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Finance & Development, December 1976
Article

The external debt situation of developing countries: An assessment based on the Bank’s World Debt Tables

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1976
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Thomas M. Klein

A period of steady economic progress for developing countries was abruptly interrupted by the large adverse changes of their terms of trade and by the recession in industrialized countries. With the decline in export prices of primary products and the continued rise in the price of imported manufactured goods and other essential commodities, the per capita growth rate of non-oil developing countries (adjusted for the income effects of the terms of trade) is estimated to have been negligible in 1975, after rising at a rate of about 2 per cent per annum during the 1960s and at about 2V2 per cent per annum from 1971 to 1974.

A number of developing countries attempted to cushion the fall of investment and consumption by permitting and sustaining very large current account balance of payments deficits in 1974 and 1975 by drawing upon reserves accumulated in the early 1970s and by increased use of foreign loans. In the absence of this inflow of external resources, standards of living and long-term development programs could not have been maintained. Furthermore, the efforts of these countries to limit the reduction of their import volumes had a significant positive effect on exports and growth in the industrial countries.

The source of information for this article is the annual summary of statistics on external public debt (including publicly guaranteed debt) reported to the World Bank by developing member countries. While the data do not go beyond 1974, they do give a first indication as to how widespread among developing countries this ability to borrow was and what has been the impact of this new borrowing on the structure of their external debt.

Credit sources

New commitments received by the public sector of developing countries amounted to $36.33 billion in 1974, an increase by more than one third over the 1973 level of $27 billion. A small number of countries accounted for the bulk of this $9 billion increase. In Latin America, Argentina and Brazil accounted for $1.1 billion each, while Peru’s increased borrowing was $0.3 billion. Among the advanced Mediterranean countries, Spain and Yugoslavia secured additional commitments of about $0.9 billion each. Five East Asian countries borrowed $3.8 billion more in 1974 than in 1973. In the South Asian region, Pakistan’s borrowings were up by almost $1.0 billion; India’s by $0.4 billion. Two oil exporting developing countries, Algeria and Iran, which have been major borrowers in the past, reduced their new commitments in 1974 by $2.5 billion (see footnote 1 to Table 1 for definitions of regions).

The $36 billion of new commitments received in 1974 was accompanied by a net resource flow of about $18 billion [measured by the increase in debt outstanding from end-1973 to end-1974). Net flows are always less than commitments for any year; disbursements received from 1974 and earlier commitments were partly offset by repayment of existing loans. However, in 1974 there was another reason why net flows were well below the level or commitments: namely, an unusually large increase in undisbursed balances. For the non-oil developing countries, the increase in undisbursed balances was equal to 34 per cent of new commitments as contrasted with an average of 21 per cent for 1970-73. There is evidence that some of this borrowing was beyond what was required for immediate needs, and that some portion of the proceeds of these loans were, accordingly, available for 1975 and subsequent years. Debt outstanding at the end of 1974 reached $105.5 billion, or $151.4 billion if undisbursed balances are included (see Table 1). Since the data are expressed in U.S. dollars, some of the increase represents the revaluation of some other creditor country currencies in terms of the dollar; but, even excluding this effect, as is shown in the bottom line of Table 1, there has been an acceleration in the growth rate of debt outstanding. However, when the increase in external debt is compared with other relevant magnitudes, for example, changes in the amount and prices of imports and exports, the increase in debt, although still large, is a good deal less alarming.

Most of the increased borrowing by Latin American countries, the more advanced Mediterranean countries, and by East Asian countries was from private sources, principally from financial institutions. Borrowing from financial institutions by all developing countries comprised 38 per cent of commitments received in 1974 (see Table 2), compared with 21 per cent in 1970. The largest borrowers from financial institutions in recent years (which includes bond issues as well as loans from banks and other private lending institutions), were Argentina, Brazil, Mexico, and Peru among the Latin American countries; Greece, Israel, and Spain among the advanced Mediterranean countries; Korea and Malaysia in East Asia; Algeria in the North African and Middle Eastern region; and Zaire in Africa, south of the Sahara. These eleven countries accounted for 72 per cent of the debt of developing countries owed to financial institutions at, the end of 1974.

