III External Debt Sustainability for Heavily Indebted Poor Countries

International Monetary Fund
Published Date:
December 1995
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Current mechanisms for handling the debt situation of the heavily indebted poor countries ensure that debt relief is given in support of adjustment by debtors on a case-by-case basis, reflecting the countries’ highly varied external positions (see Box 2). The preliminary conclusions from the current analysis are that these mechanisms are likely to work for the majority of countries currently eligible for Naples terms, in that they offer the likelihood of a durable exit from the rescheduling process consistent with the achievement of external debt sustainability (for prospective debt service in 1995, see Chart4; Tor a definition of sustainability, see Box 7). These chances can be strengthened by actions by all of the principal parties—debtors, creditors, donors, and multilateral institutions—as discussed below. For a minority of currently eligible countries, existing mechanisms would not appear to provide good prospects for a durable exit from the rescheduling process. However, such countries may still be able to pursue policies conducive to adjustment and growth over the medium term with the support of flow reschedulings.22 But if these countries are ultimately to exit from the rescheduling process, with the advantages described below, they may eventually require some combination of higher debt relief from Paris Club creditors, more debt relief from other official bilateral creditors or commercial banks, or action to tackle their multilateral debt. Appropriate action would be most effectively tailored to individual circumstances as they become clearer in the adjustment process, and as countries demonstrate through track records of adjustment that debt relief would be put to effective use. For the heavily indebted poor countries that are not yet eligible for Naples terms, it is difficult at this stage to make an assessment of the current mechanisms for handling their external debt situations, although some of these countries would appear to face extremely heavy debt burdens.

The current mechanisms for handling the external debt situations of the heavily indebted poor countries, including ensuring adequate financing to allow the countries to realize their growth potential, can be summarized as follows:

  • The adoption by the country concerned of programs of adjustment and reform supported by the IMF and the World Bank, and associated multilateral inflows.

  • A consultative group meeting (generally annually) to secure the concessional bilateral assistance required from donors to finance the program.

  • For countries unable to meet their debt-service obligations to official creditors in full, reschedulings by Paris Club creditors. For most of the heavily indebted poor countries, this involves a 67 percent NPV reduction of debt service on eligible debt (flow reschedulings) under Naples terms (see Box 4), with the prospect of a stock-of-debt operation for countries with three years of good track records under both IMF arrangements and rescheduling agreements.

  • The granting of debt relief, comparable to that provided by the Paris Club, by other official bilateral creditors and private creditors such as commercial banks. This process has important advantages, namely

  • it ensures that debt relief both under How reschedulings (directly) and under stock-of-debt operations (via the required track record) is given in support of an adjustment effort by the debtor; and

  • it provides for case-by-case treatment of individual debtors reflecting their widely different external positions (see Box 2) both by creditors (with Pans Club creditors tailoring effective debt relief through the amount of debt rescheduled to financing needs) and by donors (in the consultative group process).

Pending the results of further country-specific debt-sustainability analysis for heavily indebted poor countries, subsequent subsections present a preliminary assessment of the mechanisms described above from the viewpoint of external debt sustainability. This concept is summarized in Box 7.

This section focuses first on external debt-service obligations in 1995 resulting from hypothetical stock-of-debt operations for 27 low-income rescheduling countries, and then examines prospective debt service and the external financing positions over 20 years for 14 of these countries that could be early candidates for stock-of-debt operations or whose debt burden is particularly difficult.23 It should be emphasized that the current analysis is only partial and the results need to be treated as preliminary. A dynamic analysis of the NPVs of debt-to-exports ratios over time was not included in the medium-term projections due to data limitations.24 For many countries, integration of the analysis into the policy dialogue was necessarily imperfect—reflecting the different stages of policy discussions. The current analysis, however, provides a first assessment of the likely results of stock-of-dcbl operations tinder Naples terms, bearing in mind the uncertainties of longer-term country-specific projections and, in particular, of the projections of aid flows on which most countries are heavily dependent.

