Eugene L. Versluysen
The Task Force on Non-Concessional Flows was set up in late 1979 at the initiative of the Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries (the Development Committee). It submitted its final report to the Development Committee in Helsinki in May 1982.
Its terms of reference were to:
Assess, in the light of recent events, conditions in international capital markets as they bear on the magnitude and terms of market borrowings.
Examine the content and feasibility of recent proposals to increase capital flows, such as the proposal from the Development Assistance Committee of the Organization for Economic Cooperation and Development on cofinancing and proposals for the financing of exports of capital goods to support investment programs of developing countries.
Consider the role of export credits by national export credit institutions and other national financial agencies.
The Task Force was chaired by Alfredo Phillips, Deputy Director of Banco de Mexico S.A., and included senior officials from Argentina, Brazil, Canada, France, the Federal Republic of Germany, Japan, the Republic of Korea, Kuwait, Malaysia, Mexico, the Netherlands, Nigeria, Saudi Arabia, Turkey, the United Kingdom, and the United States. Staff from the World Bank and the International Monetary Fund provided the secretariat for the Task Force and produced technical and background studies.
Between March 1980 and March 1982 the Task Force met ten times. To gain the views of private international financial institutions on various aspects of its work and to reflect their concerns in the formulation of its recommendations, the Task Force also hosted international seminars in October 1980 and December 1981, attended by representatives of these institutions. Additional consultations were held with individual banks in several financial centers.
Patterns of external flows
The Task Force’s primary mandate was to study the various categories of nonconcessional flows and to formulate recommendations designed to enhance their availability to developing countries. In order to be realistic and useful, the recommendations were based on an analysis of global resource flows to developing countries and of shifts in the composition and direction of these flows caused by changes in the world economy.
The Final Report to the Development Committee of the Task Force on Non-Concessional Flows is available without charge from the World Bank’s Publications Distribution Unit. See inside front cover for ordering information.
In the Task Force’s view, 1974 marked, in many respects, a turning point in the pattern of developing country finance. During the 1960s and early 1970s, coinciding with the fairly stable growth of the world economy, the composition of external financial flows to developing countries was relatively consistent. The majority of developing countries was able to finance the bulk of its domestic capital needs from trade surpluses and domestic savings. Foreign funds—most of which came from official sources (both bilateral and multilateral) on concessional or partly concessional terms—provided only 10 to 20 per cent of their capital requirements. Financial flows from private sources were residual and consisted mainly of direct foreign investment and supplier credits. Resource flows and economic growth progressed hand-in-hand without major shifts or disruptions.
In 1974, the global economic environment changed. The non-oil developing countries had to contend with a substantial deterioration in their terms of trade, caused by the combined impact of a fourfold increase in the price of crude oil, a simultaneous rise in the price of imported manufactures, and a fall in the demand for their own exports consequent on the recession in the industrial countries and, in some cases, protectionist measures. Although some developing countries continued to benefit from favorable price levels for their exported primary commodities, the aggregate external payments position of oil importing developing countries deteriorated rapidly between 1973 and 1975 (see Table 1).
|Low income1||Middle income2|
|In billions of 1978 U.S. dollars|
|In per cent of gross national product (GNP)|
The pattern of external financial flows to low- and middle-income oil importing developing countries—particularly to the latter—also changed considerably after 1974 (see Table 2). Low-income countries, which had restricted access to market financing, were forced to slow down their economic growth and to continue to rely on overseas development assistance (ODA). Countries in the middle-income group, whose current external deficits had risen most, had to rely increasingly on borrowings on nonconcessional terms from international commercial banks; commercial loans became their largest single source of external finance. Meanwhile the external surpluses of the oil exporters underwent a process of recycling, channeling resources to deficit countries largely through the international banks, but also through substantial contributions to the International Monetary Fund (IMF) and through increased concessional assistance. Countries whose adjustment policies proved successful were also able to borrow more commercial funds than previously.
|Low income1||Middle income2|
|Net capital flows|
|Official development assistance||3.4||4.1||6.6||5.1||5.7||3.3||5.3||5.3||6.5||7.9|
|Private direct investment||0.3||0.2||0.4||0.2||0.2||3.4||5.1||3.8||4.6||4.5|
|Changes in reserves and short-term borrowing3||-0.5||-1.1||-0.7||-1.1||2.4||-0.8||-11.7||-12.7||-20.1||9.5|
Under its terms of reference, the Task Force was mandated to examine primarily nonconcessional flows to developing countries. Its conclusions were submitted to the Development Committee at its meeting in the spring of 1981, and while the current outlook may be somewhat less optimistic, the Report stressed that these conclusions remain valid.