Table 1.Foreign borrowing and external public debt of 86 developing countries, 1972-74(In billions of U.S. dollars)
Commitments receivedDebt outstanding disbursed only (Year-end)Debt outstanding incl. undisbursed (Year-end)
1972197319741972197319741974
By geographical region1
Africa, south of Sahara1.753.523.606.227.669.3115.96
East Asia and Pacific3.213.537.378.8011.6614.1523.76
Latin America and the Caribbean7.409.0711.5321.8626.9334.5745.38
North Africa and the Middle East3.315.654.729.6112.4714.1822.79
South Asia1.682.564.2314.2215.7317.4723.38
More advanced Mediterranean2.812.694.8810.8813.0315.8520.12
Total20.1627.0136.3372.5987.49105.53151.40
By income group2
Oil exporters4.006.764.1712.0215.6417.7125.92
Higher-income countries10.6812.4818.7833.3740.9252.1870.76
Middle-income countries2.973.376.259.9511.4713.4922.08
Lower-income countries2.514.407.1417.2419.4722.1532.64
Total20.1627.0136.3372.5987.49105.53151.40
By type of credit
Official sources
Loans from governments
Concessional3.993.815.9923.3126.5929.7940.83
Other3.935.005.2613.5516.2418.7225.94
Subtotal8.8111.2538.8642.8348.5166.77
International organizations3.774.926.5910.8813.0215.8330.24
Total, official sources11.6913.7317.8447.7455.8564.3597.01
Private sources
Financial institutions6.4311.1913.9014.7920.8828.6536.86
Suppliers’ credits2.042.084.598.949.9111.2216.22
Other 30.000.000.001.120.841.311.31
Total, private sources8.4713.2718.4924.8531.6341.1754.39
Total, all sources20.1627.0136.3372.5987.49105.53151.40
Total, adjusted for exchange rate changes since the Smithsonian Agreement (December 1971)
Amounts72.7485.67102.18146.76
Increase from previous year (%)15.817.819.322.6
Source: Data reported to the World Bank on external public and publicly guaranteed debt with an original maturity of more than one year, as published in World Debt Tables EC-167/76.

These regions are as follows:

Africa, south of the Sahara—Benin; Botswana; Burundi; Cameroon; Central African Republic; Chad; Congo, People’s Republic of the; East African Community; Ethiopia; Gabon; The Gambia; Ghana; Ivory Coast; Kenya; Lesotho; Liberia; Madagascar; Malawi; Mali; Mauritania; Mauritius; Niger; Nigeria; Rwanda; Senegal; Sierra Leone; Somalia; Sudan; Swaziland; Tanzania; Togo; Uganda; Upper Volta; Zaire; Zambia.

East Asia and Pacific—China, Republic of; Fiji; Indonesia; Korea; Malaysia; Philippines; Singapore; Viet Nam; Thailand.

Latin America and the Caribbean—Argentina; Bolivia; Brazil; Chile; Colombia; Costa Rica; Dominican Republic; Ecuador; El Salvador; Guatemala; Guyana; Honduras; Jamaica; Mexico; Nicaragua; Panama; Paraguay; Peru; Trinidad and Tobago; Uruguay; Venezuela.

North Africa and Middle East—Afghanistan; Algeria; Cyprus; Egypt; Iran; Iraq; Jordan; Morocco; Syrian Arab Republic; Tunisia.

South Asia—Bangladesh; Burma; India; Pakistan; Sri Lanka.

More advanced Mediterranean countries—Greece; Israel; Malta; Portugal; Spain; Turkey; Yugoslavia.

The income groups are divided according to annual per capita gross national product as given in the World Bank Atlas, 1975 edition: lower income, below $200; middle income, $200-$499; higher income $500-1,999.

Commitment figures shown here exclude the increase in public debt resulting from the nationalization of foreign properties.

Source: Data reported to the World Bank on external public and publicly guaranteed debt with an original maturity of more than one year, as published in World Debt Tables EC-167/76.