Box 7.External Debt Sustainability

The external position of a country could be considered sustainable if the country is expected to be able to meet its external obligations in full, without future recourse to debt rescheduling or relief or the accumulation of arrears, over the medium or long term and without compromising economic growth. Reducing the burden of current and future obligations to sustainable levels could also eliminate a possible disincentive effect on investment and new capital inflows, thereby improving growth prospects.

The key indicators for assessing sustainability could be

  • the ratio of scheduled debt service to exports of goods and services;

  • the externa) financing gap—after allowing for expected inflows in the form of grant receipts, loan disbursements, and any commercial capital flows; and

  • the ratio of the net present value (NPV) of the debt to exports.

The levels of the above indicators that could be considered sustainable vary from country to country depending on specific macroeconomic and other circumstances. As important as the starling levels of such indicators is their trend over the projection period, particularly over the next ten years. A country’s external debt position might generally be considered sustainable over the projection period if

  • scheduled debt-service ratios were declining to below 20-25 percent of exports of goods and services;

  • financing gaps were eliminated; and

  • the ratios of the NPV of debt-to-exports decline to below 200-250 percent of exports.

The definition of sustainability used here differs importantly from the normal IMF definition of medium-term viability, which precludes recourse to further exceptional financing (such as the use of IMF resources). Given the heavy dependence of the heavily indebted poor countries on continued aid inflows, including those of an exceptional nature, and the continued likely need for future use of ESAF resources, it would be extremely difficult for many of these countries to reach viability defined to exclude exceptional finance.

The assessment of whether current mechanisms can achieve debt sustainability assumes the desirability of an eventual exit from the rescheduling process. The paramount advantage of such an exit is a return to normal relations with the international financial community, characterized by spontaneous financial flows and the full honoring of commitments. In addition, repeated reschedulings involve significant costs for policy makers and create uncertainty about future debt relief; and they may foster the belief on the part of borrowers that financial contracts need not be honored. Moreover, debt overhangs may have contributed to investment disincentives, potentially delaying private capital flows required to generate sustainable growth (though a review of this issue for heavily indebted poor countries found such effects difficult to identify given the multitude of other influences on investment and growth; see Box 8).

Impact in 1995 of Hypothetical Stock-of-Debt Operations for Selected Low-Income Rescheduling Countries

This subsection looks at the possible impact of hypothetical stock-of-debt operations on debt service in 1995 for 27 low-income rescheduling countries that are currently eligible for Naples terms from Paris Club creditors.25Box 2 and Chart 3 summarize the diverse external positions of these low-income rescheduling countries in 1994. Chart4 summarizes the structure of projected external debt service in 1995—distinguishing between payments on restructurable (pre-cutoff date) and nonrestructurable debt.

Box 8.External Debt Overhang

Appendix I looks at the relationship between external debt and investment/growth in 39 heavily indebted poor countries.1 It concludes that;

  • The direct relationship between debt and investment or economic growth in heavily indebted poor countries seems to be weaker than in middle-income developing countries. It is difficult to disentangle the role of any debt overhang from other factors that have clearly worked to depress economic growth and investment in these countries.

  • Total net flows mainly from official sources to these countries have remained strongly positive throughout the 1980s and 1990s, despite their heavy debt burdens.

  • Several countries, such as Bolivia, Guyana, and Uganda, have experienced rising investment and relatively buoyant growth in the 1990s, despite heavy external debt burdens.

  • Nevertheless, heavy external debt burdens may have been associated with disincentives to invest, which could have contributed to the relatively poor growth performance of some of these countries.

  • Widespread acceptance of the proposition that external debt levels for many of these countries go beyond their debt-servicing capacity has been in-strumental in the Paris Club’s agreeing to implement increasingly concessional rescheduling terms for low-income rescheduling countries, involving, most recently, 67 percent net present value reductions for most countries under Naples terms.

