The economic performance of developing countries in 1985 was disappointing, following the encouraging recovery of output that had occurred in 1984. Economic growth decelerated, inflation remained high and external creditworthiness showed few signs of improving. Part of the reason for this weaker performance is traceable to the slowdown in industrial countries, and the associated decline in developing countries’ export earnings. In addition, however, adjustment efforts seem to have flagged, particularly in the field of policies aimed at improving domestic economic performance.
Developments in 1986–87 will depend on the extent to which these slippages can be reversed, as well as on the state of the international environment. For most countries the recent sharp fall in oil prices will lead to terms of trade gains or will, in combination with the decline in international interest rates, at least facilitate adjustment to the low prices currently prevailing for most other commodities. Developing countries that are dependent on oil for their export earnings, on the other hand, face a difficult process of adjustment. In this chapter, attention is directed first to the factors determining recent developments and short-term prospects for output and demand in various groups of developing countries. Other domestic issues are then examined, including the outlook for inflation, financial policies, and domestic saving and investment. The concluding sections of the chapter deal with external developments, and focus in turn on trends in the current account position of developing countries and on prospects for external financing and debt.
Demand and Output
The growth of real GDP in the developing world slackened appreciably in 1985, in broad conformity with developments in the industrial countries. For the developing countries as a group, aggregate output growth, which had accelerated from about 1½ percent per annum in 1982–83 to 4 percent in 1984, fell back to 3¼ percent in 1985. This outturn was about a ¼ of 1 percentage point below the estimate made in mid-1985 and about ¾ of 1 percentage point below that made at the beginning of the year. The downward revisions have been widespread, with output growing by less than projected in all regions except the Western Hemisphere, which was heavily influenced by the strong pace of expansion in Brazil. Overall, therefore, the slowing of growth in the industrial countries appears to have had a fairly immediate and generalized effect on the developing world. This outcome, although perhaps not surprising given the limited room for maneuver in developing countries’ external positions, is nevertheless a considerable disappointment, postponing as it does hopes of seeing these countries resume a more satisfactory pace of economic development.
The influence of external developments on developing countries in 1985 can be illustrated by comparing the growth of output relative to that of real export earnings in various groups of countries (Table 4). The fuel exporting countries confronted the most adverse external conditions in 1985, with the real purchasing power of their exports falling by 8 percent. They also had the weakest output performance, with their combined real GDP actually declining slightly. The non-fuel exporters, by contrast, fared considerably better. Although their terms of trade deteriorated by 1¼ percent, the volume of their exports rose by nearly 3½ percent. As a result, the trade accounts of these countries continued to be a source of support to economic activity and growth remained a quite vigorous 4¾ percent. Within the non-fuel exporting group, the growth of real export earnings was better sustained among the exporters of manufactures than among the exporters of primary products, and this contributed to a more satisfactory rate of output growth in the former group.
Developing Countries: Output and Export Earnings, 1985
(Changes, in percent)
Export earnings deflated by import prices.
Developing Countries: Output and Export Earnings, 1985
(Changes, in percent)
Purchasing Power of Exports1 |
||||||
---|---|---|---|---|---|---|
Real GDP |
Total | Export volumes |
Terms of trade |
|||
Developing countries | 3.2 | -1.8 | 0.4 | -2.2 | ||
Fuel exporting countries | -0.1 | -8.1 | -4.1 | -4.2 | ||
Non-fuel exporting countries | 4.8 | 2.1 | 3.4 | -1.2 | ||
Of which, | ||||||
Primary product exporters | 3.6 | — | 3.3 | -3.2 | ||
Exporters of manufactures | 6.6 | 3.7 | 3.6 | 0.1 |
Export earnings deflated by import prices.
Developing Countries: Output and Export Earnings, 1985
(Changes, in percent)
Purchasing Power of Exports1 |
||||||
---|---|---|---|---|---|---|
Real GDP |
Total | Export volumes |
Terms of trade |
|||
Developing countries | 3.2 | -1.8 | 0.4 | -2.2 | ||
Fuel exporting countries | -0.1 | -8.1 | -4.1 | -4.2 | ||
Non-fuel exporting countries | 4.8 | 2.1 | 3.4 | -1.2 | ||
Of which, | ||||||
Primary product exporters | 3.6 | — | 3.3 | -3.2 | ||
Exporters of manufactures | 6.6 | 3.7 | 3.6 | 0.1 |
Export earnings deflated by import prices.
The influence of external factors should not, however, be overstressed. Domestic sources of demand are as important to the economies of developing countries as they are in industrial countries. For the past several years, macroeconomic policies have been aimed at limiting domestic absorption to levels that would permit the increases in net exports required to ease external imbalances. However, with the re-establishment of more sustainable external positions in 1984–85, particularly among the larger countries, that context changed. Domestic demand was able to grow more rapidly, and when export growth slowed in 1985, the effects of this slowdown on output were tempered, at least in some groups of developing countries, by the continuation of fairly strong domestic demand growth.
Fuel Exporting Countries
The fuel exporting countries have been the most adversely affected by recent trends in external demand. As oil prices began to recede from earlier peaks, and as export volumes weakened in the face of energy conservation, interfuel substitution, and the development of alternative sources of supply, the purchasing power of fuel exporting countries’ exports fell sharply. In 1985, these countries’ real export earnings fell 8 percent, and were only 5 percent above the level reached before the second round of oil price increases in 1979–80. Not surprisingly, therefore, the combined output of this group of countries has been hard hit. Their aggregate GDP in 1985 was unchanged from the previous year and was at approximately the level first reached in 1980.
The domestic and external adjustment required of the fuel exporting countries in recent years has been substantial. Initially, the large current account surpluses registered by these countries in 1979–80 had sheltered domestic spending from the effects of falling revenues. By 1982, however, their combined current account was in deficit by some $26 billion, after having been in surplus by $95 billion two years earlier. To cope with this turnaround, firm action was undertaken to curtail domestic expenditure, particularly investment spending. The average ratio of investment to GDP declined from 27¼ percent in 1981 to 23¼ percent in 1985. By 1984–85, despite the continued weakness of oil revenues, the deterioration in these countries’ budgetary positions had been arrested, and import cuts had permitted a reduction in the combined current account deficit to less than $10 billion.
These adjustments notwithstanding, it is clear that sizable further adjustments will be required of fuel exporting countries in 1986 and beyond. As described in Supplementary Note 4, oil prices fell sharply in the early part of 1986. In elaborating the projections, the staff has assumed that the oil export price will average $16 a barrel in 1986–87, a decline of some 40 percent from the 1985 level. Since oil accounts for some four fifths of the fuel exporters’ exports, a drop in oil prices of this magnitude is expected to imply an overall terms of trade loss of some 37 percent in 1986. Similarly, with oil exports accounting for close to a sixth of output, the immediate loss in real income is also expected to be severe, equivalent to some 6–7 percent of GDP.
A loss of this magnitude will tend to be amplified as domestic economic agents gradually adjust their spending to the reduced level of real income. However, policies in these countries are expected to be oriented toward limiting, at least to some extent, the adverse consequences for the economy as a whole, for example, through sales of foreign assets and, where possible, by allowing increases in public sector deficits. Moreover, governments can be expected to concentrate on adjusting those expenditures, such as technology and import-intensive investment, which result in the greatest import reductions for the lowest adverse consequences for domestic incomes. In the same vein, a number of countries may resort to intensified import restrictions aimed at curbing “non-essential” imports, i.e., those which can be cut without undue adverse consequences for output and employment. Moreover, several of these countries are expected to promote their non-oil exports through exchange rate adjustments and other means. Finally, the task confronting these countries will be eased by the firming of output prospects in oil importing countries and the easing of international interest rates. Nevertheless, even after these mitigating factors are taken into account, the fuel exporters will need to effect large cuts in both real imports and absorption so that, overall, real domestic demand might eventually decline by an amount broadly equivalent to that of the initial terms of trade effect. Real GDP, however, would be somewhat better sustained because of the concurrent improvement in the real foreign balance. In 1986, real GDP for the group of fuel exporters as a whole is expected to decline by 0.6 percent before firming slightly in 1987.
Within the group of fuel exporters, an important distinction may be made between those countries that have typically been capital exporters and those that, despite oil revenues, have tended to remain importers of capital from abroad. The former group is relatively more dependent on oil revenues, with oil exports accounting for the near totality of exports in 1985. Moreover, because of the production cutbacks these countries have had to undertake in recent years, they have experienced a disproportionate share of the loss in oil export earnings recorded by fuel exporting countries since 1980. By 1985, their real export earnings were half their 1980 levels and 16½ percent below those obtaining before the second round of oil price increases. Losses of this magnitude have taken their toll, and governments have responded with wide-ranging expenditure cuts. As a result, domestic demand has slackened appreciably. Imports in particular have been cut sharply in volume terms—by 5 percent in 1983, 9 percent in 1984, and 15½ percent in 1985 (Chart 18).
Developing Countries: Imports, in Volume, 1972–86
(Indices: 1972=100)
The decline in oil prices of early 1986 will, if sustained, hit the capital exporting countries hardest because of the overriding importance of oil in most of these economies. The loss in the terms of trade is expected to very nearly equal the drop in oil prices and the immediate loss in real income would reach some 7 percent of GDP. However, most of these countries were able to accumulate substantial external assets while oil prices were rising. These external assets, as well as the relatively high income levels in their countries, provide something of a cushion against the effects of a loss of export earnings.
As a result, the countries in this group have some latitude as regards the pace of the adjustment. A few of them are expected to remain in current account surplus, and some could at least for a time probably finance the loss in export earnings through running down external financial assets. Nevertheless, these countries as a group are under considerable pressure to adjust, given the 42 percent loss in the real purchasing power of their exports projected for 1986.
The extent by which these countries might curtail imports to compensate for the drop in earnings is difficult to estimate. The data for the years 1982 to 1985 suggest that adjustment has increased over time, with the relationship approaching one-to-one by the end of the period. On the other hand, the compression in imports already undertaken has been so large for some countries that further adjustments will become increasingly difficult. In the projections, the staff has assumed that the adjustment in 1986 would be large, with imports dropping by some 18 percent in volume terms, but nevertheless less than half that which would be required to match the loss in the purchasing power of exports.
The situation of the capital importing fuel exporters (a group that includes Algeria, Indonesia, Mexico, Nigeria, and Venezuela) is rather different. The real export earnings of these countries have been less severely affected than those of the capital exporting group in recent years, partly because oil is a smaller share of their economies, but mainly because terms of trade losses have been largely made up by increases in oil export volumes. Thus, while these countries’ earnings were down by some 4 percent in 1985 compared with 1984, they were still above their level in 1982–83. Nevertheless, these countries have been faced with the need for substantial adjustments, as they have not had the same flexibility as most countries in the capital exporting group to draw down external assets. In addition, many of the capital importing fuel exporters were severely affected by the cessation of private bank lending after 1982, which, together with higher debt service payments, prompted sharp cutbacks in absorption, especially investment spending. As a result, imports declined by 28 percent between 1981 and 1983. By the close of 1983, however, most of this initial adjustment had been completed and, under the impetus of the international recovery, output growth resumed in 1984.
After 1984, the momentum of policy adjustment seems to have slackened in this subgroup of the fuel exporting countries. Their combined fiscal deficit rose from 3¾ percent of GDP in 1984 to 5 percent in 1985 and their current account swung back toward deficit. For 1986, however, the substantial weakening of the terms of trade, together with limited opportunities for external borrowing, makes a renewed curtailment of expenditures in these countries unavoidable.
These countries are, by and large, heavily indebted and without ready access to the external financing that would be required to enable them to postpone adjustment to a $30 billion loss in export earnings. Given these financing constraints, governments can be expected to seek pronounced cuts in both fiscal expenditures and imports, as they did in 1982–83. The earlier cuts had been relatively easy, however, coming as they had on the heels of a period of marked buoyancy. Indeed, they did little more than reverse the preceding surge. Further cuts, however, would occur in a context in which there has been no substantive improvement in living standards for close to a decade, and in which per capita GDP and imports are at or below the levels of the mid-1970s. Under these circumstances, the political pressures resisting adjustment could well be considerable and national authorities are expected to seek ways to phase the adjustment over several years.