These regions are as follows:

Africa, south of the Sahara—Benin; Botswana; Burundi; Cameroon; Central African Republic; Chad; Congo, People’s Republic of the; East African Community; Ethiopia; Gabon; The Gambia; Ghana; Ivory Coast; Kenya; Lesotho; Liberia; Madagascar; Malawi; Mali; Mauritania; Mauritius; Niger; Nigeria; Rwanda; Senegal; Sierra Leone; Somalia; Sudan; Swaziland; Tanzania; Togo; Uganda; Upper Volta; Zaire; Zambia.

East Asia and Pacific—China, Republic of; Fiji; Indonesia; Korea; Malaysia; Philippines; Singapore; Viet Nam; Thailand.

Latin America and the Caribbean—Argentina; Bolivia; Brazil; Chile; Colombia; Costa Rica; Dominican Republic; Ecuador; El Salvador; Guatemala; Guyana; Honduras; Jamaica; Mexico; Nicaragua; Panama; Paraguay; Peru; Trinidad and Tobago; Uruguay; Venezuela.

North Africa and Middle East—Afghanistan; Algeria; Cyprus; Egypt; Iran; Iraq; Jordan; Morocco; Syrian Arab Republic; Tunisia.

South Asia—Bangladesh; Burma; India; Pakistan; Sri Lanka.

More advanced Mediterranean countries—Greece; Israel; Malta; Portugal; Spain; Turkey; Yugoslavia.

The income groups are divided according to annual per capita gross national product as given in the World Bank Atlas, 1975 edition: lower income, below $200; middle income, $200-$499; higher income $500-1,999.

Commitment figures shown here exclude the increase in public debt resulting from the nationalization of foreign properties.

Countries have been able to attract funds from private financial institutions because they had, at the time of borrowing, extremely attractive prospects either for the production and export of primary products (such as, for example, Algeria and Zaire) or because their economic prospects more generally were thought to be good, with production and exports, particularly of manufactured goods, growing rapidly (for example, Mexico, Greece, Spain, Yugoslavia, and Korea). In addition, some lending was related to direct investment. There are some unique situations among the countries listed in Table 2, such as Panama (a financial entrepôt center) and the Sudan (a recipient of aid from the Organization of Petroleum Exporting Countries—OPEC—through guaranteed commercial bank loans rather than through direct loans from governments).

Lending to developing countries has continued to grow through mid-1976, according to information on publicized Eurocurrency lending and international bond issues. Such commitments were $13.5 billion in 1975 and $7.0 billion in the first half of 1976, as compared with $10.7 billion in 1974 (World Bank, Borrowing in International Capital Markets, EC-181/762).

In addition to private source credits, commitments received by developing countries from official sources rose in 1974 (see Table 1). Commitments from official sources in 1974 were $17.84 billion, an increase of $4.11 billion from 1973, of which $2.44 billion was from governments and $1.67 billion from international organizations. Member countries of the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) provided two thirds of all commitments from governments in 1974 ($7.16 billion). This was about the same level as in 1973, as an increase in DAC concessional lending was offset by a decline in other credits. Commitments from OPEC governments totaled $1.93 billion in 1974 as compared with $0.19 billion in 1973. An estimated $1.29 billion was concessional. The remaining commitments from governments came largely from centrally planned economies. The increase in commitments from international organizations was divided in roughly equal parts between the World Bank and regional development banks, particularly the Inter-American Development Bank and the Asian Devel-