1 All 41 heavily indebted poor countries (see Table 1), excluding Angola and Somalia due to data limitations.

For all countries covered, debt service on post-cutoff date debt to Paris Club creditors is less than 5 percent of exports, except for Cóte d’Ivoire (6 percent), Guinea Bissau (17 percent), and Nicaragua (10 percent) (Chart 5). Several of these countries face high debt service to multilateral institutions (including the IMF).

Chart 4 also shows the impact (marked with an asterisk) of a hypothetical and illustrative stock-of-debt operation on Naples terms assumed to have taken place at the beginning of 1995 (see Box 9). The hypothetical stock-of-debt operation assumed would reduce debt service on restructured debts in 1995 to below 5 percent of exports of goods and services for all but three countries.26 For 13 of the 27 countries concerned,27 overall debt service would decline to less than 20 percent of exports of goods and services following such an operation, while in 9 other countries28 debt-service ratios would be between 20 and 30 percent. Two countries (Cameroon and Sierra Leone) face heavy short-term debt-service obligations in 1995 that would be expected to fall in subsequent years, while the three remaining countries (Guinea-Bissau, Mozambique, and Nicaragua) face debt-service levels after this hypothetical stock-of-debt operation that would appear unsustainable.

Beyond 1995, with the repayment profile under Naples terms, the restructured debt-service obligations would rise at aboul 3 percent annually in nominal terms, which would be consistent with unchanged or decreasing debt-service ratios on this debt provided nominal exports grow by at least this amount. For most countries, the structure of debt service in 1995 would appear representative of the future debt-service profile. However, this is not tme of all cases, particularly for countries that face large obligations to the IMF. The following subsection looks at the effect of hypothetical stock-of-debt operations for 14 of these countries through 2014.

Medium-Term Analysis for Selected Low-Income Rescheduling Countries

The analysis above focuses on the impact of a hypothetical stock-of-debt operation on debt service in 1995 on existing debt for 27 low-income rescheduling countries. This analysis was extended for 14 of these countries over the next 20 years, incorporating new lending on the basis of illustrative country-specific medium-term scenarios. These countries were chosen as they could be relatively early candidates for a debt-stock operation or because their debt burden is particularly difficult. Most of the remaining 13 low-income rescheduling countries not covered in this medium-term analysis either face relatively less heavy debt burdens (with debt service after hypothetical stock-of-debt operations of 18 percent or less in 1995) or are less advanced in their adjustment programs. It should be em-phasized that coverage is not comprehensive, and there are several other heavily indebted poor countries that face extremely difficult debt situations. Furthermore, as emphasized earlier, the analysis is only partial—in that movements in NPVs of debt in relation to exports were not included-—and the results need to be treated as preliminary.

Key macroeconomic assumptions for these illustrative projections—the current account balance excluding interest, growth in GDP and in exports of goods and services, and new financing—are summarized in Table 6 while the results are shown in Table 7. The main conclusions—which, of course, are dependent on these assumptions—are as follows:

Chart 3.Low-Income Rescheduling Countries: Actual Debt-Service Payments and New Financing, 1994

(In percent of exports of goods and services)

Source: IMF staff estimates.

1/ Consists of scheduled debt service less debt relief and change in arrears.

  • On the assumption of continued strong adjustment efforts, 10 of the 14 countries considered would appear to reach sustainable medium-term external positions after a hypothetical stock-of-debt operation on the terms assumed above.29 This would also appear to be the case for Sierra Leone, although, given the steep decline in exports in recent years and the current difficult security situation, the prospects for sustainability would appear more un-certain.

  • Mozambique, Nicaragua, and Zambia face such large debt burdens that stock-of-debt operations on Naples terms would likely not result in sustainable external positions.30 While for Zambia (and Mozambique) the topping up by Paris Club creditors31 of debt previously rescheduled on Toronto and London terms would ease financing pressures to a considerable extent, Zambia would continue to face very high debt-service obligations to the IMF following clearance of arrears and replacement of the current Rights Accumulation Program by an ESAF arrangement, and would require substantial balance of payments assistance during the peak years of ESAF repayment.