Some latitude in this respect will be provided by the reserves accumulated by some of these countries in 1983–85, which, at end-1985, amounted to close to 25 percent of imports for the group as a whole. In the main, however, these countries will be able to phase their adjustment only to the extent that they are able to attract additional external financing. For a number of these countries, this financing will in all likelihood not be forthcoming on a voluntary commercial basis. The grounds for such financing will rather reflect various political considerations; concerns for the stability of the financial system; and concerns about maintaining the capital value of existing commercial claims on these countries by, for instance, avoiding arrears on debt service payments. Whatever the reason, such financing is likely to be tied to the implementation of policies that ensure adjustment in these countries’ current account balances to the new price of oil within a relatively short time.
Non-Fuel Exporting Countries
Economic activity among the non-fuel exporting countries has been much better sustained than among those countries that are heavily dependent on oil exports. Output growth in non-fuel exporters averaged 2¾ percent in the years 1981–83, and accelerated to 5½ percent in 1984, before falling back to 4¾ percent in 1985 (Chart 19). A major factor underlying the much stronger performance of these economies has been the relatively stable growth in foreign demand for their exports. This is not to say that these economies did not confront weak international demand or strong adjustment pressures. Indeed, their real export earnings were no better than stagnant during the international recession, at the same time as their interest costs rose sharply, and their access to external private financing virtually dried up. These adverse trends forced a marked squeeze on the growth of domestic absorption during 1981–83. Thereafter, with the onset of recovery in the United States, and aided by the adjustment policies in place, these countries’ real export earnings responded strongly to the growth in foreign demand, with real earnings rising by 8½ percent in 1983 and 13½ percent in 1984.
Non-Fuel Exporting Developing Countries: Real GDP, Real Domestic Demand, and Purchasing Power of Exports, 1978–86
(Annual changes, in percent)
In 1985, however, global conditions once again turned less favorable, with the growth of real export earnings dropping back to only 2 percent. This weakness of external demand would undoubtedly have led to a substantial slowing of GDP growth had it not been for a strengthening of domestic demand growth. This firming of domestic demand seems to have reflected primarily an easing in the stance of demand management policies—not in the sense that policies became actively expansionary but rather that there was an easing in restraint. Fiscal deficits, for example, which had been significantly reduced as a percentage of GDP in 1984, tended to stabilize in 1985. In the same vein, the combined current account deficit—which had fallen steadily in the period 1981–84—ceased to narrow.
For 1986 and 1987, the policy objectives of governments in the non-fuel exporting countries indicate that financial policies will once again become more restrictive, with central government fiscal deficits expected to decline by ½ of 1 percent of GDP in 1986. These adjustment measures, geared as they often are to dramatic cuts in inflation rates in some countries, are expected, in combination with a more favorable set of external developments, to lead to a reasonably well-sustained pace of both demand and output in 1986 and 1987. The improvement in the external circumstances confronting these countries in 1986 is especially marked. The drop in oil prices will result in a reduction in the group’s net oil import bill of about $15 billion, or some 4 percent of imports and ¾ of 1 percent of GDP. Further savings will stem from the associated 1 percentage point reduction in international interest rates. Moreover, with the partly oil-induced recovery of domestic demand in industrial countries, the export earnings of these countries are expected to firm in 1986–87, In addition, a number of countries (in particular in Africa and in Central America) will register significant further gains in real incomes because of the large increases in coffee prices.
These gains will be partially offset by losses stemming from the continuing weakness of primary commodity prices other than coffee, by the decline in exports to fuel exporting countries and, for countries in and around the Middle East, by significant reductions in remittance and official transfer receipts from the fuel exporting countries of that region. Nevertheless, the balance of these factors is expected to be distinctly favorable for the group as a whole, with the purchasing power of exports expected to rise by some 8 percent in 1986. While part of this real income gain is expected to be used to buttress adjustment efforts and to replenish reserves, part also is expected to be used for additional imports to sustain domestic demand and output growth. Overall, growth is expected to average 4½ percent in 1986 and to firm to 4¾ percent in 1987.
It needs to be remembered, of course, that the group of non-fuel exporting countries covers a diversity of economies, each facing rather different external and internal circumstances. With respect to 1985, an important distinction can be made between the primary product exporting countries, on the one hand, and the exporters of manufactures, on the other. The importance of this distinction stems from the fact that the primary product exporters incurred terms of trade losses not experienced by the exporters of manufactures. Thus, whereas the terms of trade of the exporters of manufactures were unchanged in 1985, those of the primary product exporters deteriorated by 2¼ percent. This worsening reflected the 13 percent drop in prices of non-oil primary products relative to those for manufactures in 1985. (See Supplementary Note 3 for more details.) The resulting real income losses in primary product exporting countries had depressing effects on domestic demand and output that were largely avoided by the exporters of manufactures.
Within the primary product exporting group, it is important to distinguish developments in Brazil and Argentina from those in most other countries.1 Brazil, like many other countries, underwent a period of concentrated economic adjustment in the early 1980s, which led to a pronounced decline in output and an even more marked decline in domestic absorption. Partly because of this adjustment and partly because of the resurgence in U.S. demand for its goods, Brazilian exports increased sharply in both 1983 and 1984. As a result, output growth had recovered to 4½ percent by 1984 and balance had been established in the current account, after a $16 billion deficit only two years earlier. After the elections late in 1984, the Brazilian authorities used the scope provided by their stronger external position to support the growth of domestic demand through large increases in real wages. The result was a consumption-led boom in domestic demand and an acceleration in GDP growth to 8 percent in 1985, despite a significant loss in real export earnings. This performance was achieved with only a small deterioration in the current account, owing in large part to the relatively small size of the tradable goods sector in Brazil—imports account for 4 percent of GDP—and to rigid controls over the flow of imports. Internal disequilibria were significantly exacerbated. however, as evidenced by the acceleration of inflation from average twelve-monthly rates of less than 140 percent in 1984 to well over 200 percent in 1985. As a result, the Brazilian authorities announced in early 1986 a major set of policy measures intended to reestablish control over inflation (see below).
Developments in Argentina were also atypical in 1985, but for quite different reasons. Adjustment efforts in Argentina had had a somewhat mixed record until 1984. After 1984, however, policies moved increasingly toward controlling internal and external disequilibria. The fiscal deficit was reduced from 18 percent of GDP in 1983 to 5 percent in 1985; inflation was lowered dramatically after mid-1985; and the current account deficit was roughly halved. Nevertheless, the costs of earlier policy errors have been high. Real output declined by 4½ percent in 1985 and domestic absorption by perhaps twice that amount.
Developments in most other primary product exporting countries in 1985 were less striking than those in Argentina and Brazil. The international recovery had led to a strengthening of their growth rates from an average of ¾ of 1 percent in 1982–83 to 3¼ percent in 1984. Partly because of inadequate policy adaptations, however, substantial fiscal imbalances and exposed external positions remained prevalent in these countries. As a result, when 1985 brought a slowdown of export growth and a sharp deterioration in the terms of trade, these countries had little choice but to continue policies of demand restraint. Fiscal deficits were curtailed further and imports were cut. Rates of output and domestic demand growth thus faltered, with real GDP growth slowing to 2 percent in 1985.
For many of the primary product exporting countries the growth of output is likely to be considerably more buoyant in 1986. The decline in oil prices will cut over $7 billion from their combined import bill, thus freeing, in combination with reduced debt service payments, foreign exchange for other pressing uses. The 50 percent rise in coffee prices occasioned by the drought in Brazil will be even more beneficial for the twenty or so countries in the group that export coffee. Not only will these countries benefit from the rise in price, but they will also benefit from being able to export large amounts of coffee out of existing stocks. Accordingly, except for Brazil where coffee production is expected to be quite weak, these countries’ export earnings are projected to rise by some 18½ percent in 1986, fueling an acceleration in output growth from 2½ percent in 1985 to almost 6 percent in 1986. Growth among the other primary product exporters is expected to be more subdued, with the favorable terms of trade effects originating in the decline in oil prices being more than offset by the continuing deterioration in the relative price of non-coffee primary products vis-à-vis manufactures. For the group of primary product exporters as a whole, the weighted average growth rate is expected to remain around 3¾ percent in 1986. This unchanged overall growth rate is, however, swayed by developments in several of the larger countries. For the typical or median country, a distinct firming of growth is anticipated, from 2¾ percent in 1985 to nearly 4 percent in 1986 and 1987.
The exporters of manufactures have had rather different experiences. As noted earlier, these countries did not experience the terms of trade losses incurred by the primary product exporters in 1985. Nevertheless, they were significantly affected by an unexpected weakness in export demand. Over the five years leading up to 1985, these countries’ real exports had increased at an average rate some 7 percentage points faster than that of world trade. The deceleration of these countries’ export growth to 3½ percent in 1985—a rate barely in line with world trade, which was itself unexpectedly weak—was therefore a considerable setback. Although this weakness of exports was accompanied by a firming of domestic sources of demand, overall GDP growth among the exporters of manufactures nevertheless slowed from 8¼ percent in 1984 to 6½ percent in 1985.
The strengthening of domestic demand among the exporters of manufactures reflects in part developments in China, which has a large weight in the output of the group. The Chinese economy, propelled by an ambitious program of economic reform, grew at a steadily accelerating rate from 1981 to 1984, when output expanded by some 14 percent. In 1985, the pace of demand expansion, especially that of investment demand, increased further, outstripping the economy’s ability to increase production at the same rate. Hence, despite real GDP growth of 12 percent, the current account swung from a surplus of $2½ billion in 1984 to a deficit of almost $11 billion in 1985—a swing equivalent to some 4 percent of GDP. In the face of this shift, the authorities have acted to restrain domestic demand and the flow of imports. These actions are expected to bring about some diminution of the current account deficit and a slowing of growth.
Developments among the other exporters of manufactures were similar to those in China, but of lesser amplitude. Thus, confronted with a marked slowing of export growth in 1985, these countries used the room for maneuver afforded by the current account surplus they had built up in 1984 to cushion contractionary external influences. Domestic demand growth, which had been relatively subdued in 1984, firmed appreciably in 1985. In effect, therefore, these countries compensated for the weakening of world demand by lessening their past strenuous efforts at external adjustment. In terms of policies, this development took the form of increases in fiscal deficits in a number of countries. For the future, given the generally more cautious approach of these countries to economic management, it is to be expected that renewed restraint will be exercised so as to preserve external and internal financial balance. For the group as a whole, growth is expected to stabilize around 6 percent in 1986–87.
The economic prospects of developing countries can be differentiated on other bases besides that of their foreign trade structure. Countries that have succeeded in avoiding external debt-servicing difficulties, for example, have generally fared better in terms of GDP growth in recent years than countries that have encountered such difficulties. This pattern is expected to be repeated in 1986–87, with growth in the former group expected to be close to double the rate in the latter group. These divergent prospects serve to underline the variety of constraints facing different groups of developing countries, and point to the need for adequate differentiation in analysis.
Per Capita Output
Another perspective on the divergence of economic performance among developing countries is provided by the data in Table 5 on the cumulative growth of per capita output during the first half of the 1980s. Two points emerge from this table. First, per capita GDP was unchanged for the developing world as a whole during the period, while in the industrial countries the corresponding measure rose by some 9 percent. Second, there was considerable diversity among the regional groups of developing countries. Output per head has actually grown quite buoyantly in Asia, where real per capita incomes rose by almost a fifth over the period. In Africa, the Middle East, and Latin America, on the other hand, large declines were pervasive. Moreover, these divergences in output per head understate, if anything, developments in living standards. Asian countries tend to be exporters of manufactures and have thus not suffered serious terms of trade losses. In Africa and the Western Hemisphere, by contrast, an increasing share of real output has had to be channeled to net exports in order to compensate for terms of trade losses and to bring about a reduction in external deficits. For these countries, per capita absorption has fallen by perhaps twice as much as the measured decline in output per head. (The Middle East is a special case, since a sharp decline in output per capita between 1980 and 1985 has been cushioned by a reversal in the balance between exports and imports.)