Table 2.Borrowing from financial institutions by the public sector of 86 developing countries, 1972-74(In billions of U.S. dollars)
CommitmentsDebt Dec. outstanding 31, 1974
197219731974Undisbursed onlyIncluding undisbursed
Latin America and
Caribbean3.485.506.7815.8518.01
Of which:
Major Latin American
countries
Argentina0.510.290.771.281.79
Brazil0.981.352.224.655.08
Chile0.070.140.010.770.86
Colombia0.090.240.050.320.35
Mexico0.792.192.335.686.22
Peru0.210.580.520.991.22
Venezuela0.300.070.070.540.55
Subtotal2.954.855.9714.2416.06
CACM countries 10.110.170.280.420.50
Jamaica0.070.120.140.310.35
Panama0.080.190.100.310.36
More advanced
Mediterranean
Of which:1.051.352.656.117.38
Greece0.420.470.471.421.87
Israel0.380.720.692.862.97
Portugal20.010.160.120.26
Spain0.110.110.921.211.48
Yugoslavia0.140.020.370.410.68
East Asia and Pacific0.700.882.462.124.47
Of which:
China (Rep. of)0.050.130.560.170.80
Indonesia0.310.420.070.450.65
Korea0.080.250.760.671.32
Malaysia0.110.030.750.371.05
Philippines0.060.020.270.310.44
North Africa and Middle
East
Of which:0.852.230.872.603.84
Algeria0.331.610.461.322.22
Egypt0.100.030.210.270.35
Morocco20.010.110.110.20
Iran0.390.540.050.770.88
Tunisia0.030.020.010.120.15
Africa, south of Sahara0.351.191.061.812.97
Of which:
Ivory Coast0.060.130.130.21.0.37
Sudan0.020.050.260.080.34
Zaire0.120.570.520.671.29
Zambia0.050.1520.240.24
South Asia20.030.080.150.18
Totals:
33 selected countries5.9710.6113.2627.0634.83
86 developing countries6.4311.1913.9028.6536.86
Source: World Bank, World Debt Tables.

Central American Common Market countries: Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua.

… indicates negligible values.

Source: World Bank, World Debt Tables.

Central American Common Market countries: Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua.

… indicates negligible values.

Of the $2.44 billion increase in commitments from all governments, $1.1 billion was to South Asia, with more than half the increase going to Pakistan, a substantial portion of which comprised credits from OPEC countries. Credits to a number of North African and Middle Eastern countries grew in 1974. Borrowing by Egypt and the Syrian Arab Republic increased by $0.3 billion; Afghanistan received $0.4 billion from the Soviet Union. Excluding loans to Algeria and Iran (two oil exporting developing countries which had substantially reduced their previous, large levels of borrowing), loans from governments to the North African and Middle Eastern countries increased by $1 billion. Commitments from governments to Latin America, the advanced Mediterranean countries, and the East Asian countries expanded by about $1.5 billion in 1974. These consisted mainly of increases in official export credits rather than concessional lending.

Time profile ratios

The growth in the relative importance of private sector lending to developing countries has affected the structure of developing countries’ external debt. At the end of 1974, credits to financial institutions comprised 27 per cent of disbursed debt, compared with 15 per cent only four years earlier. The share of loans from governments fell from 53 per cent to 46 per cent of the total during this period, offset slightly by a relatively faster growth of lending by international organizations. The debt structure of developing countries varies markedly by income group (see footnote 1 to Table 1 for a definition of these groups). At the end of 1974, for the lower-income countries 65 per cent of lower-income countries, 65 per cent of external debt consisted of loans from governments, 24 per cent from international organizations, and 11 per cent from private sources. For the higher-income and middle-income non-oil countries, these proportions were 35 per cent, 20 per cent, and 45 per cent, respectively.

The growth in borrowing from private financial institutions by middle-income and higher-income group developing countries has affected the timing of their future debt service obligations. This may be seen in the changes of time profile ratios. Compared with borrowing from official sources, borrowing from private sources requires repayment in a shorter period of time and also payment of a higher rate of interest. Therefore, as the maturity of a country’s debt becomes shorter and the average interest rate rises, the ratio of future debt service to the debt outstanding as of some base period (the time profile ratio) will accordingly increase. Time profile ratios for five years and for ten years are given in Table 3. Looking at the loans from private sources to developing countries as a whole, the five-year ratio increased from 75 to 79 between 1969 and 1974, and the ten-year ratio from 106 to 124. This indicates a hardening of the terms of borrowing, mainly because of the increased level of market interest rates from the late 1960s to the early 1970s. It is also a reflection of the shift in private source financing from suppliers’ credits to bank lending; suppliers’ credits generally have lower interest rates than bank loans.