The results are dependent on the conn try-specific assumptions made on export growth and the terms of new financing. Average growth of exports of around 15 percent a year was projected for 1995 and 1996,32 followed by a slowdown to around 7 percent by 2014. In virtually all cases a decline of aid flows in real terms was assumed. Some countries are more vulnerable to external shocks because their export base is less diversified than in other cases.

Chart 4.Low-Income Rescheduling Countries: Structure of Scheduled Debt-Service Payments, 1995 1

(In percent of exports of goods and services)

Source: IMF staff estimates.

Note: For countries underlined, the medium-term effects of hypothetical stock-of-debt operations on Naples terms through 2014 were examined.

1 The debt is restructured into a mortgage-type repayment schedule under which principal payments would initially be eliminated or restricted to a very small fraction. Hence, in the early years after a stock-of-debt operation payments on restructured debt would be limited to about 33 percent (with 67 percent NPV reduction of the stock) of currently scheduled restructurable interest payments. Total payments on restructured debt thereafter would rise by about 3 percent a year in nominal terms. For further background, see Box 9.

2 For details, see Chart 5.

3 After February 1995 stock-of-debt operation in the case of Uganda.

Virtually all of the 14 countries will remain heavily dependent on continued large net resource flows on concessional terms regardless of action on their debt. External debt sustainability can be reached only on the assumption of the continuation of such inflows.

Conclusions and Next Steps

Table 8 and 9 and Box 10 attempt to bring together (1) the analysis above on the impact of hypothetical stock-of-debt operations in 1995 on 27 low-income rescheduling countries and the subsequent, more detailed medium-term analysis for 14 of these countries, and (2) an earlier stylized analysis of multilateral debt for all heavily indebted poor countries. Table 8 shows the structure of the existing external debt of the 41 heavily indebted poor countries by principal creditors.33Box 10 and Table 9 attempt a preliminary categorization of those same countries by their external debt situations and the prospects for achieving medium-term sustainability. The country groupings proposed are inevitably judgmental and will need to be refined by detailed country-specific analysis, particularly for the countries not covered by the medium-term analysis summarized above.

Chart 5.Low-Income Rescheduling Countries: Structure of Scheduled Debt-Service Payments on Nonrestructurable Debt, 1995

(In percent of exports of goods and services)

Source: IMF staff estimates.

1 Includes short-term debt, new borrowing, gap financing, debt service from previous reschedulings on concessional terms, and private sector debt.

The above analysis suggests that Naples terms from Paris Club creditors, combined with comparable, or in some cases more generous,34 treatment from other bilateral official and private creditors, offer the prospect for achievement of debt sustainability and for an exit from the rescheduling process for the majority of the low-income rescheduling countries. However, this conclusion is dependent on achieving the assumed export growth or further adjustment by the country concerned. Virtually all of the countries will remain heavily dependent on continued {although, in the scenarios, declining) aid inflows. The prospects for a durable exit from the rescheduling process would be enhanced by

  • debtor countries strengthening their adjustment efforts;

  • creditor countries being prepared in some cases to top up previous concessional reschedulings;

  • donors focusing highly concessional assistance on the low-income rescheduling countries that persist with strong adjustment policies, particularly in the early years after stock-of-debt operations; and

  • significant reserve buildups being incorporated in medium-term projections, on which stock-of-debt operations are based, in order to provide a cushion against external shocks, given that all debt service to Paris Club creditors after a stock-of-debt operation is nonrestructurable.

Box 9.Assumptions on Hypothetical Stock-of-Debt Operation

The key assumptions are:1

  • For ail countries, a 67 percent net present value (NPV) reduction is assumed, except for Cameroon, Guinea, and Honduras, where a 50 percent NPV reduction is assumed—in line with Paris Club guidelines.

