Chapter

II Paris Club Policies Regarding the Poorest Debtor Countries

Author(s):
International Monetary Fund
Published Date:
January 1987
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In recent years, official creditors have provided through Paris Club reschedulings debt relief to a large number of low-income countries; during the period 1982–87 about half of these reschedulings were for countries currently eligible for assistance under the structural adjustment facility—most of which were sub-Saharan African countries. Although official creditors in determining the extent of debt relief always take account of the debt-servicing capacity of the individual debtor country in question, Paris Club reschedulings for low-income countries were generally more comprehensive, both as regards categories and percentage rescheduled than those for other debtor countries and involved longer maturities (Chart 1). As far as ODA loans are concerned, Paris Club creditors have generally rescheduled concessional loans on concessional terms. In addition, a number of creditor countries have forgiven or converted into grants some of their claims on low-income countries in line with UNCTAD Resolution No. 165, dating back to 1978.

Chart 1.Average Maturity of Reschedulings for Countries Eligible for Assistance Under the Structural Adjustment Facility and for Other Countries, 1980–871

Sources: Agreed Minutes; and Fund staff estimates.

1Defined as the average number of years between the date of the Agreed Minute and the date of the last payment.

In 1986 and early 1987 Paris Club creditors, in their periodic discussions on Paris Club policies and practices, focused increasingly on the questions posed by the problems of the poorest and most heavily indebted countries, including particularly sub-Saharan African countries. Many of these countries had sought debt relief repeatedly from Paris Club creditors, and creditors were concerned that in many instances the repeated application of standard Paris Club terms had not provided an adequate response to the special and deeply rooted problems of these countries, as evidenced by the difficulty the debtors had in adhering even to the already stretched out debt-servicing terms resulting from previous Paris Club consolidations. The communiqués of the Interim and Development Committees, in April 1987, also raised the issue of the need for more favorable terms in Paris Club reschedulings for the poorest and most heavily indebted countries undertaking strong economic reform.

The question of preferential debt consolidation within the Paris Club for these countries was addressed further by a working group of the Paris Club on April 24, 1987. It was recognized that for some of the heavily indebted low income countries, debt relief on comprehensive terms but with standard maturities and market-related interest rates would result in an insufficient reduction, or even in growth, of external debt and debt service relative to the country’s gross domestic product (GDP) or exports of goods and services. Creditors agreed that in these circumstances exceptional debt relief would be essential to ease the debt-servicing difficulties of these countries over the medium term and that decisions on such preferential treatment should be taken on a case-by-case basis and with a view to supporting and encouraging those countries that were pursuing far-reaching economic reforms. Preferential treatment was to be restricted to the poorest and most heavily indebted countries, as determined by creditors on the basis of indebtedness indicators and per capita income criteria.

A consensus emerged to lengthen for eligible countries the maturity period to between 15 and 20 years, including a corresponding lengthening of the grace period up to 10 years. Although analysis of the medium-term outlook for selected countries indicated that progress toward balance of payments viability would be much enhanced by the introduction of a strong element of concessionality in interest rates, many creditors stressed that the question raised an array of technical, legal, and budgetary difficulties and that the issue of comparability of treatment between official creditors and between official creditors and other creditors was difficult to solve, particularly as regards commercial credits.

There was broad agreement that low-income, heavily indebted countries urgently needed concessional financing. Some creditors stressed that their existing budgetary and accounting constraints made it difficult to introduce concessionality through lower interest rates on rescheduled commercial debts. There was concern that interest concessions would largely be charged against the aid budget and, thus, would lead to cuts in aid projects or programs, while interest deferral did not have that effect. Some creditors feared that it would prove difficult to limit interest concessions to the poorest debtor countries. Moreover, for some export credit agencies, interest concessions could require a markdown in the book value of their claims on these countries and potentially result in a very large initial charge against budgets. Some creditors stressed that they have already substituted grants for credits and, therefore, were providing in total highly concessional flows of finance to this group of countries, despite the continued application of market-related interest rates to commercial debts included in Paris Club reschedulings. It was also noted that as regards the treatment of concessional aid loans, almost all creditor countries already had rescheduled on concessional terms and several have already converted some of those loans into grants.

During the May and June 1987 Paris Club meetings, Mauritania, Mozambique, Uganda, and Zaïre were each granted extended repayment periods. Following this experience, and in light of the Venice summit communiqué which also stated: “for those of the poorest countries that are undertaking adjustment effort, consideration should be given to the possibility of applying lower interest rate to their existing debt, and agreement should be reached, especially in the Paris Club, on longer repayment and grace periods to ease the debt service burden,” the Paris Club reviewed its experience and confirmed in July 1987 its policy to lengthen both grace and repayment periods for the poorest and most heavily indebted countries. In the second half of 1987, extended repayment periods were accorded to Somalia, Guinea-Bissau, and Senegal. Chart 2 illustrates the significant outward shift in the repayment schedules for low-income debtor countries, a result of the new policies adopted by the Paris Club.

Chart 2.Average Repayment Schedule for Countries Eligible for Assistance Under the Structural Adjustment Facility, 1985–87

(In percent of total debt service covered by agreement)

Sources: Agreed Minutes; and Fund staff calculations.

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