if the younger generation is more numerous, it can force repayment of previously defaulted debt. Other voter heterogeneities, such as in income, can generate similar results.
Eduardo A. Cavallo, Mr. Eduardo Borensztein, and Mr. Patricio A Valenzuela
Natural disasters are an important source of vulnerability in the Caribbean region. Despite being one of the more disaster-prone areas of the world, it has one of the lowest levels of insurance coverage. This paper examines the vulnerability of Belize's public finance to the occurrence of hurricanes and the potential impact of insurance instruments in reducing that vulnerability. The paper finds that catastrophic risk insurance significantly improves Belize's debt sustainability. In addition, the methodology employed makes it possible to estimate the appropriate level of insurance, which for the case of Belize is a maximum coverage of US$120 million per year.
Lithuania showed strong economic growth with low inflation owing to its sound economic policies. Executive Directors commended this development, and appreciated Lithuania for signing the European Union Accession Treaty. They encouraged the authorities to maintain macroeconomic stability and accelerate structural reforms. They welcomed the efforts of the Bank of Lithuania to implement Financial Sector Assessment Program recommendations. They emphasized the need for energy and transport privatization, the modernization of the agriculture sector, and streamlining of the legal framework to enhance transparency, governance, and the overall business environment.
This paper presents report on a number of countries in Asia that have made substantial use of agency credits, including the quasi-concessional financing available through mixed credit s. Through their willingness to grant comprehensive relief on a case-by-case basis, official creditors have responded flexibly to the needs of individual countries. The ability of export credit agencies to also provide substantial new financing to rescheduling countries has depended on the strategy of debt subordination achieved through fixing cutoff dates. As to the role of export credits at present, when the debt strategy’s continuing emphasis on new money flows is being supplemented by debt reduction, the debt subordination strategy followed by export credit agencies has left them well positioned to provide necessary new financing for middle-income countries pursuing strong adjustment. In heavily indebted low income countries, whose needs for project finance should most appropriately be met by concessional finance, export credit agencies continue to play an important role in supporting essential short-term credits.
Export credit agencies continue to play a critical role in the flow of external finance to developing countries. The relatively limited demand for investment goods in many of the countries experiencing debt-servicing difficulties, together with the restrictions on cover that agencies have had to impose on noncreditworthy countries, has meant that agency activity has tended to concentrate on those developing countries that have avoided, or successfully adjusted to, debt service difficulties. In particular, a number of countries in Asia have made substantial use of agency credits, including the quasi-concessional financing available through mixed credits.
Following the onset of the debt crisis in the early 1980s, there was a precipitous decline in official support for export credits to developing countries. In part, this was a result of a reduced demand for imports, as governments responded to balance of payments difficulties by cutting back public sector investment programs. But it was also, in part, a consequence of export credit agencies moving to restrict the availability of insurance cover as more and more countries experienced debt service difficulties.2 The demand for export credits was reduced further in the mid-1980s when the sharp fall in export revenues led to a similar compression of imports in oil exporting countries.
Until 1983, most agencies had little experience of payments difficulties on sovereign loans. A few had substantial exposure to countries that had rescheduled in the 1970s, but for the most part major borrowers had not had to resort to debt reorganizations. Over the seven years from 1976 to 1982, 15 countries, only 3 of which were major debtors,15 had rescheduled debt service obligations to official creditors. The amounts involved (including official development assistance (ODA) and other bilateral loans, as well as export credits) averaged less than $2 billion a year (see Chart 2). In 1983–85, however, many other recipients of large amounts of export credits encountered payments difficulties: Argentina, Brazil, Mexico, Morocco, the Philippines, and Yugoslavia, among others, concluded agreements with Paris Club creditors. During this period, claims rescheduled by the Paris Club amounted to over $10 billion a year, and an increasing share of agencies’ portfolio of cover was to countries that had rescheduled; by the end of 1985, 35 percent of the disbursed stock of officially supported export credits to developing countries was accounted for by the 34 countries that had rescheduled, compared to 10 percent at the end of 1982.16 In addition, substantial arrears had been accumulated by a number of other countries, although no agreement had yet been reached to restructure their debts.
Official export credit agencies have fulfilled their mandate to facilitate and promote national exports through two principal means: channeling financial “subsidies to export credits and providing cover on terms better than those available in the market. The first of these involved explicit, though often opaque, subsidies that had a strong measure of domestic political support. The second was long perceived as a nonsubsidized, even profitable, activity, since with the full faith and credit of government treasuries behind them, agencies could offer insurance for political risk that was potentially too catastrophic for private insurers to handle. The risk itself was perceived to be less, since agencies, as official creditors, were thought to be able to count on eventual, even if delayed, repayment of sovereign credit.