Growth of Per Capita GDP, 1980–85
(In percent)
Growth of Per Capita GDP, 1980–85
(In percent)
Industrial countries | 9 | |
Developing countries | — | |
Africa | -11 | |
Of which, sub-Sahara | -7 | |
Asia | 19 | |
Europe | 7 | |
Middle East | -20 | |
Western Hemisphere | -7 |
Growth of Per Capita GDP, 1980–85
(In percent)
Industrial countries | 9 | |
Developing countries | — | |
Africa | -11 | |
Of which, sub-Sahara | -7 | |
Asia | 19 | |
Europe | 7 | |
Middle East | -20 | |
Western Hemisphere | -7 |
Price Developments
Inflation remained a serious problem in the developing world in 1985, but an improvement is expected over the forecast period. The weighted average inflation rate in developing countries was 38 percent in 1984–85, reflecting primarily the very high rates of price increase experienced in Argentina, Bolivia, Brazil, Israel, and Peru. However, the median inflation rate, which is perhaps more representative of the “typical” country, has been much lower and has tended to fall in recent years (Chart 20).
Developing Countries: Consumer Prices and Broad Money, 1978–86
(Annual changes, in percent)
The increasing divergence between these two measures of inflation is largely a reflection of the dramatic worsening in inflation rates in the five high-inflation countries noted above. The composite inflation rate for this group accelerated from about 105 percent in 1981–82 to 250 percent in 1984 and close to 300 percent in 1985. Recently, however, most of these countries, as well as others, have introduced measures aimed at strengthening their adjustment efforts and bringing inflationary pressures under better control.
For example, the economic rehabilitation program initiated in Argentina in June 1985 featured a major reduction in the deficit of the public sector and a virtual cessation in the expansion of bank credit. This tightening was accompanied by a wage-price freeze and monetary reform, including the adoption of a new currency. In the same vein, the Brazilian authorities announced and implemented in late February 1986 a major package of economic reforms. The main features of this package were wage and price controls, the de-indexation of financial and other markets, and currency reform. These measures are expected to lead to a drastic cut in the country’s triple-digit inflation rate. Assuming these policies and others like them in other high-inflation countries are vigorously and uninterruptedly pursued, significant declines in inflation can be expected in the developing countries in 1986 and beyond.
Inflationary pressures in other developing countries have been less severe. Although inflation remains a serious problem in many of them (such as Chile, Ecuador, Mexico, Nicaragua, Uganda, Uruguay, Yugoslavia, and Zaïre), most countries experienced a moderation of price increases in 1985. This is reflected in the lower median rates of inflation in 1985 for all regional groupings except the Western Hemisphere, where the consequences of financial imbalances, price distortions, exchange rate depreciations, indexation mechanisms, and inflationary expectations have been particularly pronounced.
Inflationary pressures in developing countries have been exacerbated because of difficulties in supporting price adjustments with effective measures of domestic financial restraint. Since adjustment often requires initial increases in administered prices, the liberalization of controlled market prices, reductions in subsidies, increases in public utility and other tariffs, and sizable exchange rate depreciations, it has often led to upward pressures on costs. In these circumstances, firm fiscal and credit restraint is required to prevent a spiral of further price increases from being set in train. Such restraint has not always been applied with sufficient vigor.
Financial Policies
As was noted above, policy implementation in the developing world in 1985 was somewhat mixed. This is most evident in the field of fiscal policy. In 1984, under the impetus of firm adjustment policies and strong growth in foreign trade, central government fiscal deficits declined by ¾ percent in relation to GDP, to 4½ percent. Although concentrated in those countries and regions where adjustment was most urgent, the declines were fairly widespread. In 1985, on the other hand, fiscal deficits stabilized overall and tended to edge upward among those groups where pressures for external adjustment had become less urgent, for example, in countries without a recent history of debt-servicing difficulties (Table 6).
Developing Countries: Central Government Fiscal Balances, 1983–85
(In percent of GDP)
Data are weighted averages.
Does not include capital exporting developing countries.
Developing Countries: Central Government Fiscal Balances, 1983–85
(In percent of GDP)
1983 | 1984 | 1985 | ||
---|---|---|---|---|
Developing countries1 | -5.2 | -4.4 | -4.4 | |
Africa | -7.3 | -5.1 | -4.7 | |
Asia | -3.5 | -3.2 | -4.0 | |
Europe | -2.2 | -2.3 | -3.2 | |
Middle East | -9.9 | -10.3 | -9.0 | |
Western Hemisphere | -4.1 | -2.3 | -2.0 | |
By financial criteria2 | ||||
Countries with regent debt-servicing problems | -4.6 | -2.8 | -2.8 | |
Countries without recent debt-servicing problems | -4.6 | -4.7 | -5.1 |
Data are weighted averages.
Does not include capital exporting developing countries.
Developing Countries: Central Government Fiscal Balances, 1983–85
(In percent of GDP)
1983 | 1984 | 1985 | ||
---|---|---|---|---|
Developing countries1 | -5.2 | -4.4 | -4.4 | |
Africa | -7.3 | -5.1 | -4.7 | |
Asia | -3.5 | -3.2 | -4.0 | |
Europe | -2.2 | -2.3 | -3.2 | |
Middle East | -9.9 | -10.3 | -9.0 | |
Western Hemisphere | -4.1 | -2.3 | -2.0 | |
By financial criteria2 | ||||
Countries with regent debt-servicing problems | -4.6 | -2.8 | -2.8 | |
Countries without recent debt-servicing problems | -4.6 | -4.7 | -5.1 |
Data are weighted averages.
Does not include capital exporting developing countries.
The stabilization of deficits in 1985 can be traced to developments both on the revenue and the expenditure side of the fiscal accounts. A weakening of revenues seems to be closely linked to the parallel weakening of the foreign trade sector. The downturn in commodity prices of 1985 had a significant impact on fiscal revenues in those countries where commodity export earnings are a major source of government receipts. Similarly, import cuts necessitated by external adjustment had a depressing impact on revenues from customs duties. Overall, foreign trade taxes account for about a third of tax revenues in developing countries. In addition, however, corporate income taxes, collected mostly from firms extracting minerals for exports, account for another sixth. Finally, many “domestic” excise taxes on goods and services are in fact levied on imported goods so that fully half of tax revenues in many developing countries appears to be directly related to trade.
Spurred by the need to improve fiscal positions, many countries have explored means of expanding and diversifying their sources of revenue, turning mostly to various types of indirect taxation. In addition, many have taken measures to improve tax collection procedures and the efficiency of public sector enterprises, as well as to rationalize their pricing policies. Public utilities, such as electricity and transport services, have been subject to particular scrutiny. In some cases, these enterprises have been divested to the private sector to improve efficiency.
Although budgetary revenues have fallen considerably among the capital surplus oil exporting countries, revenues were relatively well sustained among the capital importing countries (Table 7). Budgetary difficulties in these countries were instead concentrated on the expenditure side, with the share of expenditures in GDP rising from 1984 to 1985.
Capital Importing Developing Countries Fiscal Indicators,1983–85
(In percent of GDP)
Capital Importing Developing Countries Fiscal Indicators,1983–85
(In percent of GDP)
1983 | 1984 | 1985 | ||
---|---|---|---|---|
Revenues | 20.1 | 20.1 | 20.0 | |
Expenditures | 24.7 | 23.8 | 24.1 | |
Balance | -4.6 | -3.7 | -4.1 |
Capital Importing Developing Countries Fiscal Indicators,1983–85
(In percent of GDP)
1983 | 1984 | 1985 | ||
---|---|---|---|---|
Revenues | 20.1 | 20.1 | 20.0 | |
Expenditures | 24.7 | 23.8 | 24.1 | |
Balance | -4.6 | -3.7 | -4.1 |
One of the main factors putting upward pressure on government deficits in developing countries has been interest payments on outstanding government debt. Available data through 1984 point to a steep rise in the share of interest payments in total expenditure. Starting from some 6½ percent in 1980, this ratio rose progressively to reach 13 percent in 1984. The rise was especially marked among the countries of the Western Hemisphere. Relatively smaller increases were recorded among Asian countries, and the ratios among Middle Eastern countries have been both low and tending to fall (Table 8). A good part of the rise in the share of interest payments in government expenditure reflects the rise in interest payments to foreign creditors. However, these payments, unlike total interest payments, crested in 1982–83 and then receded with the easing of international interest rates. This suggests that the continuing rise of interest payments in government expenditures stems from a rapid rise in payments to domestic holders of government debt. This is in line with the general shift toward more market-determined interest rates in developing countries. It also reflects the large increases in government debt resulting from the unusually large deficits of the past several years.
Developing Countries: Central Government Interest Payments, 1980–841
(In percent of expenditure and net lending)
Estimates shown in this table are less comprehensive in terms of their geographic coverage than those shown in most other tables included in this report. That limitation, together with the restriction of the coverage to the central government as opposed to the entire public sector, is thought to result in a significant understatement of the role of interest payments in public finances, especially for the Western Hemisphere.
Estimated.
Developing Countries: Central Government Interest Payments, 1980–841
(In percent of expenditure and net lending)
1980 | 1981 | 1982 | 1983 | 1984 | ||
---|---|---|---|---|---|---|
Developing countries | 6.5 | 7.5 | 9.1 | 11.4 | 13.02 | |
Of which, | ||||||
Asia | 1.2 | 7.4 | 8.4 | 9.8 | … | |
Middle East | 1.9 | 1.1 | 0.8 | — | … | |
Western Hemisphere | 7.7 | 9.6 | 12.3 | 16.0 | … | |
Oil exporting countries | 3.9 | 3.1 | 3.8 | 4.9 | … | |
Non-oil developing countries | 7.2 | 8.5 | 10.4 | 12.9 | … |
Estimates shown in this table are less comprehensive in terms of their geographic coverage than those shown in most other tables included in this report. That limitation, together with the restriction of the coverage to the central government as opposed to the entire public sector, is thought to result in a significant understatement of the role of interest payments in public finances, especially for the Western Hemisphere.
Estimated.
Developing Countries: Central Government Interest Payments, 1980–841
(In percent of expenditure and net lending)
1980 | 1981 | 1982 | 1983 | 1984 | ||
---|---|---|---|---|---|---|
Developing countries | 6.5 | 7.5 | 9.1 | 11.4 | 13.02 | |
Of which, | ||||||
Asia | 1.2 | 7.4 | 8.4 | 9.8 | … | |
Middle East | 1.9 | 1.1 | 0.8 | — | … | |
Western Hemisphere | 7.7 | 9.6 | 12.3 | 16.0 | … | |
Oil exporting countries | 3.9 | 3.1 | 3.8 | 4.9 | … | |
Non-oil developing countries | 7.2 | 8.5 | 10.4 | 12.9 | … |
Estimates shown in this table are less comprehensive in terms of their geographic coverage than those shown in most other tables included in this report. That limitation, together with the restriction of the coverage to the central government as opposed to the entire public sector, is thought to result in a significant understatement of the role of interest payments in public finances, especially for the Western Hemisphere.
Estimated.
Given the sharp rise in interest payments and the political sensitivity of expenditures for national defense and public sector employment, fiscal retrenchment has in good part fallen on capital outlays (Table 9). Investment expenditures have been severely cut in a wide range of countries, but the cuts have been most severe in the countries undergoing the most pronounced external adjustment, such as those in the Western Hemisphere.
Developing Countries: Output and Export Earnings, 1979–84
(In percent of total expenditure and net lending)
Estimated.
