Official creditors have provided cash-flow relief to a large number of low-income countries through Paris Club reschedulings. SAF- and ESAF-eligible countries account for half of the Paris Club rescheduling countries but were involved in nearly two thirds of the reschedulings since 1976, as most of these countries had repeatedly sought relief from the Paris Club (Chart 6). Generally the reschedulings for these countries were more comprehensive in coverage and percentage of debts rescheduled than those for other creditors. However, given the protracted nature of their balance of payments problems, many of these countries experienced serious difficulties in adhering to the repayment schedules from previous agreements, largely because, as creditors recognized, the repeated application of standard terms over a long period had not provided an adequate response to the medium-term debt-servicing problems of the poorest and most heavily indebted countries.
Multilateral Official Debt Renegotiations for SAF- and ESAF-Eligible Countries, 1976–89
Sources: Paris Club Agreed Minutes and IMF staff estimates.As a first step toward alleviating the future debt-service burden resulting from successive reschedulings, creditors agreed in mid-1987 to lengthen the maturity period to between 15 and 20 years, and extend the grace period up to ten years. The rescheduling for Zaïre in May 1987 was the first to incorporate the longer maturities. This adaptation of rescheduling practices for the low-income countries was strongly endorsed by the creditor countries participating in the Venice summit meeting. Through the summer of 1988, ten low-income countries obtained extended repayment terms. During the course of that period, various proposals were considered that would further ease the terms of debt rescheduling for the poorest countries. The Interim Committee communiqué of April 1988 noted that the burden of outstanding debt would continue to weigh heavily on some of the poorest countries and that the possibilities of applying lower interest rates to existing official debt for the poorest countries should be kept under close consideration. In June 1988 creditor countries participating in the Toronto summit meeting endorsed a menu approach to the rescheduling for the low-income heavily indebted countries, including partial debt forgiveness, lower interest rates, and a further lengthening of maturities. A consensus on the modalities of the menu approach was announced by the Paris Club in September 1988. The options approach was first applied for Mali in October 1988; through end-1989, a total of 15 countries benefited from concessional reschedulings.16 The rescheduling terms under the menu approach are now generally referred to as “Toronto terms.”
The Menu of Options—Toronto Terms
The menu consists of three rescheduling options that were designed to accommodate the various institutional, legal, and financial constraints of creditor governments. The choice of option (or combination of options) is made by each creditor country at the time of the multilateral rescheduling meeting. While creditors are free to vary their choice for different debtor countries and for different categories of debt, in practice only one creditor has made frequent use of these possibilities. All other aspects of the rescheduling agreement remain common to all creditors, notably the consolidation period, the specific debt-service obligations covered by the agreement, and the arrangements regarding the implementation of the Agreed Minute. A summary of the options is presented in Table 3.
Options in Concessional Reschedulings
(Toronto Terms)
As share of debt service consolidated under the option.
Market rate refers to the “appropriate market rate” in the creditor-countries concerned.
The market rate is reduced by 50 percent if 50 percent is less than 3.5 percentage points, i.e., if the market rate is lower than 7 percent.
Options in Concessional Reschedulings
(Toronto Terms)
| Option A | Option B | Option C | |
|---|---|---|---|
| Consolidation of non-ODA debts | |||
| Overall maturity | 14 years | 25 years | 14 years |
| Grace period | 8 years | 14 years | 8 years |
| Cancellation1 | one third | — | — |
| Interest rate2 | market rate | market rate | market rate reduced by 3.5 percent3 |
| Consolidation of ODA debts | |||
| Overall maturity | 25 years | 25 years | 25 years |
| Grace period | 14 years | 14 years | 14 years |
| Cancellation1 | one third | — | — |
| Interest rate | ODA rate | ODA rate | ODA rate |
As share of debt service consolidated under the option.
Market rate refers to the “appropriate market rate” in the creditor-countries concerned.
The market rate is reduced by 50 percent if 50 percent is less than 3.5 percentage points, i.e., if the market rate is lower than 7 percent.
Options in Concessional Reschedulings
(Toronto Terms)
| Option A | Option B | Option C | |
|---|---|---|---|
| Consolidation of non-ODA debts | |||
| Overall maturity | 14 years | 25 years | 14 years |
| Grace period | 8 years | 14 years | 8 years |
| Cancellation1 | one third | — | — |
| Interest rate2 | market rate | market rate | market rate reduced by 3.5 percent3 |
| Consolidation of ODA debts | |||
| Overall maturity | 25 years | 25 years | 25 years |
| Grace period | 14 years | 14 years | 14 years |
| Cancellation1 | one third | — | — |
| Interest rate | ODA rate | ODA rate | ODA rate |
As share of debt service consolidated under the option.
Market rate refers to the “appropriate market rate” in the creditor-countries concerned.
The market rate is reduced by 50 percent if 50 percent is less than 3.5 percentage points, i.e., if the market rate is lower than 7 percent.
One notable aspect of the menu was the specific provision for the rescheduling of ODA debts, which combined the longest repayment period under the options with an explicit reference to concessional interest rates. While this represented an innovation in the Agreed Minute, most creditors had already begun to extend concessional rates on rescheduled ODA debts in the context of the bilateral agreements that implement the Agreed Minute.
Over the past ten years most creditor countries have announced and, in many cases, implemented debt forgiveness on ODA debts for the poorest countries on a bilateral basis; several countries announced comprehensive initiatives in this area in 1988–89. These initiatives have been taken bilaterally and have not been linked to multilateral debt rescheduling exercises.
The Implementation of the Menu Approach
The 16 rescheduling agreements on Toronto terms that Paris Club creditors concluded through end-1989 consolidated slightly over $3 billion.17 One country (Zaïre) accounted for more than half of this amount. The distribution of debt service consolidated over the three options was about even, but excluding Zaïre (which owes more than half of its debt to countries that chose Option B), some 40 percent was consolidated under each of the concessional Options A and C, and 20 percent under Option B.
