The external indebtedness of non-oil developing countries has been of growing concern in recent years. Several factors have brought the debt issue to the forefront of the problems facing a number of countries, including the rapid rise in external debt in the recent past, changes in the composition of debt (toward a greater proportion owed to commercial banks) and the attendant deterioration in the terms of debt, and the rise in debt service resulting from these developments. Some countries have already encountered or are currently experiencing debt servicing problems, and there is concern that such problems may become more acute as countries incur additional external debt.

Debt problems, however, cannot be considered in isolation; they must be viewed in the broader context of the overall external positions of the non-oil developing countries and their underlying stability and growth. The fundamental changes that have occurred in recent years in the external environment facing developing countries are reflected in the level and structure of their external indebtedness; the large external imbalances in prospect for many of them will require further reliance on external financing, associated with substantive adjustment efforts.

A detailed analysis of the financing requirements and prospects of non-oil developing countries is beyond the scope of this paper, but reference may be made to other Fund material on this general subject.¹ It has been emphasized that the structural nature of the present imbalances increases the urgency to develop appropriate responses from the supply side, which will allow countries to achieve viable external positions, and to maintain the requisite policies to keep aggregate demand within the constraints set by available financing. While the global payments imbalance in 1979–80 is broadly similar in real terms to that associated with the 1973–74 round of oil price increases, there are important differences. The combined current account deficit of non-oil developing countries is smaller in relation to their gross domestic product (GDP) than in the previous cycle. However, it is unlikely that the current account surplus of the oil exporters will decline as rapidly, or that the growth rates of the industrial countries will recover as quickly, as in the mid-1970s. Thus, the correction of the payments imbalances is not likely to be achieved within a short period, and substantial amounts of financing will be needed to permit the adjustment process to run its course without unduly impairing the growth prospects of developing countries.

A major portion of the financing of these deficits will represent net borrowing, and thus the outstanding indebtedness of developing countries will continue to rise. Some countries will have recourse to official development assistance for part of their financing requirements; it is unlikely, however, that these flows will increase substantially. For their remaining needs and, more important, for countries that are not recipients of official development assistance, private financial institutions will continue to be a major source of financing.

In aggregate terms, notwithstanding its rapid increase in recent years, outstanding total non-oil developing country indebtedness measured in relation to such variables as exports, GDP, or foreign exchange reserves is broadly comparable to the level of the early 1970s; there is an increase, however, in the real burden of debt service. Furthermore, both the scale of the prospective imbalances and the incremental demand for private financing are smaller in relation to the size of financial markets than they were in 1973–74. It appears, therefore, that a continuation of recent growth rates in international bank lending would be sufficient, through 1981, to accommodate aggregate demand from developing country borrowers. The particular situation and prospects for an individual country, however, will tend to influence a bank’s perception of that country’s creditworthiness. While several countries face potentially serious debt problems, the severity of such problems could be significantly alleviated by the adoption of considerably strengthened adjustment and debt management policies.

Section II of this paper presents a quantitative account of the major developments in external debt of developing countries. A discussion of some conceptual and statistical aspects is followed by a description of the rapid increase in nominal debt and debt outstanding during 1972–79 and various measures of the relative importance of debt. The debt situation of the non-oil developing countries is analyzed in detail, and the significant changes in debt structure—toward a greater proportion of debt to private creditors and the associated changes in the average terms of debt—are described. On the basis of available data, an attempt is made to extrapolate the debt situation for the period immediately ahead. It is suggested that the current debt situation and outlook is such that, in aggregate terms, and provided that appropriate national economic policies are pursued, the additional indebtedness in prospect through 1981 can be accommodated without undue concern.

Section III focuses on developments in real external debt and real debt burden (i.e., adjusted for inflation) for the non-oil developing countries. It also discusses the use of external debt indicators, such as the ratios of external debt to gross national product (GNP) and debt service to export earnings, as analytical tools in appraising a country’s external debt situation. The principal conclusion of this section is that, while the nominal burden of external debt increased substantially, the increase was considerably smaller when adjusted for inflation. The impact of inflation, however, differs greatly depending on whether fixed or variable interest rate loans are the dominant form of lending.

In Section IV, there is a summary survey of the debt difficulties experienced by a number of countries during 1975–80, including a brief account of the balance of payments background to those difficulties. There were no major differences in the terms of borrowing, but the economies of the countries encountering debt problems generally were characterized by expansionary financial policies that resulted in high import growth, relatively high export variability, and low growth of GDP and exports, suggesting a less efficient use of domestic and borrowed resources.

The Fund has continued its efforts to assist countries in avoiding debt difficulties; Article IV consultations and financial support for adjustment programs are important elements in this process. However, when such problems emerge and lead to debt rescheduling, the Fund has an important role to play. These matters are discussed in Section V in the context of multilateral debt renegotiations. The guidelines incorporated in a 1980 resolution of the United Nations Conference on Trade and Development (UNCTAD) on debt matters are also discussed in this section.

Section VI discusses the experience of a few countries that sought a restructuring of their debts to commercial banks in recent years. The focus is on the evolution of the role of international bank financing in these countries, the modalities and financial impacts of the restructurings, and the linkage of the restructuring process to other international efforts to help the countries regain a viable economic path. A few general issues that emerge from this experience are identified.