Developing Countries: Output and Export Earnings, 1979–84
(In percent of total expenditure and net lending)
1979 | 1980 | 1981 | 1982 | 1983 | 19841 | ||
---|---|---|---|---|---|---|---|
Developing countries | 19.2 | 19.0 | 19.6 | 19.0 | 17.3 | 15.0 | |
Of which, | |||||||
Asia | 18.8 | 19.5 | 21.2 | 20.9 | 20.2 | … | |
Western Hemisphere | 16.6 | 16.7 | 16.5 | 14.6 | 11.9 | … | |
Oil exporting countries | 28.9 | 27.2 | 30.0 | 31.4 | 30.6 | … | |
Non-oil developing countries | 16.7 | 16.8 | 16.9 | 15.9 | 14.0 | … |
Estimated.
Developing Countries: Output and Export Earnings, 1979–84
(In percent of total expenditure and net lending)
1979 | 1980 | 1981 | 1982 | 1983 | 19841 | ||
---|---|---|---|---|---|---|---|
Developing countries | 19.2 | 19.0 | 19.6 | 19.0 | 17.3 | 15.0 | |
Of which, | |||||||
Asia | 18.8 | 19.5 | 21.2 | 20.9 | 20.2 | … | |
Western Hemisphere | 16.6 | 16.7 | 16.5 | 14.6 | 11.9 | … | |
Oil exporting countries | 28.9 | 27.2 | 30.0 | 31.4 | 30.6 | … | |
Non-oil developing countries | 16.7 | 16.8 | 16.9 | 15.9 | 14.0 | … |
Estimated.
To some extent, this curtailment of investment has been salutary. Part of the difficulties confronting the developing countries has stemmed from over-ambitious and inefficient investment programs. As a result of the financial constraints of the past several years, governments have generally sought to rationalize their investment plans, for example, by giving greater priority to the projects with the greatest rates of return and with the shortest gestation periods. Consequently, and in light of the easing of interest rates and of oil prices, some improvement in the productivity of investment might be forthcoming in the years ahead. Nevertheless, given the implications for the longer-term growth potential of these countries, it is unfortunate that such a major reduction in capital outlays has taken place when current expenditure has been cut by much less.
Monetary policies have generally held to a course of gradual disinflation, except in those countries where inflation accelerated to triple-digit rates or more. Thus, the median rate of expansion of broad money has fallen in each recent year from a high of 21 percent in 1980 to 16 percent in 1984 and to an estimated 15½ percent in 1985. Similarly, domestic credit expansion has slowed from a high of 24½ percent in 1981 to about 14 percent in 1985. Finally, interest rate policies in a number of countries continue to aim at restoring and maintaining positive real rates for both borrowing and lending instruments. These trends reflect the important role given to credit policies in adjustment efforts designed to curb inflation, mobilize domestic savings, and reduce distortions in the allocation of resources.
The decline in the rate of domestic credit expansion has often fallen heavily on the private sector. Given the limited availability of foreign financing and, in some cases, the reluctance of countries to increase their foreign indebtedness, there has been increasing recourse to domestic credit to meet public sector financing needs. Recent reductions in fiscal deficits have tended to be associated more with cutbacks in external financing than with reduced claims on domestic saving.
If the analysis is broadened to take full account of developments in the high-inflation countries, a rather less favorable picture of monetary developments emerges. On a weighted average basis, rates of monetary expansion in the developing countries tended to accelerate through 1985 or at least to remain at very high levels. Moreover, these accelerations seemed to be almost wholly tied to the financing of public sector deficits. In 1985, growth in credit to government was a substantially higher proportion of the growth in total domestic credit than in preceding years. Beginning about mid-1985, however, a number of the high-inflation countries began to bring their finances into better order. Although these developments occurred too late in the year to have a visible effect on the aggregates for 1985, they are expected to have a more marked effect in 1986. The main reductions are expected in the rates of broad money expansion of Argentina, Bolivia, and Brazil. Smaller but still significant reductions are also projected for Mexico, Nicaragua, Peru, Uganda, Uruguay, and Yugoslavia—all countries with relatively high rates of inflation. Also noteworthy is the reduction, both actual and projected, in money growth in Israel as part of an adjustment program that has already resulted in some abatement of inflationary pressures.
Exchange Rates
The year 1985 seems to have been characterized by considerable flexibility in exchange rate policy. Exchange rate adjustments in that year represent the continuation of a process that had begun in the wake of the debt crisis of 1982. Since then, there has been a greater willingness to change exchange rates to correct misalignments in relative prices and to improve competitiveness. These changes have helped achieve adjustment at somewhat higher levels of economic activity than would have been possible through exclusive reliance on policies of demand restraint.
On a weighted average basis, real exchange rates of developing countries declined by some 13 percent during 1985, in good part because of the parallel effective depreciation of the U.S. dollar, which is the key reference currency for many developing countries. This development stands in contrast to events in 1984 when, in part because of the strength of the dollar and the buoyancy of exports, countries had allowed their real exchange rates to stabilize or even appreciate. In 1985, with world trade considerably less buoyant, countries accepted (or sought) real exchange rate depreciations in order to support export competitiveness and to encourage domestic production of tradable goods. This tendency was quite widespread. Real exchange rate indices for the five regional groups of developing countries show declines during the year ranging up to 20 percent.
Needless to say, these averages cover a wide diversity of changes for particular currencies. In some countries, exchange rate policies were aimed at a phased real depreciation, sometimes following an initial step devaluation. Other countries initiated policies to unify their foreign exchange markets. Yet others that have traditionally linked their currencies to the U.S. dollar maintained their existing peg and allowed the decline in the dollar to bring about a real effective depreciation of their own currencies. In countries where earlier exchange rate action had achieved the desired real depreciation, subsequent changes in nominal rates were often necessary to maintain competitiveness.
The increasing resort to exchange rate action during the past several years has been largely a consequence of the need to take prompt and effective measures to strengthen balance of payments positions at a time when the availability of external finance was declining sharply. In these circumstances, a realistic and predictable exchange rate policy has been seen as essential to encourage needed supply responses in agriculture and industry, to promote a more effective allocation of resources, to stimulate investment, and to contain capital flight. Moreover, growing experience with the use of exchange rate policy in adjustment programs may have allayed some earlier misgivings about the use of this instrument.
Savings and Investment
A critical condition for the success of adjustment in developing countries is the achievement of higher rates of domestic savings. Additional domestic savings are needed to compensate for the declining availability of external financing and the increased share of net factor payments abroad. However, the ratio of gross domestic savings to GDP has, if anything, tended to fall since the late 1970s. Taking into account the increase in net factor payments abroad, the proportion of GDP left to finance domestic investment has thus dropped appreciably.
Much of the decline in saving rates took place in the period up to 1983. Since then, saving rates have stabilized or even risen somewhat. This development is closely related to developments in public sector finances. The net dissaving of the public sector reached a peak in 1982–83, after which fiscal deficits have tended to come down. Private savings were also adversely affected in the early 1980s by deteriorating terms of trade, high unemployment, real wage reductions, and low income growth. Moreover, in some countries, the presence of high inflation and economic uncertainty has eroded both the incentive and capacity to save. An extreme case in point is Bolivia, where the gross domestic saving rate fell to 3 percent in 1985 from 18 percent in 1980, in part as a result of hyperinflation. Given the clear need to encourage private saving, many countries have recognized the importance of a stable, noninflationary environment and of increasing the returns on savings. Thus, with a view to mobilizing domestic resources, curtailing capital flight, and attracting foreign capital inflows, governments have sought to control inflation and to relax restrictions imposed on nominal interest rates. The limited success achieved to date in each of these areas underscores the need for a more determined implementation of policies of structural adjustment.
Because of the steep decline in the availability of foreign and domestic saving, investment spending as a share of GDP has been sharply reduced in recent years. As shown in Chart 21, for the developing countries as a whole, the rate of investment spending has fallen by some 4½—5 percentage points between 1978 and 1985. This decline was, however, rather unevenly distributed. On a regional basis, the declines were concentrated in Africa, Europe, and the Western Hemisphere, which experienced declines equivalent to 7–9 percent of GDP. Reductions in Asia, and especially the Middle East, on the other hand, were of much smaller magnitude.
Developing Countries: Gross Capital Formation, 1978–85
(In percent of nominal GDP)
The influence on investment spending of increased debt service payments and reduced external financing can be illustrated by the divergent trends between countries that borrow primarily from market sources (the “market borrowers”) and those that rely on official development assistance (the “official borrowers”). Market borrowers, not surprisingly, have been considerably more sensitive to changes in interest rates and the availability of finance. Accordingly, the decline in the investment ratio among these countries was three times as great as that among official borrowers. The role of external influences is further exemplified by the contrasting development in the investment ratios of countries that did and did not encounter debt-servicing problems. The decline was four to five times as great among the former group.
The widespread reduction in the proportion of developing country output devoted to capital formation was probably an unavoidable initial consequence of the economic retrenchment measures adopted in these countries in the early 1980s. As noted earlier, the process of fiscal consolidation led to a disproportionate share of the cuts falling on capital outlays. Similarly, tight credit and monetary policies adversely affected investment by the private sector. In a somewhat longer time frame, however, it was intended that prudent financial policies, rising private savings, and the resumption of foreign capital inflows would permit expenditures on viable investment projects to grow once again. To the extent that such viable projects have continued to be postponed, the preference thereby given to current expenditures must be regarded as a source of concern.
By the same token, however, it is important that any increases in investment expenditures be such as to enhance rather than impede longer-term growth prospects. In the past, investment programs have too often included projects that require continuing subsidies, either explicitly in the form of government transfers or implicitly in the form of distortions to relative prices. More generally, the rates of return on investment have been disappointing. Decisions have frequently been made on the basis of noneconomic considerations or unrealistic assessments of likely rates of return. Frequently, too, insufficient attention has been given to the long-term viability and robustness of some of the assumptions underlying the cost-benefit analyses attaching to the projects. Finally, and more generally, governments have seriously underestimated the critical role of prudent financial policies in ensuring that scarce resources are directed to the most productive uses.
An important reason why external adjustment has tended to be associated with falling investment is the close association between investment and imports because of the high import content of investment (Chart 22). The initial phases of adjustment often involve some element of import compression—brought about by a combination of exchange rate depreciation, higher tariffs, and import controls—that has a major effect on investment spending. Over time, however, economies should adapt to new patterns of relative scarcity, and while the composition of investment may be changed, the overall level of capital spending should tend to rise again. The continued weakness of investment spending in developing countries is thus disturbing, and suggests that needed domestic adjustments have not taken place nearly as rapidly as the required reduction in balance of payments deficits. Present investment levels, in particular in many heavily indebted developing countries, appear too low to generate rates of growth over the medium term that will permit the servicing of external debt obligations together with an adequate and sustained increase in domestic living standards. Fortunately, declines in investment spending appear to be tapering off and, indeed, investment ratios have begun to rise in some countries. For the developing countries as a whole, the rate of investment is estimated to have stabilized in 1985 and, apart from the fuel exporters, is expected to firm gradually in 1986 and 1987, assisted by the favorable effect of lower oil prices and declining interest rates, which should help release resources for financing capital expenditures and buttress the impact of adjustment measures.
Developing Countries with Recent Debt-Servicing Problems: Gross Capital Formation, Imports, and Real GDP, 1973–85
Current Account Balances
Tight financing constraints caused the combined current account deficit of developing countries to be held to $34 billion in 1985.2 This deficit was equivalent to 5 percent of exports, unchanged from the 1984 level but less than half the deficit recorded in 1982 (Chart 23).
Developing Countries—By Predominant Export: Current Account Balances, 1978–87
(In percent of exports of goods and services)
The financial constraints that developed after 1981 had uneven effects on developing countries. The most severely affected were the market borrowers. However, the bulk of the current account adjustment of these countries had been achieved by the end of 1984, and the continuation of financing constraints required little further change in their combined external balance in 1985. In fact, the market borrowers had almost eliminated their current account deficit in 1984 and moved into surplus in 1985. The official borrowers, on the other hand, were relatively less affected by cutbacks in external financing after 1982. This group of countries was able to sustain a current account deficit in 1985 that, at 25 percent of exports, was little changed from the average deficit in 1982–84 (Table 10).