The Task Force Report emphasized the following specific points:
Sound debt management and appropriate adjustment policies are important in maintaining creditworthiness and sustaining additional borrowing to increase productive capacity.
Debt indicators—such as the ratio of interest and amortization to export earnings—can be misleading, and should be used with great care, not as a substitute for comprehensive country economic reviews.
In assessing economic conditions in borrowing countries, creditors should take into account the impact of prevailing levels of international interest rates and inflation on perceived creditworthiness.
Important objectives of debt rescheduling should be to reestablish the creditworthiness of the debtor country and to promote the restoration and enhancement of financial flows through adjustment policies.
Commercial banks should be encouraged to adopt a constructive approach to private debt restructuring, viewing it as part of a comprehensive effort to assist the debtor country. The Fund and multilateral development institutions might be able to provide good offices in these matters.
Turning to the current conditions and near-term prospects in international credit and capital markets, the Task Force expressed a note of confidence. It found that the interbank market was operating smoothly, and that there were no signs of emerging liquidity constraints, an important factor being prudent bank practices. Tighter monetary policies had not had a significant impact on liquidity (although they had led to higher interest rates). The capital positions of commercial banks had not seemed to have constrained lending, nor did commercial banks’ internal limits on lending to individual countries seem likely to impede continued large-scale lending to developing countries in general—unless concern grew about their economic policies and prospects.
Sources and uses of international bank funds, 1975–811
Source: International Monetary Fund data.
1 Banks in the Group of Ten countries and Austria, Denmark, Ireland, and Switzerland, excluding interbank.
2 Excluding Fund member countries.
3 International organizations and unallocated.
4 In 1980 there was no change in the deposits of centrally planned economies, while in 1981 such deposits declined (offset against “other” in the chart).
5 End 1980-September 1981.
The Task Force pointed to the need for strong and effective international banking supervision to maintain confidence and continuity in international banking. It also believed that with an improved economic environment and reduced interest rate volatility, emerging new capital markets—particularly in the Middle East and Far East—could become a more important source of nonconcessional flows to oil importing developing countries.
Expanding multilateral flows
The Task Force considered it most essential that the future volume of nonconcessional flows to oil importing countries should increase. The multilateral institutions, in particular, should either increase their own lending or improve the international financial environment sufficiently to induce others to increase theirs. The Report’s recommendations to stimulate additional flows fall into three broad categories.
First, the Task Force proposed measures to enhance the role of multilateral institutions as catalysts in international financial recycling. These measures affect the direct lending programs of the World Bank and the regional development banks. The Task Force concluded that in order to maintain appropriate levels of lending by these institutions, it was crucial both to maintain the continued strong support and commitment of all their shareholders, especially the major ones, and to preserve the future capacity of the bodies to raise funds from the market. The Task Force found it premature to support any one mechanism for increasing lending capacity. It did, however, urge that consultation with the relevant governments include the possibility that the World Bank and other development institutions increase their future lending capacity either through increased capital with a smaller, or no, paid-in element than in previous capital increases, or through carefully managed changes in their statutory lending limits.
Second, the Task Force recommended that higher priority be given to expanding the cofinancing programs of these institutions. (The basis for this recommendation was that cofinancing could be expected to provide a more comprehensive protective umbrella for co-lenders, while offering developing country borrowers loan terms and maturity schedules better adapted to their debt servicing capacity.) The Task Force discussed a range of new cofinancing techniques to achieve this. It also recommended that portfolio sales be resumed by multilateral development institutions, either through the customary participations in individual loans or by means of a new type of instrument—Loan Pass-Through Certificates—pioneered in the market for commercial mortgages. (These Certificates, based on a “pool” comprising a cross-section of disbursed loans, aim to diversify risks. The development institutions concerned would provide partial guarantees, up to a fixed amount, to ensure steady repayments to certificate holders, irrespective of possible delays in repayments by borrowers.)
Third, the Task Force recommended steps that multilateral development institutions could take to reduce the risk of commercial lenders in their dealings with developing countries. Its members felt there was some justification in examining measures that could play even a limited role in broadening the range of available financial facilities and in extending the lending leverage of the multilateral institutions. Such measures involved guarantees by the institutions for the later maturities of commercial loans to selected countries or for selected projects, possibly to be supplemented by “guarantee leverage” to provide higher gearing ratios to loan guarantees than to the multilateral institutions’ own disbursed project and program loans. (Higher gearing ratios mean higher ratios of total authorized capital to loans disbursed and outstanding. An ancillary benefit of such guarantees would be that the regulating agencies might give them more favorable consideration than they would a normal commercial bank asset.)