  • Debt previously rescheduled on concessional (Toronto or London) terms is not assumed to be restructured (or topped up).2

  • Similar coverage is assumed to be accorded to all precutoff date ODA debt.3

  • Debt to non-Paris Club bilateral creditors (including debt owed to Russia), and to private creditors, is assumed to be dealt with in a manner comparable with that applicable to the debt to Paris Club creditors.

Following such a stock-of-debt operation, principal payments would initially be eliminated or reduced to a small fraction of the restructured debt stock, while scheduled interest payments would fall by roughly the amount of the NPV reduction of the debt stock. Specifically, if the stock-of-debt operation takes the form of the debt reduction (DR) option, the initial debt service on the restructured debt would be precisely 33 percent for a 67 percent reduction in NPV terms. Assuming that the stock-of-debt operation includes a debt-service reduction (DSR) option or capitalization of moratorium interest (CMI) option, debt service in the first year after such an operation would be slightly smaller than one third of originally scheduled interest. For example, assuming proportions of a DR option, a DSR option, and a CMI option, at 40 percent, 55 percent, and 5 percent respectively, and a market interest rate of 10 percent, the ratio of debt service after a 67 percent stock-of-debt operation to originally scheduled interest is calculated at 28 percent.

1 For a further description of Naples terms, see Box 4 and Section VII.2 Paris Club creditors have indicated that debt previously rescheduled on Toronto terms may be included in such an operation on a case-by-case basis, and, in exceptional cases, debt previously rescheduled on London terms may be included.3 Under Naples terms, all pre-cutoff date ODA debt would be eligible for inclusion in a stock-of-debt operation. The exclusion of ODA debt previously rescheduled on concessional terms from the exercise considered here thus results in an overestimate of the debt service due after restructuring. This assumption was made owing to data limitations.
Table 6.Selected Low-Income Rescheduling Countries: Parameters Underlying the Debt Sustainability Analysis, 1995-2014
GDP Growth 1Growth In Exports 2Effective Inerest RateNon Interest Current Account DeficitGrowth in New Financing 2
(In percent)(In percent)(In percent)(In percent of exports)(In percent)
Cote d’Ivoire67994-12-73
Sierra Leone451481296-2-2
Source: IMF staff estimates.
Table 7.Selected low-Income Rescheduling Countries: Results of Hypothetical Stock-of-Debt Operation, 1995-2014
Scheduled Debt Service
Financing GapOf which
(- =SUrplus)Totalto multilateral instituitions
(In millions of U.S. dollars)(In percent of exports)
Cote d’Ivoire(292)5(7)-4(23)18(9)882
Sierra Leone(17)11(-8)-8(20)16(6)695
Source: IMF staff estimates.

Note: Figures in parentheses denote position before hypothetical stock-of-debt operation.

Even with these efforts, however, based on the present analysis, Naples terms combined with broadly comparable treatment from other official bilateral and private creditors would appear insufficient for four low-income rescheduling countries35 and might not suffice for a further four of these countries36 to attain sustainability. Among the countries currently not eligible for Naples terms (see below), a further six would appear to face extremely heavy debt burdens (Table 9). Thus, possibly for one third of all 41 heavily indebted poor countries, a stock-of-debt operation on Naples terms might be insufficient to reach external debt sustainability. These are tentative judgments that may change as these countries progress with their adjustment efforts supported by the mechanisms described above, and as further analysis is pursued. As these countries’ circumstances evolve and as adjustment continues, creditors, including the international institutions, might consider whether their debt problems need to be addressed in a concerted way, but tailored on a case-by-case basis, to achieve debt sustainability and a durable exit from the rescheduling process.