The time profile ratio for total debt depends on the terms and relative importance of debt to foreign governments and to multilateral agencies as well as to financial institutions. Between 1969 and 1974, the terms of lending from multilateral agencies as a group softened, reflecting the growing importance of the World Bank lending of International Development Association funds. The five-year time profile ratio for all developing countries fell from 38 to 31 and the ten-year ratio from 75 to 69. For loans from governments, the time profile ratio has remained practically unchanged despite the better terms for concessional lending, because the growth in the volume of these loans has been more rapid in the form of official export credits than by way of concessional capital. The relative growth in private source borrowing has brought about a net increase in the time profile ratios for those developing countries which have borrowed heavily from private sources. The time profile ratios for all categories of debt combined have increased for Latin American and the advanced Mediterranean countries, reflecting a shortening of the debt maturity structure and a higher interest rate. The ratios for South Asian countries have fallen, accentuating the contrast between countries whose borrowing was largely limited to available concessional finance and those countries which were in a position to attract and service credits from private financial institutions.

Debt management

The growing dependence upon private financial institutions by the relatively advanced developing countries puts more stress on their debt management capabilities. One factor consists of the effects of shorter maturities. Loans from private banks are typically for terms of five to seven years. Developing countries cannot be expected to become capital exporters by the time amortization on such loans falls due; they will still require net capital inflows and thus the need to roll over principal payments when they fall due.

A second factor is that loans from private financial institutions now have, in large part, variable interest rates. This has come about in recent years because of the unprecedented rates of inflation in the world economy and the rapid rise and fluctuation of the interest rates which these institutions pay for deposits. Although this practice introduces greater uncertainties, it can have potential advantages to borrowers as well. The reference rate may rise, as it did in 1973-74, but when it declines, as it did in 1974-76, the reduction in the cost of money is passed along to the borrower. This would not have been the case if the borrowing had been at a fixed rate. The funds which have been lent to developing countries in recent years have come, to a large extent, from institutions receiving Eurocurrency deposits. The lending rate has been based on the rate paid on these deposits plus a margin. The most common base rate for international lending by private financial institutions is the six-month London interbank offer rate (LIBOR), and the margin has varied from as low as ½ per cent to more than 2 per cent. The three-month and one-year LIBOR have also been used as bases. Banks lending from domestic deposits often base their rates on a domestic reference rate. For example, U.S. banks might fix their rates in relation to a U.S. “prime rate.” Interest charges are normally adjusted at six-month intervals.

Table 3.Debt service time profile ratios for developing countries, 1969 and 1974
19691974
5-yr ratio10-yr ratioyear ratio10-yr ratio
86 developing countries48845290
Loans from governments39713871
Loans from international organizations38753169
Loans from private sources7510679124
Selected regions
(A)Latin America and Caribbean58916785
Loans from governments43725085
Loans from international organizations45914390
Loans from private sources8210985132
(B)South Asia34633055
Loans from governments30613160
Loans from international organizations26501631
Loans from private sources7811678106
Note: The time profile ratios are calculated by dividing the debt service payments for five years and ten years, respectively, by the debt outstanding at the end of the year indicated. The ratios shown here are based on the figures published in the statistical annex of the World Bank, Annual Reports for 1971 and 1976.
Note: The time profile ratios are calculated by dividing the debt service payments for five years and ten years, respectively, by the debt outstanding at the end of the year indicated. The ratios shown here are based on the figures published in the statistical annex of the World Bank, Annual Reports for 1971 and 1976.

At the end of 1974, half of the debt outstanding of all 86 developing countries to private financial lending institutions consisted of variable interest rate debt; but, for the regions highly dependent on financial credits, nearly two thirds consisted of variable interest rate debt. Greece, for example, received $0.5 billion of credits from financial institutions in 1973 and 1974 (public sector borrowing as recorded in the Debtor Reporting System), of which 90 per cent consisted of variable interest rate loans as contrasted with only 46 per cent during the period 1970-72. The proportion of debt to financial institutions which consists of variable interest rate loans has risen.

