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Debt Relief for African Countries: The Paris Club eases rescheduling terms

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1987
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Thomas M. Klein

Official debt dominates the external obligations of most African countries. Only five Sub-Saharan African countries—Congo, Côte d’lvoire, Gabon, Nigeria, and Zimbabwe— owe more to commercial banks than to official creditors. Excluding these five countries, 80 percent of the debt service of African countries that will fall due over 1987–90 to creditors other than multilateral organizations is owed to, or guaranteed by, official bilateral agencies. Since 1982, 23 Sub-Saharan African countries have renegotiated their official bilateral debt through the Paris Club. The Paris Club’s negotiating framework (see box), set up to deal with the debt-servicing problems experienced by some Latin American countries in the 1960s, has evolved steadily to address the more long-term debt difficulties of many African countries.

Recently, the Paris Club has responded to one of these difficulties. Low-income African countries with large external debt burdens were finding it very difficult to service rescheduled debts on the Paris Club’s standard repayment terms (a maximum of ten-years’ maturity and five-years’ grace.) In agreements with Mauritania, Mozambique, Somalia, Uganda, and Zaire signed between May and July 1987, the Paris Club altered its terms to provide longer relief. Creditors agreed that Mozambique and Somalia could repay rescheduled debt over 20 years, including ten years of grace, and Mauritania, Uganda, and Zaire could repay over 15 years.

Further information on external debt and reschedulings is available in Recent Experience With Multilateral Official Debt Rescheduling by K. Burke Dillon and Gumersindo Oliveros, February 1987 (IMF); and World Debt Tables, 1987 (World Bank), available respectively from the IMF Publications Services, Washington DC 20431, and World Bank Publications Services Unit, Washington DC 20433.

This article reviews the role of the Paris Club in the renegotiation of African debt and the circumstances that have led to the need for special treatment of low-income countries.

The Paris Club and Africa

Most of the early work of the Paris Club was with Latin American countries, as a multilateral forum for rescheduling export credits issued, guaranteed, or insured by agencies of the creditor country governments (see Table). Only a few low-income countries had renegotiated their external debts before 1976. Each was treated as a special case, and debts were rescheduled on highly concessional terms (see “Economic Aid Through Debt Relief by Thomas Klein in Finance & Development, September 1973).

The involvement of the Paris Club with Sub-Saharan Africa began gradually. Between 1976 and 1980, the Paris Club met four times with Zaire, twice with Sierra Leone, and once each with Liberia, Sudan, and Togo. But in 1981 the Club had to deal with seven countries, three of which had rescheduled debt in 1976–80. It became evident that further debt relief would be required for each of these countries and that other countries would be likely to request debt relief soon thereafter.

To take account of the depth and intractability of the global debt problem in general and the African debt problem in particular, by the early 1980s, the Paris Club expanded the scope of its negotiations to cover all inter-governmental loans, concessional as well as nonconcessional, in addition to guaranteed export credits. Interest was normally rescheduled along with principal. The basic period of debt relief was about one year. If debt relief was extended for longer, it was normally done through a series of separate agreements or “tranches” of renegotiated debt.

African countries that sought debt relief found the Paris Club willing to reschedule a high proportion of eligible debt service. In 1981–82, the proportion consolidated for rescheduling ranged between 85 and 90 percent. Between September 1986 and July 1987, 11 of the 13 agreements consolidated 100 percent of eligible payments. The non-consolidated portion was itself deferred, being payable in annual installments during the grace period of the consolidated portion. For low-income countries with poor balance of payments prospects, the period over which consolidated debt could be repaid was extended to approximately ten years, with a five-year grace period. (The terms of repayment in the Latin American agreements of the 1960s were six-seven year maturities with one year of grace.)

Until the mid-1980s, a major principle of Paris Club negotiations was that the payment terms of previously rescheduled debt would be honored. After that, the Club amended its operations so that previously rescheduled debt could be rescheduled again, if necessary, to finance the balance of payments.

A debtor country’s request for debt relief was only considered if that country had undertaken an adjustment program designed to address its payments difficulties. In practice, creditors have generally required that the debtor have an upper credit tranche arrangement with the International Monetary Fund. The Paris Club, in effect, left responsibility for monitoring the economic performance of countries seeking debt relief to the Fund. Meanwhile, the debtor country undertook to secure comparable debt relief from other creditors.