Developing Countries–By Financial Criteria: Current Account Balances, 1982–87
(In percent of exports of goods and services)
Developing Countries–By Financial Criteria: Current Account Balances, 1982–87
(In percent of exports of goods and services)
1982 | 1983 | 1984 | 1985 | 1986–87 | ||||
---|---|---|---|---|---|---|---|---|
Developing countries | -13.1 | -8.9 | -5.0 | -5.1 | -9.4 | |||
Capital exporting countries | -0.6 | -7.5 | -8.6 | -5.8 | -28.5 | |||
Capital importing countries | -17.8 | -9.4 | -4.1 | -4.9 | -6.4 | |||
Market borrowers | -20.0 | -7.5 | -0.9 | 0.4 | -2.5 | |||
Official borrowers | -29.0 | -26.3 | -28.1 | -25.4 | -23.2 | |||
Diversified borrowers | -6.6 | -10.0 | -7.7 | -16.4 | -13.4 | |||
Countries witd recent debt-servicing problems | -29.9 | -10.2 | -3.9 | -2.2 | -5.7 | |||
Countries witdout recent debt-servicing problems | -9.2 | -8.8 | -4.3 | -6.6 | -6.8 | |||
Memorandum | ||||||||
Market borrowers, excluding | ||||||||
Mexico and Soutd Africa | -20.5 | -10.7 | -1.9 | -0.6 | -3.1 | |||
Diversified borrowers, | ||||||||
excluding China | -15.5 | -18.5 | -13.0 | -9.7 | -8.1 | |||
15 heavily indebted countries, | -35.0 | -10.1 | -0.6 | -0.1 | -4.3 | |||
excluding Mexico | -39.0 | -18.2 | -4.2 | -0.9 | -4.7 |
Developing Countries–By Financial Criteria: Current Account Balances, 1982–87
(In percent of exports of goods and services)
1982 | 1983 | 1984 | 1985 | 1986–87 | ||||
---|---|---|---|---|---|---|---|---|
Developing countries | -13.1 | -8.9 | -5.0 | -5.1 | -9.4 | |||
Capital exporting countries | -0.6 | -7.5 | -8.6 | -5.8 | -28.5 | |||
Capital importing countries | -17.8 | -9.4 | -4.1 | -4.9 | -6.4 | |||
Market borrowers | -20.0 | -7.5 | -0.9 | 0.4 | -2.5 | |||
Official borrowers | -29.0 | -26.3 | -28.1 | -25.4 | -23.2 | |||
Diversified borrowers | -6.6 | -10.0 | -7.7 | -16.4 | -13.4 | |||
Countries witd recent debt-servicing problems | -29.9 | -10.2 | -3.9 | -2.2 | -5.7 | |||
Countries witdout recent debt-servicing problems | -9.2 | -8.8 | -4.3 | -6.6 | -6.8 | |||
Memorandum | ||||||||
Market borrowers, excluding | ||||||||
Mexico and Soutd Africa | -20.5 | -10.7 | -1.9 | -0.6 | -3.1 | |||
Diversified borrowers, | ||||||||
excluding China | -15.5 | -18.5 | -13.0 | -9.7 | -8.1 | |||
15 heavily indebted countries, | -35.0 | -10.1 | -0.6 | -0.1 | -4.3 | |||
excluding Mexico | -39.0 | -18.2 | -4.2 | -0.9 | -4.7 |
The aggregate data for the above-mentioned groups tend to mask developments in individual countries. Many smaller countries did achieve a modest degree of current account adjustment in 1985, but the changes in their current balances were often more than offset by sizable changes in the opposite direction for a few larger countries. Thus the large deterioration in China’s current balance conceals the underlying improvement in other countries in the groups to which China belongs (the diversified borrowers and the countries without recent debt-servicing difficulties). Similarly, the large reduction in Mexico’s surplus on current account in 1985 in large part offsets an aggregate improvement in the other 14 heavily indebted countries. Conversely, the strong improvement in South Africa’s current account exaggerates the degree of strengthening of other countries in the African region.
Because of the decline in oil prices, the staff expects the combined current account deficit of developing countries, relative to exports, to double in 1986 compared to its 1985 level. This increase is, of course, concentrated in the fuel exporting group, whose aggregate current account deficit is expected to increase from 2¾ percent of exports in 1985 to 27¼ percent in 1986, before falling back to around 19 percent in 1987. For the non-fuel exporters, by contrast, the corresponding ratio is projected to decline from 6½ percent in 1985 to about 4 percent in 1986–87.
The deterioration in the fuel exporting countries’ current account balance stems from the sharp fall in oil prices in early 1986. The reaction of the fuel exporting countries to this development is expected to depend to a great extent on their financial position. The capital importing fuel exporters, several of which experienced recent debt-servicing problems, remain under severe financial pressures and are expected to take adjustment measures that will restrict the deterioration in their current account balance in 1986 to a level, in relation to exports, which is slightly less than that in 1982. The capital exporting fuel exporters, however, are expected to finance a substantial deterioration in their current account balance, and their deficit in 1986 will be approximately as large relative to exports as was their average surplus in 1979–80. Adjustment measures in both the capital exporting and the capital importing fuel exporting countries are expected to produce a marked reduction in the current account deficit in 1987. Nevertheless, the remaining deficit, at 19 percent of exports, would still be much larger than could be considered sustainable over the longer term.
The expectation that current account deficits, relative to exports of goods and services, will continue to be low by historical standards among the non-fuel exporters reflects the prospect of little or no relaxation of the financing constraints facing many countries. Moreover, it also reflects the apparent reluctance of countries that are not financially constrained to absorb larger capital inflows at prevailing market interest rates. However, attitudes toward borrowing might change if export prospects weakened or if the terms under which funds could be borrowed became more favorable.
The prevalence of external financing constraints and the importance of meeting scheduled interest payments to avoid jeopardizing existing financing arrangements ensure that changes in the purchasing power of developing countries’ exports tend to be reflected rather quickly in import volumes. The purchasing power of exports, after rising by 8½ percent in 1984, declined by 1¾ percent in 1985. This represents a substantially less favorable outcome than was envisaged at the beginning of the year (Table 11). The exports of fuel exporting countries were especially weak, and these countries were obliged to cut their imports by 9 percent.
Developing Countries: Purchasing Power of Exports, 1983–871
(Changes, in percent)
Export value deflated by import prices.
Developing Countries: Purchasing Power of Exports, 1983–871
(Changes, in percent)
1983 | 1984 | 1985 | 1986–87 | April 1985 Estimates for 1985 |
Revision | ||
---|---|---|---|---|---|---|---|
Developing countries | -1.1 | 8.4 | -1.8 | -2.3 | 4.6 | -6.4 | |
Fuel exporting countries | -12.2 | 1.8 | -8.1 | -19.8 | 0.5 | -8.6 | |
Non-fuel exporting countries | 8.5 | 13.4 | 2.1 | 6.7 | 7.3 | -5.2 |
Export value deflated by import prices.
Developing Countries: Purchasing Power of Exports, 1983–871
(Changes, in percent)
1983 | 1984 | 1985 | 1986–87 | April 1985 Estimates for 1985 |
Revision | ||
---|---|---|---|---|---|---|---|
Developing countries | -1.1 | 8.4 | -1.8 | -2.3 | 4.6 | -6.4 | |
Fuel exporting countries | -12.2 | 1.8 | -8.1 | -19.8 | 0.5 | -8.6 | |
Non-fuel exporting countries | 8.5 | 13.4 | 2.1 | 6.7 | 7.3 | -5.2 |
Export value deflated by import prices.
Foreign Trade Prices
The disappointing weakness in the purchasing power of developing countries’ exports relative to earlier expectations was caused by a combination of unexpected deterioration in the terms of trade and sharply lower export volume growth. Non-oil commodity prices turned out to be much weaker in 1985 than had been generally expected. These prices declined by some 12 percent in U.S. dollar terms, compared with the projection of a 2¼ percent decline in World Economic Outlook, April 1985. (For more details, see Supplementary Note 3.) Part of this weakness may be explained by demand factors. Growth of both total output and industrial production in the industrial countries slowed sharply in 1985, particularly in the early part of the year. Moreover, inflation in these countries continued to recede, which might have further dampened commodity prices. Finally, demand for some commodities appears to have been adversely affected by longer-term substitution possibilities and technological improvements. Nevertheless, even taken together, these factors cannot explain the sharp fall in real commodity prices (relative to manufactures) that occurred in 1985.
It appears, therefore, that much of the fall in real commodity prices can be traced to unusually ample supplies. Available indicators suggest that the increases in supplies of non-oil commodities in 1984 and 1985 were particularly large. The increase was especially pronounced among agricultural crops, which, in many parts of the world, had benefited from good weather (until the impact of the drought on coffee output in Brazil). Prices for food and beverage crops declined by an average of 15 percent in 1985 and those for agricultural raw materials by 12 percent, whereas those for metals fell by less than 3 percent. It should be noted, however, that prices of metals had been quite weak in the preceding year and had not responded to the recovery in industrial output as in the past. It is possible that metal prices have been subject both to secular shifts in production technology, as well as higher production levels in countries seeking to raise export earnings. A particular factor affecting the price of metals was the financial collapse of the International Tin Agreement (ITA) in the latter part of 1985. The exhaustion of the ITA’s funds led to concerns for the orderly financing of trade in tin, and of trade in some other metals. As a result, metal prices fell by 6 percent in the fourth quarter of 1985.
Trade barriers and the associated price support policies of industrial countries were another factor that exerted a depressing influence on the international prices of traded commodities. This is a particularly serious problem for agricultural commodity exporters. For example, sugar-producing countries, and especially those for which sugar is a monoculture, have been severely affected by protection of domestic sugar producers in the European Community and the United States.
A development that was widely expected to induce a strengthening in the dollar price of primary commodities, although in fact it did not, was the depreciation of the dollar during 1985. It is generally accepted that real commodity prices (that is, commodity prices relative to the price of manufactures) are largely independent of exchange rates among major currencies. That is, a given depreciation of the dollar should lead eventually to roughly commensurate changes in both non-oil primary commodity prices and in world trade prices for manufactures. There is, however, less agreement as to how rapidly this tendency asserts itself. During 1985, this ambiguity left some scope for interpreting the observed real decline in commodity prices as a temporary and soon-to-be-reversed exchange rate factor. The plausibility of this hypothesis has, however, been undermined by the persistence of lower real commodity prices beyond what might reasonably be regarded as a transitional period. It would seem, therefore, that the supply factors discussed above provide the more satisfactory explanation of recent commodity price trends.
It should be noted that not all relative price changes were adverse to primary product exporting countries in 1985. The cost of borrowing—as measured by the six-month LIBOR—declined substantially, from 11.3 percent in 1984 to 8.6 percent in 1985. This change is particularly important to the market borrowers because interest payments are equivalent, on average, to about one fifth of their payments for merchandise imports.
World oil prices also declined in 1985, although on an annual average basis by considerably less than the average price of non-oil primary commodities. This limited decline, however, masked the increasing tenuousness of the prevailing price as the year wore on, reflecting the growing reliance on a single producer to support the price. As discussed in Supplementary Note 4 on the “World Oil Situation,” the conditions in the oil market eventually led to far-reaching changes in the policies of the members of OPEC in the latter part of 1985. The major elements were a shift toward market-related prices and a substantial relaxation (or de facto abandonment) of the previous policy of concerted output restraint. The consequent large increase in oil production and exports of the major oil exporting countries quickly led to a substantial imbalance between demand and supply in early 1986. Prices in the spot markets for both crude oils and refined products began to fall sharply, with a major break occurring in the latter part of January. Although the average price of oil in international trade in the early part of 1986 cannot be estimated with any precision, spot market prices for some crude oils had, by mid-March 1986, fallen well below $15 a barrel. Prices in this period were also highly volatile, being influenced by speculative trading.