The cancellation of debt service consolidated under Option A amounted to about $300 million, which reduced the amount rescheduled under all options to 90 percent of debt service consolidated. Annually this represented an estimated $41 million reduction in moratorium interest payments—about $15 million from lower interest payments on debt service rescheduled under Option A and the remainder from the direct reduction in interest rates under Option C.18 These savings, amounting to some 1.3 percent of the total amounts consolidated, increase cash-flow relief during the consolidation period only marginally but reduce moratorium interest payments during the grace period by some 20 percent relative to previous rescheduling terms. Thus, while reschedulings on Toronto terms provide little additional immediate financing, the options approach enhances the progress toward medium-term viability. Since the Paris Club reschedules debt-service obligations falling due during a specific consolidation period, however, a significant improvement in the concessionality structure of the stock of debt can only be achieved through successive reschedulings over a number of years.
The consolidations on Toronto terms incorporate an average grant element of about 20 percent compared with the minimum grant element of 50 percent employed by the OECD Consensus on mixed export credits to low-income countries or the typical grant element of bilateral concessional assistance, assistance provided by the International Development Association or SAF and ESAF resources.19 It should be noted, however, that this calculation measures only the additional grant element directly attributable to the application of Toronto terms on non-ODA credits and does not take into account the grant element inherent in the rescheduling of ODA debts on ODA terms.
In Implementing the options approach, creditors have stressed that reschedulings are to be considered exceptional financing for countries in severe debt-servicing difficulties. They have continued to underscore that concessional reschedulings for the poorest countries should not be seen as a substitute for aid flows on highly concessional terms. Creditors have also stated that debt service arising from reschedulings on Toronto terms would be exempt from possible future consolidations on Toronto terms.
Creditors have emphasized that concessions were to be limited to the poorest countries unable to service debts on commercial terms. The Agreed Minutes for concessional reschedulings refer in particular to very heavy debt-service obligations in conjunction with very low per capita income, chronic balance of payments problems, and the implementation of a strong adjustment program.
Eligibility for Toronto terms is decided on a case-by-case basis in light of these broad criteria. SAF- and ESAF-eligible rescheduling countries would generally meet these criteria. Since the adoption of the options approach in October 1988, all SAF- and ESAF-eligible countries that had multilateral official debt reschedulings through the Paris Club have received concessional terms except for Bolivia (1988) and Guyana (1989). The latter obtained repayment terms extending over 20 years, however, and Bolivia obtained Toronto terms in the March 1990 rescheduling.
Reschedulings on Toronto terms were in all cases comprehensive, covering 100 percent of debt-service payments falling due on pre-cutoff date debt, including in most cases all previously rescheduled debts.20 Arrears were generally covered and consolidated under the same terms as current maturities, but creditors usually exempted arrears on debts that had not been covered by previous consolidations from the rescheduling on concessional terms and deferred these payments for one to two years.
Summary of Experience, 1986–89
The adaptations in creditors’ policies vis-à-vis the low-income countries closely parallel the shift in Fund support from general resources under stand-by arrangements to resources from the SAF and the ESAF. Since 1986, Paris Club creditors have concluded 39 reschedulings for low-income countries. In 1986, all 11 reschedulings for low-income countries were on standard terms, and all were based on a Fund stand-by arrangement (though 6 countries also had an arrangement under the SAF). In the following year, all seven low-income countries that came to the Paris Club received extended maturities, and all had a SAF arrangement. Similarly, in 1988–89, all but two of the low-income countries with Paris Club reschedulings had programs supported by Fund resources under the SAF or the ESAF, and the Paris Club accorded extended maturities or Toronto terms in all but one instance.
It is noteworthy that a significant number of low-income countries with Fund-supported programs did not require Paris Club reschedulings. Of the 82 Fund arrangements approved during 1986–89 for these countries, 34 did not require exceptional financing in the form of debt, and of the 35 countries that had arrangements from the Fund during this period, 40 percent did not reschedule, including two low-income countries that graduated from reschedulings under programs supported by ESAF arrangements (The Gambia and Malawi).
The effects of the evolution in Paris Club rescheduling terms are illustrated in Chart 7, which compares average repayment terms for current maturities since 1986 under standard terms, extended maturities, and Toronto terms. The upper panel presents average annual principal repayments as a percentage of amounts consolidated in Paris Club reschedulings for all SAF- and ESAF-eligible countries. This presentation shows the effects of cancellations under Option A, but cannot take into account the effects of the reduction in interest rates under Option C. The lower panel, therefore, presents total debt-service payments per annum, including moratorium interest, as a percentage of the amounts consolidated. Until year 20 (after the agreement date) the schedule of debt-service payments from reschedulings under Toronto terms remains uniformly below the debt-service payments under the previous preferential treatment with the exception of year 10 because of the shorter grace period under Toronto terms. The reduction in debt-service payments is particularly pronounced during the grace period, reflecting the lower moratorium interest payments.
Evolution of Rescheduling Terms of SAF and ESAF-Eligible Countries, 1986–89
Sources: Paris Club Agreed Minutes and IMF staff estimates.Successive reschedulings on Toronto terms would progressively widen the difference in payments on rescheduled debts. However, assuming continued consolidations of scheduled interest payments on pre-cutoff date debts (but excluding moratorium interest from concessional reschedulings), the stock of pre-cutoff date debt would continue to increase because the capitalization of interest under all options is not offset by the cancellation of one third of debt-service payments under Option A. The rate of increase in the stock would be considerably lower than under past rescheduling practices, however, and the average interest rate on the stock would decline somewhat.