The low-income rescheduling countries’ situations—their records of adjustment and the structure of their debt—differ widely and need to be kept under close review. These countries face high debt service to a variety of creditors (Table 8), including in some cases to the IMF and/or other multilateral institutions.37 They will be eligible, or will continue to be eligible,38 for flow reschedulings from Paris Club creditors, which will give them time to establish strong track records of adjustment and to strengthen their externa) positions. Other official bilateral creditors and private creditors should also provide at least equivalent debt relief; where they are dominant creditors, more generous relief may be necessary in the light of the payments capacity of the countries concerned. The priority will be to ensure over the period ahead that these countries obtain sufficient external financing and mobilize sufficient domestic financing to attain their growth potential. For its part, the IMF could best assist the countries’ adjustment efforts by helping to provide such external finance through continued—and, where appropriate, enhanced—support under a continued ESAF

Table 8.External Debt of Heavily Indebted Poor Countries: Characteristics of Existing Debt
Total ExternalNPV of total
Debt (End-1993)Debt ServiceClub stock ofDebt by principal Non-Paris Club Creditor Group 3
TotalOf whichto Exports 1Club Stock ofMultilateral Instituitions
(In US$mulilateralas at End-1993Debt OperationsCommercial
billion)(In percent)(In percent)On Naples Terms 2banksRussiaIMFWorld bankOther
Burkina Faso1.173108
Central African Republic0.963240
Cote d’Ivoire519.116483
Equatorial Guinea0.341343
Kenya7.0432274, 9
Lao People’s Democratic Republic2.0242337
Liberia61.937295410, 11
Sao Tome and Principe0.3571,0497
Sierra Leone51.42559411
Somalia62.5363,086410, 11
Sudan616.6172,750410, 11
Uganda53.168812 131411
Yemen. Republic of5.9192897
Zaire611.3246168, 10
Zambia5, 66.83748910, 11
Sources: World Bank Debtor Reporting System; and IMF staff estimates.

Box 10.Heavily Indebted Poor Countries: Prospects For Medium-Term External Debt Sustainability

This is a first attempt to assess the prospects for external debt sustainability for all 41 heavily indebted poor countries based on the partial analysis described in Section III. The composition of the groups set out below is judgmental and is subject to change as a result of both more detailed country-specific analysis and country developments, as adjustment strategies are implemented with the support of existing mechanisms for debt relief.

Focusing initially on the 27 low-income rescheduling countries, 1 based on the effects of a hypothetical stock-of-debt operation on debt service in 1995 and the more detailed medium-term analysis of 14 of these countries, there would appear to be four groups of countries:

  • For 18 low-income rescheduling countries, a stock-of-debt operation on Naples terms from Paris Club creditors—once the country concerned has established a strong track record of adjustment—would appear to provide a good prospect for achieving sustainability and thereby an exit from the rescheduling process. This judgment assumes continuing adjustment and aid inflows, and comparable action by other creditors. These countries are Benin, Bolivia, Burkina Faso, the Central African Republic, Chad, Cote d’voire, Equatorial Guinea, Ethiopia, Guinea, Guyana, Honduras. Mali, Mauritania, Niger, Senegal, Tanzania, Togo, and Uganda. 2 Two of these countries—Cflte dTvoire and Ethiopia—would need large concessions from commercial banks and Russia, respectively, tailored to their limited payments capacity. Uganda has already received a stock-of-debt operation from Paris Club cred-itors, though if still faces a heavy burden of multilateral debt.

  • For four low-income rescheduling countries (Cameroon, Madagascar, Sierra Leone, and Zaire) a stock-of-debt operation under Naples terms from Paris Club creditors might in due course achieve sustainability and thereby an exit from the rescheduling process. However, because of relatively high debt burdens, this prospect appears less secure than for countries in the category above. 3

  • Four low-income rescheduling countries (Guinea-Bissau, Mozambique, Nicaragua, and Zambia), on current analysis, appear to have little prospect of achieving sustainability through an exit from the rescheduling process via a stock-of-debt operation under Naples terms, even on favorable assumptions, due to their extremely heavy debt burdens. Nicaragua has an extremely large debt to Russia (as—to a lesser extent—does Mozambique), while Guinea-Bissau and Zambia face large multilateral debt service, the latter to the IMF.