The commodity price movements described above led to a 2 percent deterioration in the merchandise terms of trade of developing countries in 1985. The terms of trade of fuel exporting countries, which import relatively few primary commodities, deteriorated by 4 percent, reflecting mainly the change in the price of oil relative to that of manufactures. The non-fuel exporting countries—which export a large amount of manufactures and benefit from the lower oil prices—experienced a much smaller deterioration in their terms of trade of just over 1 percent. Within the group of non-fuel exporting countries, the largest terms of trade deteriorations were, not surprisingly, concentrated in countries that export predominantly primary commodities. The terms of trade of these countries deteriorated by 3¼ percent (and by 5 percent if Brazil is excluded from this group). By contrast, exporters of manufactures, which are significant importers of both oil and other primary products, experienced virtually no change in their terms of trade for the second year in succession.
Prospects for foreign trade prices in 1986–87 are dominated by those for oil. As noted in Supplementary Note 4, the uncertainty attaching to oil prices is considerable and largely contingent on developments on the supply side of the oil market. If production should remain at the levels prevailing in the first quarter of 1985, there would be scope for significant further declines in spot prices from the $12-$34 prevailing in mid-March. If, on the other hand, production is significantly curtailed, oil prices could rise sharply. In the light of this uncertainty, the staff has adopted the working assumption that oil prices will average $15 a barrel over the period from the second quarter of 1986 to the end of 1987. Year on year, this implies a 40 percent drop in oil prices, expressed in terms of U.S. dollars, from 1985 to 1986.
Prospects for non-oil commodity prices in 1986 are heavily influenced by the effects of drought on Brazil’s coffee crop. Coffee prices are projected to increase by 50 percent in 1986, and this accounts for virtually all of the expected 12 percent increase in the overall index of non-oil commodities. The price of manufactured goods entering world trade will be strongly affected by recent exchange rate changes and is projected to be some 14 percent above the 1985 level in dollar terms in 1986. Given the above constellation of price developments, and excluding the highly localized effect of the rise in coffee prices, the developing countries’ terms of trade would deteriorate by almost 15 percent in 1986. The bulk of this drop would be experienced by the fuel exporters, which would incur a 37½ percent deterioration in their terms of trade. The terms of trade of primary product exporters, other than those that are heavily dependent on coffee, would worsen by 2 percent while those of exporters of manufactures, some of which are significant importers of both oil and other primary commodities, would improve by 2 percent.
Foreign Trade Volumes
A further source of disappointment to developing countries in 1985 was the unexpected weakness of world trade. In volume terms, world trade increased by only 2.9 percent in 1985, barely in step with the rise in world output. This is a significantly smaller rise than was expected a year ago when, on the basis of a projected 3.4 percent rise in world output, trade was expected to increase by 5.4 percent. The unexpected weakness of trade is partly traceable to the sharper-than-expected slowdown in activity in industrial countries, as a result of which the volume of developing countries’ exports virtually stagnated in 1985. Imports into fuel exporting countries were also much lower than anticipated earlier in the year.
The commodity composition of developing countries’ exports is one of the main factors that influence the degree to which growth in industrial countries is translated into demand for developing countries’ exports (Chart 24). In recent years, non-fuel exporting countries have generally been able to sustain the growth of their total exports, in volume terms, at a much faster rate than the growth of industrial countries’ output; the opposite has been the case, however, for the fuel exporting countries. Within the non-fuel exporting group, there have also been significant differences: the apparent income elasticity of demand for the exports of the exporters of manufactures has been over twice that of the primary product exporting countries.
Developing Countries: Export Volumes and Industrial Countries’ Real GDP, 1972–871
(Indices: 1980= 100)
1 Charts are in ratio scale on both the horizontal and vertical axes. Thus the slope of the line joining any two points indicates the apparent income elasticity of demand. The dashed lines indicate an income elasticity of demand of two and are shown for reference purposes.Another factor that can have a decisive influence on export performance is price. This is particularly evident for the fuel exporting countries. The oil price increases of 1979–80 led to large declines in these countries’ export volumes, both because of conservation by consumers and because of the development of alternative sources of supply. Changes in relative prices have also affected other developing country trade flows. Indeed, the very high apparent income elasticity of demand of industrial countries for manufactured goods from developing countries may in part reflect the growing price competitiveness of developing country producers.
A source of concern in this respect has been the effect of protectionism in industrial countries on developing countries’ ability to increase their export earnings. Many of the most dynamic exports of developing countries are increasingly being constrained by restrictions. The problems are most evident for the simpler types of manufactures, such as shoes and textiles. But the problem is more widespread and covers a large number of the commodities or products which are both exported by developing countries and produced by industrial countries. A particular concern at the current juncture is the extent to which protectionism accounted for the very sharp slowing of developing country exports in 1985. Although the slowdown can be partially explained by cyclical factors, it is noteworthy that the deceleration was especially marked for the exporters of manufactures, the group most likely to be affected by quantitative restrictions.
Especially troublesome in this respect is the decline in the real exports of the heavily indebted countries in 1985 after two years of rapid increases. Although these countries’ export performance depends upon many factors, including the quality of their own policies, it is essential to the resolution of these countries’ payments difficulties that they not face undue restrictions on their exports.
The geographical distribution of a country’s exports is another important influence affecting the link between industrial countries’ output growth and developing countries’ export volumes. In recent years, countries whose exports have traditionally been directed to the U.S. market have, not surprisingly, enjoyed a more buoyant export performance than developing countries generally.
A last factor which may weaken the direct relationship between the growth of output in industrial countries and developing countries’ export volume is the scope that exists for expanding trade among developing countries. For example, intra-regional trade among developing countries in Asia has been growing, both in absolute terms and in relation to the region’s exports to the rest of the world (Chart 25). Intra-regional trade in the Western Hemisphere has also been significant, although it has tended to decline in relative importance following the onset of the debt crisis. (This is both because of the weakness of the region’s imports and because heavily indebted countries have been compelled to shift their exports away from trading partners in regional payments arrangements toward convertible currency markets, in order to earn the foreign exchange required to service debt.) The critical role of these intra-regional developments to overall performance is illustrated in Table 12. The recent much faster rise of total exports in Asia than in the Western Hemisphere may be seen to be very largely due to intra-regional trade.
Developing Countries: intra-Regional Trade, 1978–84
(In percent of total exports)
Developing Countries: Growth of Exports in Value, 1980–84
(Changes, in percent; in terms of U.S. dollars)
Developing Countries: Growth of Exports in Value, 1980–84
(Changes, in percent; in terms of U.S. dollars)
Asia | Western Hemisphere |
||
---|---|---|---|
Total exports | 24 | 3 | |
To own region | 39 | -27 | |
To other countries | 19 | 12 |
Developing Countries: Growth of Exports in Value, 1980–84
(Changes, in percent; in terms of U.S. dollars)
Asia | Western Hemisphere |
||
---|---|---|---|
Total exports | 24 | 3 | |
To own region | 39 | -27 | |
To other countries | 19 | 12 |
The staff expects that export volume growth of developing countries will accelerate modestly in 1986–87, to a rate of about 5 percent per annum in the latter year. But the growth of trade volumes is likely to be distributed rather unevenly (Table 13). The agricultural exporters should achieve only average volume growth, while the mineral exporters would be below the average. The largest increases will probably once again be found among the exporters of manufactures. However, because of the disappointing performance of these countries’ exports in 1985 and because of shifts in the geographic distribution of industrial country imports, these countries’ exports are expected to increase at only about half their “normal” rate, given the cyclical circumstances expected to prevail over the forecast period. The moderate increase projected for the fuel exporters, following the strong downward trend since 1980, reflects both a significant expansion in non-oil exports of some of these countries and a moderate recovery in the volume of their oil exports as world oil demand begins to rise at a slightly more rapid rate.
Developing Countries—By Predominant Export: Growth of Trade Volumes, 1981–87
(In percent)
Developing Countries—By Predominant Export: Growth of Trade Volumes, 1981–87
(In percent)
1981 | 1982 | 1983 | 1984 | 1985 | 1986–87 | |||
---|---|---|---|---|---|---|---|---|
Growth in export volume | ||||||||
Developing countries | -5.7 | -8.1 | 2.9 | 7.1 | 0.4 | 4.6 | ||
Fuel exporters | -15.1 | -16.5 | -3.7 | 0.7 | -4.1 | 3.4 | ||
Non-fuel exporters | 6.5 | 0.7 | 8.3 | 11.7 | 3.4 | 5.0 | ||
Of which, | ||||||||
Agricultural exporters | 9.5 | 2.2 | 6.7 | 11.6 | 1.9 | 5.0 | ||
Mineral exporters | -9.1 | -2.0 | 4.3 | 0.6 | 7.4 | 1.6 | ||
Exporters of manufactures | 10.3 | 0.6 | 10.2 | 14.5 | 3.6 | 5.6 | ||
Growth in import volume | ||||||||
Developing countries | 7.1 | -4.2 | -3.2 | 2.2 | -0.3 | 0.7 | ||
Fuel exporters | 20.0 | -1.6 | -12.0 | -4.5 | -8.8 | -11.6 | ||
Non-fuel exporters | 1.5 | -5.5 | 1.6 | 5.2 | 3.3 | 5.2 | ||
Of which, | ||||||||
Agricultural exporters | -4.8 | -5.7 | -1.5 | 0.3 | -2.2 | 7.9 | ||
Mineral exporters | 12.7 | -16.0 | -13.4 | 4.3 | -9.0 | 6.0 | ||
Exporters of manufactures | 1.7 | -4.9 | 6.5 | 8.9 | 9.3 | 5.3 |
Developing Countries—By Predominant Export: Growth of Trade Volumes, 1981–87
(In percent)
1981 | 1982 | 1983 | 1984 | 1985 | 1986–87 | |||
---|---|---|---|---|---|---|---|---|
Growth in export volume | ||||||||
Developing countries | -5.7 | -8.1 | 2.9 | 7.1 | 0.4 | 4.6 | ||
Fuel exporters | -15.1 | -16.5 | -3.7 | 0.7 | -4.1 | 3.4 | ||
Non-fuel exporters | 6.5 | 0.7 | 8.3 | 11.7 | 3.4 | 5.0 | ||
Of which, | ||||||||
Agricultural exporters | 9.5 | 2.2 | 6.7 | 11.6 | 1.9 | 5.0 | ||
Mineral exporters | -9.1 | -2.0 | 4.3 | 0.6 | 7.4 | 1.6 | ||
Exporters of manufactures | 10.3 | 0.6 | 10.2 | 14.5 | 3.6 | 5.6 | ||
Growth in import volume | ||||||||
Developing countries | 7.1 | -4.2 | -3.2 | 2.2 | -0.3 | 0.7 | ||
Fuel exporters | 20.0 | -1.6 | -12.0 | -4.5 | -8.8 | -11.6 | ||
Non-fuel exporters | 1.5 | -5.5 | 1.6 | 5.2 | 3.3 | 5.2 | ||
Of which, | ||||||||
Agricultural exporters | -4.8 | -5.7 | -1.5 | 0.3 | -2.2 | 7.9 | ||
Mineral exporters | 12.7 | -16.0 | -13.4 | 4.3 | -9.0 | 6.0 | ||
Exporters of manufactures | 1.7 | -4.9 | 6.5 | 8.9 | 9.3 | 5.3 |
Turning to the import side of the trade accounts, there has been a significant shift in recent years in the factors determining the level of real imports. During much of the 1970s and early 1980s, import needs were determined in the context of development plans and were sustained through external borrowing when the growth of export earnings was inadequate to finance them. After 1982, however, the availability of finance became an active constraint, and the level of imports became much more dependent on movements in the purchasing power of exports.
The result of these developments has been that imports have been subdued for the past several years. For developing countries as a group, the volume of imports in 1985 was still 5 percent below the 1981 peak. This behavior contrasts strongly with that in the preceding decade and a half, when real imports grew at an average rate of over 8 percent per annum. Imports were at their weakest in 1982–83, as countries adjusted to low export receipts, sharply rising debt service burdens, and a marked reduction in the availability of external finance. With the recovery of the world economy, the easing of interest rates, and the stabilization of current account deficits, imports began to recover in 1984. Nevertheless, the overall rise was fairly modest and gave way to renewed stagnation in 1985 as the purchasing power of exports slackened once again.