Most bankers consulted on this issue supported a proposal for partial guarantees by the development institutions. However, they felt that, in order to make these attractive to international banks and nonbank financial institutions, the total guarantee coverage provided would have to exceed substantially the 50 per cent limit suggested in the Task Force’s original proposal. The Task Force felt that the principle of risk-sharing between the development institutions and international banks should be the guiding rule, which would preclude total—or very high—guarantee coverage. It also felt that extensive guarantee coverage would neutralize the essential requirement that additional funds be raised, since high guarantees would substantially erode the guaranteeing institutions’ direct lending power and would merely cause a shift in lending from the institution to commercial banks.
Finally, on the issue of eligibility for guarantees, the bankers consulted stressed that their decisions were based more on the nature and purpose of a loan than on the borrowing country itself. Thus the notion of “threshold countries” was not regarded as a relevant eligibility criterion.
After careful consideration, the Task Force decided that the question of export credits raised in the terms of reference was not appropriate for discussion.
Development Committee, Helsinki
The Task Force concluded its work with the formal presentation of its Report to the Development Committee meeting in May 1982.
At this meeting, ministers noted its general conclusions and recommendations, and asked the Executive Directors of the World Bank and the regional development banks to consider the recommendations of the Task Force and report their deliberations to the Committee in due course. The Committee endorsed the efforts of the World Bank and the International Development Association to secure, where appropriate, an increase in cofinancing from all sources on terms suitable for and acceptable to the borrowers, and asked the Executive Directors of the World Bank to consider the various proposals on cofinancing which they will be discussing and to report on them if possible to the September 1982 meeting of the Committee.
The Committee also believed that appropriate arrangements should be made for periodic review of further developments in nonconcessional flows.
Constraints on commercial bank lending
Considerable attention was given by the Task Force, as part of its assessment of current and prospective market conditions, to possible structural constraints on bank lending, including official bank supervision, to determine factors that might limit the role of banks. On the global question of the impact of possible structural and regulatory constraints on commercial flows, the Task Force considered that these constraints, while significant, have not impeded nonconcessional flows of funds to the developing countries.
The Task Force found the lending capacity of the international capital markets sufficiently flexible so that, on a global basis, an increase in bank lending to industrial countries need not occur at the expense of lending to developing countries, although it could affect the terms on which such lending occurs. No signs were found of emerging liquidity pressures that would lead to a major reduction in the pace of international bank lending—given the maintenance of standards of bank prudential behavior and of official bank supervision and given the ability of monetary authorities to resolve crises quickly to avoid major disruptions.
The Task Force also examined the impact of industrial countries’ monetary policies on the pace and terms of international lending through their effects on market liquidity and interest rates, and the impact of the latter on debt service and the perceived creditworthiness of borrowers. It concluded that up to now, tight monetary policies in the industrial world have not impinged on the ability of banks to continue large-scale international lending. However, the rise in nominal domestic interest rates attendant on tighter monetary policies could have indirect effects on borrowing. Where, for instance, they increase significantly the borrowing requirements for some developing countries, creditworthiness may appear to deteriorate; the rise in real interest rates may also reduce the domestic activity of the debtor and, consequently, its borrowing capacity.
The available evidence was that neither lack of adequate capital nor the concentration of loans to developing countries as a group has so far been an important constraint on international bank lending by particular banks or groups of banks.
Since the interbank markets continued to function smoothly, with no signs of emerging liquidity crises or unusual differences in interest rates paid by major participants in the market, and there was a large network of interbank credit lines to support the system, the Task Force concluded that liability management was not a current constraint. Its review of the adequacy of the returns on international lending concluded that the continued high rate of lending indicated that the current level of spreads, even though low by historical standards, provided a sufficient expected rate of return. There were no discernible structural impediments to keep spreads from widening if the aggregate demand for international intermediation services were to begin to outpace the supply. As a result, developing country borrowers with adequate policies and reasonable growth prospects were not likely to be denied continued market access solely because exogenous factors—such as a deterioration in their terms of trade or the adverse impact on debt service of high world interest rates—may have caused them to appear less than completely creditworthy in the short run.
While it was beyond the scope of the terms of reference of the Task Force to examine bank supervision in detail, it emphasized the need for strong and effective supervision to maintain confidence in international banking and to help sustain international financial flows through banks. Thus far, supervisory guidelines have not been a significant impediment to bank lending to developing countries, but they could be.
Regarding the access of developing countries to bond markets, the Task Force noted that the developing country share of the international bond markets declined from a peak of about 15.5 per cent in 1978 to about 6.5 per cent in 1980, and to 7.5 per cent in 1981.