  • One low-income rescheduling country (Angola) is not currently eligible for Naples terms from Paris Club creditors (it received a nonconcessional rescheduling in 1990; however, it has now become eligible for IDA-only borrowing from the World Bank) and has a large debt to Russia. Given the uncertainties facing Angola as it emerges from internal conflict, it would appear too early to make an assessment of its external sustainability.

The remaining 14 countries can be divided into two groups, namely:

  • Four countries that appear to have sustainable external positions without further action by Paris Club creditors. These include Ghana and the Lao People’s Democratic Republic (which have never rescheduled; the Lao People’s Democratic Republic would, however, require debt relief from Russia), and Kenya and Vietnam (which have received exit reschedulings, though Vietnam still requires debt relief from Russia and commercial banks).

  • Ten countries that have not received concessional reschedulings from the Paris Club. Five countries have never had reschedulings (Burundi, Myanmar. Rwanda. Sao Tomé and Principe, and the Republic of Yemen). The remaining five countries have received nonconcessional reschedulings (the Congo and Nigeria received lower middle-income country terms in 1994 and 1991, respectively, and Liberia, Somalia, and Sudan received earlier reschedulings on nonconcessional terms). Given that these countries have not yet entered into the process of establishing track records of adjustment, it would be premature to make any firm assessment of the prospects of achieving sustainability and an exit from the rescheduling process via stock-of-debt operations, for which these countries are not yet eligible, and which some may not need. However, it would appear that, on current information, six of these countries (Burundi, Liberia, Rwanda, Sao Tom6 and Principe, Somalia, and Sudan) face extremely difficult external debt situations.

1 For a listing of countries concerned, see Box 1 and Table 1.2 The eight countries not covered in the medium-term analysis described above (Benin, Burkina Faso, the Central African Republic, Chad, Equatorial Guinea, Mali, Niger, and Togo) all have debt service after a hypothetical stock-of-debt operation of 18 percent or less of exports in 1995.3 Cameroon’s Paris Club stock-of-debt clause, contained in its 1994 agreement, is weaker than the customary clause, with creditors agreeing in principle to hold a meeting on the matter of Cameroon’s stock of debt.

Of the remaining 14 heavily indebted poor countries, four appear to have sustainable external positions without further action by Paris Club creditors—Ghana and the Lao People’s Democratic Republic, which have never rescheduled, and Kenya and Vietnam, which have received exit reschedulings (Table 9) and Box 10). For the remaining ten heavily indebted poor countries that are currently not eligible for Naples terms.39 it would appear too early to make an assessment of the effectiveness of current mechanisms for handling their debt situations, including potential stock-of-debt operations under Naples terms. On current information, six of these countries40 would appear to face extremely difficult debt situations, including some countries with large obligations to the IMF.41 A more considered assessment should realistically await the sustained implementation of appropriate adjustment policies, with the application of current mechanisms in the early phases of adjustment programs.

Table 9.Heavily Indebted Poor Countries: Prospects for Medium-Term External Debt Sustainability—A Preliminary Assessment 1
Countries Where External Debt isCountries Currently Not Eligible for Napels Terms
Likely Sustainable Without further Action from Paris Club CreditorsThat face extremely heavyWhere it is premature to make a
Action from Paris Club Creditorsdebt burdensdebt sustainability assessment
Ghana*Burundi*Angola 2
Lao People’s Democratic Republic 2*Rwanda*Myanmar*
Uganda 3Sao Tome and Principe*Nigeria
Vietnam 24Somalia 2Yemen. Republic of 2*
Countries Eligible for Naples Terms
Source: IMF staff estimates.
Countries where external debt is likelyCountries with less secure debtCountries unlikely to achieve debt
sustainable with Paris Club stock-of-debtsustainability with Paris Club stock-sustainability even wilh a Paris Club
operation under Naples termsof-debt operations under Naples termsstock-of-debt operation under Naples terms
BeninCameroonGuinea-Bissau 2
BoliviaMadagascarMozambique 2
Burkina FasoSierra LeoneNicaragua2
Central African RepublicZaireZambia
Cote d’Ivoire 4
Equatorial Guinea
Ethiopia 2
Guinea 2
Mali 2
Source: IMF staff estimates.