The weakness of imports is distributed unevenly among developing countries (Table 13). The countries that encountered debt-servicing problems have been those most seriously affected. Not only were they the hardest hit by the rise in interest payments and the sudden unwillingness of private creditors to extend further credit, but they also included some of the economies most exposed to the international recession. As a result, these countries’ imports declined by 15 percent both in 1982 and 1983 before stabilizing in 1984. Despite this import compression, their external positions remained precarious and, with a renewed terms of trade loss of 2½ percent in 1985, they were once again forced to curtail imports. Countries that avoided debt service problems, on the other hand, have experienced much more limited import cuts. Indeed, in only one recent year did their average import growth fall below 5 percent. This occurred in 1982 when a number of countries in this group took early action to reduce current account imbalances, and imports declined by a little less than 1 percent. However, the strength of these countries’ trade flows also reflects their relatively low levels of external indebtedness and the concentration of their exports in manufacturing.
Imports by capital exporting developing countries, all of which are fuel exporters, followed a rather different trend, at least in terms of timing, from that of the two groups of capital importing countries just described. These countries’ imports grew rapidly in the early years of this decade, rising by almost 50 percent from 1979 to 1982. Since then, however, large declines in export earnings have led to substantial cuts in imports. As noted earlier, the fall in imports has proceeded at an accelerating rate and exceeded 15 percent in 1985.
Turning to prospects, the staff foresees a small decline in developing country imports in 1986 and only modest growth of about 2 percent in 1987. This stagnation in developing country imports is due entirely to the expected declines in the imports of the fuel exporters. Because of the fall in oil prices, the fuel exporting countries are expected to intensify existing adjustment policies. These will result in sharp reductions in import volumes, by 15 percent for the fuel exporting group in 1986, and by 8 percent in 1987. However, there are likely to be significant differences between the two groups of fuel exporters stemming both from the countries’ external financial positions and from the intensity of the countries’ recent adjustment efforts.
Since 1982 the capital exporting countries have increasingly attempted to protect the strength of their net foreign asset position by compressing imports in line with reductions in export earnings. However, the magnitude of the price shock in 1986, in combination with the increasing difficulty of curbing imports further, suggests that adjustment of imports to the loss of export earnings in 1986–87 will not be as great, in proportionate terms, as it was in 1985. Nevertheless, imports are expected to be cut sharply, by almost 18 percent in volume in 1986 and by a further 13 percent in 1987. As a result, the capital exporting countries’ trade balance will begin to improve in 1987, although import volume will then be only half of the 1982 level. The improvement in the current account in that year will be more marked because of the accompanying efforts in these countries to boost and diversify exports and to curtail service and transfer payments. The latter reductions will have a significant adverse impact on those countries which have been major recipients of these payments.
The capital importing fuel exporting countries were obliged by external financing constraints to adjust more vigorously during 1982–85 than were the capital exporters. Against this background, as well as that of no substantive improvement in living standards during the 1980s, national authorities in the indebted fuel exporting countries are likely therefore to attempt to phase adjustment over several years. In particular, these countries are expected to make major efforts to increase exports other than oil, to increase external borrowing, and, if need be, to draw on official reserves. Notwithstanding these actions, cuts in import volumes will be severe: import volumes are expected to decline by 12¼ percent in 1986, and by a further VA percent in 1987, by which time import volume will be only three fifths of the 1981 level (Chart 18).
For the non-fuel exporting countries, positive import growth is projected for 1986–87 at a rate (5¼ percent annually) which is only marginally lower than the long-run average for the group. Any faster growth of imports by these countries would lead to increases in current account deficits and imply an increased ability or willingness on their part to step up borrowing from commercial sources. The chief exceptions are the coffee exporters (other than Brazil), which, because of the very rapid increase in their export earnings, are expected to increase their imports by nearly 14 percent in 1986.
External Financing
The external financing situation of most capital importing developing countries remained as tight in 1985 as it had been in 1984, and current account deficits were limited accordingly. Nevertheless, there were some encouraging signs that countries may have completed the main part of the adjustment to the reduced levels of borrowing from private creditors. These signs included the leveling out of payments arrears outstanding, the continued, albeit modest, rebuilding of official reserves, the successful conclusion of a number of rescheduling arrangements, and the reduction in the net use of Fund credit. Nevertheless, external financing constraints remain severe and are likely to continue to be so for many countries until such time as their creditworthiness is re-established.
Four developments that characterized the payments position of capital importing developing countries in 1981–84 continued to be important in 1985. First, the deficit on goods, services, and private transfers, which had been reduced by almost two thirds from 1981 to 1984, remained at approximately its new lower level in 1985. It was thus largely covered by two relatively stable sources of finance: non-debt-creating flows and long-term borrowing from official creditors. Much of the reduction in deficits after 1981 was, of course, in response to the loss of access to private sources of credit. Net borrowing from private creditors fell from $73 billion in 1981 to less than $11 billion in 1985.
A second important trend in recent years has been the curbing of capital flight. The outflow of residents’ capital from the capital importing countries (defined as net asset transactions plus recorded errors and omissions) declined from $36½ billion in 1982 to $10 billion in 1985. Capital outflows are expected to stabilize in 1986–87. The reduction in capital outflows had a number of causes. Perhaps the most important factor in reducing capital flight has been the reduced level of capital inflows, which, because of the resulting shortages of foreign exchange, has restricted the ability of residents to purchase foreign assets. In addition, some countries have introduced adjustment measures that have increased the attractiveness of domestic financial assets compared with foreign assets—through increases in domestic interest rates, for instance, and devaluation of overvalued currencies—and that ought to have a lasting effect on capital flight. Other countries, however, have delayed the adoption of appropriate adjustment policies or have allowed slippages to occur in the implementation of an orderly adjustment strategy.
A third development is that the rate of growth of external debt has slowed substantially. This deceleration occurred because cuts in deficits on goods, services, and private transfers left deficits at levels that could more nearly be financed with non-debt-creating flows. Furthermore, as just noted, domestic adjustment in many countries, by helping to limit capital flight, reduced the need to borrow to finance outflows of residents’ capital. Consequently, the rate of growth of total debt has fallen sharply: from 16½ percent in 1981 to 5½ percent in 1985 in terms of U.S. dollars. (The 1985 figure would have been even lower if the depreciation of the dollar had not caused the value of existing debt in non-dollar currencies to rise.) In 1986–87 the value of outstanding debt is expected to continue to rise at 5½ percent, in part because of valuation effects.
Fourth, progress in strengthening the balance between external assets and liabilities, as well as in improving the maturity structure of external debt, has continued to be made. Reserves have increased in value by almost one third since the end of 1982, and the reserves-to-imports ratio, at 22¾percent in 1985, is now at its highest level since 1979. The accumulation of arrears, which had been a record $10½ billion in 1982, declined to $½ billion in 1984. In 1985, there was a small net repayment of arrears (a reduction in the outstanding arrears), for the first time since 1979.
Part of the reduction in arrears was attributable to the successful conclusion of a series of annual and multiyear rescheduling agreements (MYRAs) (Table 14). MYRAs have the merit of stabilizing the debt repayments schedule over the medium term for countries that are seen to be pursuing appropriate medium-term adjustment policies. Consequently, MYRAs are in some respects more closely related to the voluntary arrangements for the early refinancing of debt that were common in the late 1970s than to the “distress” arrangements for annual debt reschedulings that became common in the first half of the 1980s. More generally, rescheduling arrangements have become an increasingly accepted method of refinancing outstanding debt for many countries which have encountered debt-servicing difficulties and are not yet ready to resume borrowing on a spontaneous basis. The sum forecast for debt rescheduling in 1986–87 does not, therefore, necessarily indicate a persistence of debt servicing-problems at the same intensity as in 1983–84.
Capital Importing Developing Countries: Rescheduled Debt Service, 1980–87
(In billions of U.S. dollars)
Capital Importing Developing Countries: Rescheduled Debt Service, 1980–87
(In billions of U.S. dollars)
1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 | 1987 | |||
---|---|---|---|---|---|---|---|---|---|---|
Capital importing developing countries | 4.7 | 2.0 | 6.8 | 21.5 | 36.8 | 31.6 | 31.7 | 32.9 | ||
Of which, | ||||||||||
Africa | 0.8 | 1.4 | 0.4 | 2.7 | 4.2 | 4.5 | 4.1 | 2.2 | ||
Europe | 3.0 | 0.1 | 1.8 | 2.5 | 1.8 | 2.0 | 1.4 | 1.3 | ||
Western Hemisphere | 0.9 | 0.5 | 4.4 | 16.3 | 30.6 | 23.0 | 23.0 | 27.2 |
Capital Importing Developing Countries: Rescheduled Debt Service, 1980–87
(In billions of U.S. dollars)
1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 | 1987 | |||
---|---|---|---|---|---|---|---|---|---|---|
Capital importing developing countries | 4.7 | 2.0 | 6.8 | 21.5 | 36.8 | 31.6 | 31.7 | 32.9 | ||
Of which, | ||||||||||
Africa | 0.8 | 1.4 | 0.4 | 2.7 | 4.2 | 4.5 | 4.1 | 2.2 | ||
Europe | 3.0 | 0.1 | 1.8 | 2.5 | 1.8 | 2.0 | 1.4 | 1.3 | ||
Western Hemisphere | 0.9 | 0.5 | 4.4 | 16.3 | 30.6 | 23.0 | 23.0 | 27.2 |
The problems associated with rebuilding creditor confidence show clearly in the external financing situation of the market borrowers. These countries were the most affected by the increased reluctance of private creditors to lend to developing countries. In response, their deficit on goods, services, and private transfers was cut from $74 billion in 1982 to less than $1 billion in 1985; outflows of their residents’ capital fell from $33 billion to $9 billion in the same period; their official reserves were rebuilt by $27 billion in 1984–85; and arrears were reduced by $3 billion in the same two years. Yet net borrowing from private creditors has fallen in every year since 1981, from $76 billion in 1981 to $4½ billion in 1985.
There are three principal reasons why these adjustments have not elicited a greater response from private creditors. First, creditors remain skeptical about the ongoing commitment of national authorities to sound financial and market-oriented structural adjustment policies. Until creditors become persuaded of the underlying creditworthiness of countries—of their ability to service debt—they are unlikely to be forthcoming with new lending. Second, the process of rebuilding creditor confidence in any case takes time. The market borrowers rescheduled more than $80 billion of debt service that was due to be paid during 1982–85, and rescheduling arrangements in place or in immediate prospect will defer a further $52 billion of payments in 1986–87. Creditors are obviously concerned to see how these countries will cope with the new payments schedules. Third, some of the creditworthy debtor countries may now be averse to both the cost and risks associated with market sources of finance. The market borrowers have in fact borrowed as much from official creditors as from private creditors since 1982. These official inflows, in combination with non-debt-creating flows, constitute a much less expensive source of funds than market borrowing. Moreover, some countries appear to have decided that it is not only expensive, but also risky, to depend on the market sources of finance.
The official borrowers, by contrast, have traditionally relied almost exclusively on official transfers and on long-term borrowing from official creditors to finance their deficit on goods, services, and private transfers. The result has been a considerable stability of net resource inflows—a stability that has enabled the official borrowers to avoid the severe current account adjustment problems that confronted the market borrowers. It is only when the official borrowers have lost the confidence of their official creditors, especially that of the export credit guarantee agencies (for example, as a result of the incurrence of arrears to these agencies), that the cost in terms of the loss of access to credit has been considerable.
The weakness of the official borrowers’ reserve position is therefore a cause of concern because the availability of reserves can mean the difference between prompt payment of debt service and the emergence of arrears. The stock of official reserves held by the official borrowers was only $9 billion at the end of 1985. At such a level, reserves were equivalent to only eight weeks of imports. (In 1978, by contrast, reserves were almost three months of imports.) Clearly, the official borrowers need to rebuild reserves in order to reduce the risk that unexpected adverse developments might precipitate debt-servicing problems that could subsequently be magnified by the loss of access to new loans from official creditors.