This problem can be elucidated by describing the fluctuations of the LIBOR during the past five years. The six-month LIBOR, for example, fluctuated between 5¼ per cent and 6¼ per cent during 1972, but in the year 1974 averaged 11.2 per cent and exceeded 14 per cent during August 1974. The rate declined steadily in 1975, reaching 5.9 per cent in January 1976 and then rose again in the first half of 1976, averaging 7.8 per cent in June. Until recently, when forecasting a country’s future balance of payments position, debt service on debt outstanding at the base period has been one of the given elements; the major unknowns are exports and imports and debt service on new borrowings. Now, with the advent of variable interest rate debt, interest on much of the debt to private financial institutions is itself a dependent variable, the level fluctuating with short-term money market conditions. To show the significance of this phenomenon, the projected future interest charges on variable interest debt to private financial institutions outstanding at the end of 1974 were recalculated.

Debt statistics published by the World Bank

World Debt Tables (EC-167/76). This two-volume statistical compilation is based on reports by developing countries which borrow from the World Bank of public and publicly guaranteed debt with a maturity of more than one year. Figures are included for 86 countries whose data are sufficiently reliable for presentation. EC-167/76, which contains debt figures only through end-1974, is supplemented by bimonthly country data sheets giving summary debt statistics on data for end-1975 as they become available.

Borrowing in International Capital Markets (EC-181). This is a compilation of foreign and international bond issues and of Eurocurrency credits, published quarterly. A recently issued supplement lists all bond issues and Eurocurrency credits for the years 1973-75.

One set of estimated future interest charges was calculated using a historically high interest rate (the average six-month LIBOR prevailing during 1974 was used) and another was calculated using a historically low rate (the average six-month LIBOR for 1972). If interest rates were at their historically high level, debt service due to private financial institutions in calendar year 1976 on debt outstanding as of end-1974 would have been $5.50 billion. If interest rates were at their historically low level, debt service would have been $4.66 billion. Three quarters of this hypothetical swing of $840 million would have been concentrated in Latin America and in the more advanced Mediterranean countries, the two regions of the developing world most highly dependent upon credits from financial institutions.

The figures for potential variations in debt service payments for 1976 do not reveal the entire magnitude of the potential swing in debt service during 1976. In the first place, although complete data are not available, it is clear that there has been an increase in credits from financial institutions in 1975 and 1976, and the proportion bearing variable interest rates appears to be higher than in earlier years. second, the debt service figures cover sublic sector borrowing only. Much of private sector debt apparently consists of variable interest rate financial credits. If they continue to grow relative to credits at a fixed rate of interest, the amount of interest payments subject to uncertainty will also increase.

The potential swing estimated for debt service payments, even if adjusted upward to take account of recent disbursements and private sector debt, is not large relative to total exports of developing countries. However, a problem may arise in the future for individual countries with a large amount of variable interest rate debt. A rise of interest rates in the industrialized countries used as reference rates would bring about an increase in interest costs.

In conclusion, it may be observed that the ability of developing countries to run substantial balance of payments deficits since 1973 through long-term borrowing has been limited to two groups of countries: those lower-income countries which were in a position to secure additional concessional financing and those countries, largely middle-income and higher-income countries, which were in a position to borrow from suppliers and from financial institutions. The fact that large amounts of funds have been available to developing countries through commercial channels has been a very desirable feature of the international financial system. However, this growth of lending by financial institutions to developing countries imposes responsibilities on borrowers and lenders. For the borrowing countries, skillful and prudent balance of payments management has become a matter of increasing importance. Growing debt service payments in general, combined with the potential swing in interest payments on variable interest rate loans, increases uncertainty, and the growth in the amounts outstanding increases vulnerability to cyclical disturbances. Minimizing balance of payments stresses is important if a developing country wishes to remain creditworthy for lending by private financial institutions. For the lending countries, there must be a recognition that the continuity of the development effort in the developing countries will continue to require refinancing of maturing debt, and that the banking arrangements which made possible the growth of financial credits to developing countries should continue to have the flexibility to make such accommodation possible.

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