In fact, flow reschedulings—through the capitalization of interest in the consolidation period—initially provide for more debt relief and financing than stock operations that are equivalent in NPV terms.

For an explanation of these groups and a listing of the countries involved, see Box 1 and Table 1.

Such an analysis for Uganda in May 1995 projected this ratio to fall from 318 percent in 1995—after the Naples terms stock-ofdebt operation—to 150 percent in 2002, on certain assumptions.

For a listing of countries, see Box 1 and Table 1. All have received concessional reschedulings from Paris Club creditors, with the exception of Angola. Angola’s last rescheduling was agreed with Paris Club creditors on nonconcessional terms in 1989, but it would likely be eligible for a concessional rescheduling now—although creditors decide this on a case-by-case basis—because it has become eligible for borrowing from the World Bank exclusively on International Development Association (IDA) terms (“IDA-only”).

Guinea-Bissau, Nicaragua, and Zaire.

Angola, Benin, Burkina Faso, the Central African Republic, Chad, Equatorial Guinea, Ethiopia, Mali, Mauritania, Niger, Senegal, Tanzania, and Togo.

Bolivia, Cote d’Ivoire, Guinea, Guyana, Honduras, Madagascar, Uganda, Zaire, and Zambia; Uganda, after its February 1995 stock-of-debt operation.

Of these countries, four (Ethiopia, Mauritania, Senegal, and Tanzania) are projected to have debt service after a hypothetical stock-of-debt operation of below 20 percent of exports in 1995, and six (Bolivia, Cote d’lvoire, Guinea, Guyana, Honduras, and Uganda) have debt service of between 20 and 30 percent of exports.

Mozambique and Nicaragua both face debt service after hypothetical stock-of-debt operations of over 40 percent of exports in 1995; while Zambia’s prospective debt service is only 21 percent, it faces high future debt service to the IMF, as noted in the text.

For an explanation, see Box 4 under “Coverage”.

For 1995, export growth in the major coffee-producing countries (Ethiopia, Honduras, Nicaragua, Tanzania, and Uganda) is projected to be boosted by the full-year effect of the surge in coffee prices that took place in the second half of 1994. For the remaining nine countries, the growth in exports in 1995 is projected to average 8 percent. The assumptions are broadly consistent with those in the World Economic Outlook (Washington: International Monetary Fund, May 1995).

For country coverage, see Box 1.

In cases where the creditor or group of creditors concerned has very large claims on a particular debtor, the creditor would need to take fully into account the debtor’s limited payments capacity.

Guinea-Bissau, Mozambique, Nicaragua, and Zambia.

Cameroon, Madagascar, Sierra Leone, and Zaire.

As is indicated in Table 8, footnotes 11 and 12, three lowincome rescheduling countries face potential debt service to the IMF of over 10 percent of exports assuming a 3 percent annual growth of exports in U.S. dollar terms. One of these countries is currently in arrears (Zambia), while Sierra Leone is a postarrears case; the remaining country is Uganda.

With the exception of Uganda, given that it has already received a stock-of-debt operation.

The countries that have not yet had concessional reschedulings from Paris Club creditors (see Box 10, last category), namely Burundi, the Congo, Liberia, Myanmar, Nigeria, Rwanda, Sao Tome and Principe, Somalia, Sudan, and the Republic of Yemen; Angola could also be considered to be in this category.

Burundi, Liberia, Rwanda, Sảo Tomé and Principe, Somalia, and Sudan.

Liberia, Somalia, and Sudan face debt service to the IMF of over 10 percent of exports, assuming a 3 percent annual growth of exports in U.S. dollar terms (Table 8, footnotes 11 and 12). All of these countries are currently in arrears.

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