The nature and extent of these agreements varied considerably. The chart shows the duration of debt-service payments covered by Paris Club agreements between official creditors and Sub-Saharan African countries. Madagascar, for example, in its first agreement (signed in April 1981) rescheduled arrears outstanding at the beginning of 1981 and debt service due through June 1982. Debt service due from July 1982 through December 1987 was rescheduled in four successive agreements. Arrangements with some other countries were more complicated. Debt relief for Zaire, from January 1975 through May 1988, was achieved through nine agreements. The third debt relief agreement for Côte d’lvoire was a multi-year agreement, one of the two agreed to date by Paris Club creditors. (The other was for Ecuador.) The agreement for Côte d’lvoire rescheduled principal due over three years in three separate tranches, the proportion consolidated declining in each tranche. This was arranged parallel to a multi-year agreement with commercial banks.

Repayment maturity

By the end of 1986, the very long-term nature of the debt service problems of some Sub-Saharan African countries had become apparent. The balance of payments of the poorer countries seeking debt relief had not improved quickly enough to enable them to repay debt rescheduled with a standard ten-year maturity, even with five years of grace. The protracted nature of the debt-servicing problem facing these countries reflected a variety of factors. Earlier borrowing—particularly when commodity prices were strong—had often not been invested productively and had left many countries with a burden and profile of debt that was unsustainable. This was particularly so in an environment of declining commodity prices, slow growth in world trade, and reduced capital flows. In some cases, these problems were compounded by the continued pursuit of inappropriate economic policies, in particular inadequate agricultural production incentives, parastatal enterprises requiring large government subsidies, and inappropriate public sector investments. A number of countries that had maintained, over a prolonged period, programs of adjustment sufficiently strong to qualify for support under Fund arrangements, still required virtually continuous debt relief through the Paris Club. Consequently, in 16 of the 29 follow-up Paris Club agreements signed between 1983 and 1986 it was necessary to consolidate previously rescheduled debt.

Debt relief agreements of Sub-Saharan African countries with official creditors, 1976–July 1987

Source: World Bank. International Finance Division.

Notes: Lines indicate the length of consolidation periods. Dotted line indicates portion of agreement cancelled. “Ar” indcates arrears on long-lerm debt consolidated. Number indicates number of agreement. Vertical bars indicate separate tranches. Asterisks indicate rescheduling of previously rescheduled debt.

The June 1987 Venice economic summit meeting of the leaders of the major industrial countries recognized the need to improve the terms of debt relief for low-income African countries: “For those of the poorest countries that are undertaking adjustment efforts, consideration should be given to the possibility of applying lower interest rates on their existing debt and agreement should be reached, especially in the Paris Club, on longer repayment and grace periods to ease the debt burden.”

Paris Club agreements with Mauritania, Mozambique, and Uganda in June, and with Somalia in July reflected this new approach. An important breakthrough was the extension of 20-year maturities with ten years’ grace to Mozambique and Somalia. Mauritania and Uganda received 15-year maturities (as did Zaire, in May). Extended maturities are likely to be given to other countries in a similar situation—large debt-service obligations, poor balance of payments prospects, and low per capita income. However, each country will be considered eligible for exceptional treatment on a case-by-case basis. The Mozam bique and Uganda agreements were also exceptional in that the Paris Club agreed to reschedule on the basis of an economic program supported by the Fund’s new Structural Adjustment Facility rather than an upper credit tranche stand-by or extended arrangement.

The Paris Club

The Paris Club came into being in 1956. It is an informal official forum through which debtor countries can seek debt relief on loans from governments and on export credits insured or guaranteed by agencies of creditor country governments. Debt relief is extended only if the debtor country demonstrates (normally through a Fund-supported adjustment program) that its balance of payments situation, after the application of corrective policies, would permit it to meet its external debt obligations.

While the French Treasury provides a secretariat and a senior official to act as the Club’s president, the Paris Club remains an ad hoc group without any fixed membership or organizational charter. Nonetheless, the participating creditor countries take careful note of precedents in dealing with each new application for debt relief. The Club meets at the request of the country seeking to reschedule its external debt. Generally, in addition to the debtors and creditors, meetings are attended by observers from the Fund, the World Bank, the Organisation for Economic Co-operation and Development, and the United Nations Conference on Trade and Development.