Three other groups of capital importing countries also merit particular attention: the heavily indebted countries—because of their recent history of debt-servicing difficulties and low growth; the indebted fuel exporting countries—because of the prospective weakness in their export earnings; and the small low-income countries—because of the growing size of their debt ratios.
The reluctance of private creditors to resume spontaneous lending to many capital importing countries is causing particular difficulties for the 15 heavily indebted countries mentioned in the U.S. debt initiative. Their import volumes fell by two fifths between 1981 and 1985, in large part because the availability of private credit contracted sharply, and the growth of real GDP has been quite sluggish. The U.S. debt initiative has two main features. First, debtor countries are expected—in collaboration with the Fund and the World Bank—to intensify their pursuit of sound macroeconomic and structural adjustment policies designed to facilitate a reactivation of growth. Second, commercial and multilateral development banks have been asked to increase their lending to these countries during 1986–88, by $20 billion for the commercial banks and $9 billion for the World Bank and the Inter-American Development Bank.
A successful implementation of the plan would clearly ease the financing constraints on the 15 countries. For example, the $29 billion of additional lending, phased evenly over the three years, would enable the countries to increase their imports by about 12½ percent in value compared to the 1985 level. However, because of uncertainties regarding the commitment of authorities in the debtor countries on the requisite policies and regarding the export earnings prospects of these countries, such financing has not yet been incorporated into the staffs projections for a number of these countries. Net borrowing from all private creditors is projected to be negative for these countries taken as a group in 1986–87. It should be noted, however, that this overall development masks opposing tendencies for subgroups of countries. In particular, significant reductions in bank exposure are anticipated for several countries where adjustment efforts are lagging, whereas significant lending is anticipated for countries which are carrying out policies of structural adjustment.
A second category of countries that is a source of concern in the forecast period is the capital importing fuel exporters. These countries are expected to experience a deterioration in their terms of trade of about one third from 1985 to 1987. Moreover, because about half of the group has recently experienced debt-servicing problems, there is a risk that the weakening of their terms of trade might precipitate further debt-servicing difficulties and could result in further large cuts in import volumes. Indeed, external payments arrears are forecast to increase by about $2 billion annually during 1986–87. However, these countries undertook significant adjustment measures in 1982–85, which resulted in a strengthening in their balance of payments position during that period (Table 15). Further adjustment is expected from most countries in this group, which, in combination with some use of Fund credit and additional borrowing from official and private creditors, should ensure that cuts in import volumes in 1986–87, though sizable, will not have to match the decline in real export earnings. However, prospects for this group are extremely sensitive to the future path of oil prices and to the attitude of their creditors. The staff expects that these countries will be able to attract the necessary additional financing only if adjustment measures of adequate intensity are adopted urgently. Any delay by these countries, or any attempt to minimize the degree of adjustment, would probably stimulate both a shift away from these countries in the portfolios of foreign private creditors, and a further wave of capital flight by the resident private sector.
Developing Countries–Capital Importing Fuel Exporters: Current Account, Debt, and Debt Service, 1981–87
(In percent of exports of goods and services, or indices)
Including official transfers.
Developing Countries–Capital Importing Fuel Exporters: Current Account, Debt, and Debt Service, 1981–87
(In percent of exports of goods and services, or indices)
1981–82 | 1984–85 | 1986–87 | ||
---|---|---|---|---|
Current account balance1 | -18 | 2 | -18 | |
Debt | 148 | 182 | 255 | |
Debt service payments | 25 | 35 | 42 | |
Memorandum | ||||
Terms of trade (index, 1980=100) | 104 | 96 | 63 | |
Import volume (index, 1980= 100) | 112 | 86 | 74 |
Including official transfers.
Developing Countries–Capital Importing Fuel Exporters: Current Account, Debt, and Debt Service, 1981–87
(In percent of exports of goods and services, or indices)
1981–82 | 1984–85 | 1986–87 | ||
---|---|---|---|---|
Current account balance1 | -18 | 2 | -18 | |
Debt | 148 | 182 | 255 | |
Debt service payments | 25 | 35 | 42 | |
Memorandum | ||||
Terms of trade (index, 1980=100) | 104 | 96 | 63 | |
Import volume (index, 1980= 100) | 112 | 86 | 74 |
Including official transfers.
A third group that is the focus of concern comprises the group of small low-income countries. In relation to exports, these countries’ debt is more than double the average for all capital importing countries (Table 16). Moreover, these countries have borrowed relatively heavily in recent years, increasing their debt at more than 8 percent per annum during 1983–85. The small low-income countries have been able to service this large volume of debt because much of it has been on concessional, fixed-interest terms. However, the level of concessional debt is such that debt service payments have reached high levels. These countries’ debt service ratio was still below that of the countries with recent debt-servicing problems in 1985, but the two groups’ ratios are expected to be nearly equal by 1987. There are evident dangers for the small low-income countries in this situation: approximately one third of their export earnings is required to service debt, and their margin for financial maneuver is further limited by the fact that their reserves cover only slightly more than one month’s imports.
Small Low-Income Countries and Capital Importing Countries: Debt and Debt Service, 1981–87
(In percent of exports of goods and services)
Period average.
Interest payments as a share of debt. In percent per annum.
Small Low-Income Countries and Capital Importing Countries: Debt and Debt Service, 1981–87
(In percent of exports of goods and services)
1981 | 1982 | 1983 | 1984 | 1985 | 1986–871 | ||
---|---|---|---|---|---|---|---|
Small low-income countries | |||||||
Debt | 269 | 321 | 335 | 345 | 383 | 349 | |
Debt service payments | 18 | 19 | 20 | 23 | 30 | 29 | |
Of which, | |||||||
Interest payments | 8 | 9 | 9 | 9 | 13 | 13 | |
Memorandum | |||||||
Implicit interest rate2 | 3 | 3 | 3 | 3 | 3 | 4 | |
Capital importing countries | |||||||
Debt | 123 | 149 | 159 | 153 | 163 | 164 | |
Debt service payments | 21 | 24 | 22 | 23 | 24 | 23 | |
Of which, | |||||||
Interest payments | 11 | 14 | 13 | 13 | 13 | 12 | |
Memorandum | |||||||
Implicit interest rate2 | 9 | 9 | 8 | 9 | 8 | 8 |
Period average.
Interest payments as a share of debt. In percent per annum.
Small Low-Income Countries and Capital Importing Countries: Debt and Debt Service, 1981–87
(In percent of exports of goods and services)
1981 | 1982 | 1983 | 1984 | 1985 | 1986–871 | ||
---|---|---|---|---|---|---|---|
Small low-income countries | |||||||
Debt | 269 | 321 | 335 | 345 | 383 | 349 | |
Debt service payments | 18 | 19 | 20 | 23 | 30 | 29 | |
Of which, | |||||||
Interest payments | 8 | 9 | 9 | 9 | 13 | 13 | |
Memorandum | |||||||
Implicit interest rate2 | 3 | 3 | 3 | 3 | 3 | 4 | |
Capital importing countries | |||||||
Debt | 123 | 149 | 159 | 153 | 163 | 164 | |
Debt service payments | 21 | 24 | 22 | 23 | 24 | 23 | |
Of which, | |||||||
Interest payments | 11 | 14 | 13 | 13 | 13 | 12 | |
Memorandum | |||||||
Implicit interest rate2 | 9 | 9 | 8 | 9 | 8 | 8 |
Period average.
Interest payments as a share of debt. In percent per annum.
External Debt
The growth of external debt of all capital importing countries, taken together, has recently proceeded at a modest pace. As noted above, the rate of growth, in dollar terms, decelerated from about 15 percent per annum in 1981–82 to 5½ percent in 1985. The deceleration was the result of the tightening of external financial conditions described above, and of the greater relative importance of non-debt-creating flows in financing current account deficits. The rate of growth of the dollar value of debt is expected to stabilize during 1986–87, when total debt is forecast to rise by an average 5½ percent annually. Part of this sustained growth of debt reflects the increase in the dollar value of existing borrowing in non-dollar currencies—so that the underlying rate of new debt creation is rather less.
Debt ratios are affected both by the growth of debt in absolute terms and by fluctuations in export earnings. Indeed, in the short term, changes in exports often affect the ratio more strongly than changes in the rate of debt accumulation. Overall, the debt-to-export ratio rose steeply through 1983, but receded in 1984 in response to the cyclical rise in export earnings. However, the renewed weakness of export receipts in 1985, combined with the continued growth of debt, caused the debt ratio of the capital importing developing countries to rise to a new peak of 163 percent. The small low-income countries had the highest debt ratio, but the Western Hemisphere, which is mostly middle income, also recorded a high debt ratio, of 295 percent. Both groups have experienced above-average increases in their debt ratios since 1978. Whereas the debt ratio of all capital importing countries increased by about one fifth between 1978 and 1985, the Western Hemisphere countries increased their debt ratio by one third and small low-income countries by two thirds.
Debt service payments have shown considerable volatility in recent years as a result of debt rescheduling agreements. The interest payments ratio of all capital importing countries—a series that has been less distorted by debt reschedulings than the series for total debt service payments—increased from 7 percent in 1978 to 13½ percent in 1982 before declining to 13 percent in 1985 as interest rates eased. LIBOR fell by 3¾ percentage points between the third quarter of 1984 and the fourth quarter of 1985, and the recent downward movement in long-term U.S. interest rates is likely to exert further downward pressures on the interest rates paid by developing countries during the forecast period. The reductions in market interest rates have provided some relief to capital importing countries, particularly to the market borrowers. Interest payments by all capital importing countries are projected to stabilize at about $74 billion annually in 1986—87, some 2½ percent above the level of payments in 1984. But the interest payments ratio is expected to continue to fall, to about 12 percent in 1987.
The interest payments ratio of the market borrowers is expected to decline more rapidly than the average for all capital importing countries. The market borrowers’ interest payments ratio peaked at 15¾ percent in 1982, and remained at high levels during 1983–85. However, the ratio is expected to fall by ½ a percentage point in 1986 and by a further 1¼ percentage points in 1987. The official borrowers, however, have been substantially unaffected by the reduction in interest rates. Their interest payments ratio has been pulled up by the growth of their debt, from under 5 percent in 1979 to 11 percent in 1985. A further increase to 11½ percent is expected in 1986–87.
The debt service ratios discussed above do not include the servicing costs associated with some reserve-related liabilities, notably Fund credit. Servicing costs incurred as a result of using Fund credit have increased since 1978, but, at VA percent of export earnings in 1985, are still relatively small for the capital importing countries as a whole. However, for some groups of countries these servicing costs are relatively more important, being equivalent to 6½ percent of the small low-income countries’ exports in 1985, for example, and to 4¼ percent of sub-Saharan Africa’s exports (see Statistical Appendix Table A52). If debt service were reported inclusive of payments to the Fund, the consolidated debt service ratios would have been 36¼ percent for the small low-income countries in 1985 and 33 percent for sub-Saharan Africa.
Another relatively neglected topic in relation to the capital importing countries’ external indebtedness has been the question of the net debt of these countries. The gross debt of the capital importing developing countries is estimated at $883 billion in 1985, but the net debt—that is, gross debt less total foreign assets—was probably less than half that amount. Rough estimates of the stock of all foreign assets held by the capital importing countries, excluding the offshore banking centers, suggest that these amounted to some $450 billion in 1985, of which official reserves accounted for about $138 billion. The balance consists mainly of trade-related credits, working balances of trading companies held abroad, and the like, but also includes flight capital. The last factor helps to explain why Western Hemisphere countries hold the largest stocks of foreign assets in value terms. However, the non-oil Middle Eastern countries had the largest stock of assets in relation to exports of goods and services (Chart 26). The existence of the large stocks of foreign assets represents an opportunity for the capital importing countries to ease their financial problems through pursuit of policies conducive to the repatriation of some of the capital that flowed out.