The traditional common characteristic of creditors in Paris Club meetings is that each creditor country has a system of export credit insurance that has given rise (or threatens to give rise) to claims on the debtor country in question. The industrialized OECD countries provide the core membership, but other countries may be invited if they have export credit insurance claims to be resolved (e.g., Argentina and Mexico for the 1983 meeting on Peru, and Brazil in meetings for Costa Rica, the Dominican Republic, Gabon, Mauritania. Mozambique. Nigeria. Poland, and Senegal).

Interest as well as principal may be rescheduled. The consolidation period for debt to be rescheduled is typically 12-18 months, and rescheduled debt is to be fully repaid in eight-ten years. Equal semi-annual principal payments normally begin after a three-five year grace period. (As noted in the accompanying article, grace and repayment periods have recently been extended for some low-income debtors.) Paris Club debt consolidation periods now coincide closely with the timing of Fund arrangements. The results of the negotiations are summed up in an Agreed Minute.

After the Agreed Minute has been signed, debt relief becomes effective only when bilateral implementing agreements have been negotiated with the individual participating signatory countries. These establish the list of debts covered by the rescheduling and the interest charge on rescheduled debt (the “moratorium interest rate”).

Remaining problems

While the recent Paris Club actions are an important development, many problems remain for poor indebted countries. Longer maturities may not entirely relieve the debt problems of a number of Sub-Saharan African countries. In these countries, the interest due on rescheduled loans may need to be rescheduled again for the foreseeable future to reduce debt service to a level consistent with the availability of external resources. Concessional loans are generally rescheduled at concessional interest rates, while commercial loans are rescheduled at market rates. The latter rates, currently averaging about 8.5 percent per year, may cause the growth of debt to outstrip the growth of nominal GDP (in US dollar terms) in these countries, adding to the debt burden and discouraging adjustment and investment.

This problem is not amenable to a simple solution. Creditor agencies are often funded by market borrowing and do not have the discretion of lowering moratorium interest rates. Budgetary transfers to these agencies may be feasible in some countries, but may be difficult to accomplish in most. If the resources came from existing aid budgets, it could be at the expense of fresh economic assistance, leaving the low-income debtor country in a possibly worse position as fewer resources would be available to support current needs. Proposed solutions will need to take into account these constraints on creditor agencies and governments.

Geographical distribution of debit relief by official creditors, 1956—July 1987

(In billion of US dollars)

Sub-Saharan

Africa
Latin America

and the Caribbean
All otherAll countries
No. of

agreements
AmountNo of

agreements
AmountNo. of

agreements
AmountNo. of

agreements
Amount
1956–65071.220.791.9
1966–7540.551.2133.6225.3
1976–87
(June)6819.92518.61938.311276.8
Totals7220.43721.03442.614384.0
Source: World Bank. International Finance Division.

Another issue is that of annual rescheduling versus bloc rescheduling (i.e., consolidating debt falling due in several years into a single sum). Creditor country governments favor year-by-year rescheduling for most countries because of the need to assure appropriate and prompt domestic policy responses and because of the added flexibility in adjusting the terms of the rescheduling to fit the needs of the country.

Debtor governments appreciate the flexibility of annual reschedulings but worry that short consolidation periods also mean short planning horizons and the need for virtually continuous negotiations. Nearly one year is required to negotiate the bilateral implementing agreements that must follow a Paris Club agreement, and then the Club must be approached regarding debt relief for the next year. Since debt relief is not assured, financial planning must also be on a year-to-year basis.

Concluding observations

The recent initiative by the Paris Club in dealing with the debt of the poorer countries is a major step in arranging debt relief on terms consistent with those countries’ ability to pay, given their difficult economic environment. Since the Paris Club considers debt relief on a case-by-case basis, it can introduce further modifications in its procedures, as required. The basic approach of the Paris Club is to provide debt relief within a framework that will open the way for renewed flows of capital, including officially supported export credits, to developing countries —opportunities that, should they arise, must be used more prudently than in the past. The major problem in development finance today is not solely to find solutions for unpaid debts but also to accelerate the expansion of world trade. This requires an economic structure in developing countries that will enable them to respond to export opportunities, more rapid economic expansion in the industrialized countries, and a rollback of protectionist policies that reduce the volume of international trade.

Social Indicators of Development 1987

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