IV Restoring Normal Debtor/Creditor Relations and Other Issues in the Recovery Phase
- International Monetary Fund
- Published Date:
- January 1986
The initial reaction of export credit authorities to the debt-servicing difficulties that emerged in 1982 and the related reschedulings was to apply the same policies concerning new credit cover that had been developed and used over many years for isolated, single-country problem cases. Recently, however, it has been increasingly recognized that such a policy approach could be counterproductive in the aggregate when applied to a range of debtor countries that were experiencing problems but implementing satisfactory adjustment policies and that had reasonable medium-term prospects. Consequently, as noted above, many export credit authorities have shown greater flexibility and have begun on a case-by-case basis to introduce special cover policies or programs that would allow the maintenance or early resumption of cover for certain countries.
Regarding current policies and issues in the recovery phase, questions of considerable interest that remain to be addressed among governments concern other steps that could be taken through the export credit instruments to expedite a return to normal debtor/creditor relations, and some of the obstacles that would need to be overcome. The policy objectives of creditor governments with respect to their export credit agencies are to help foster export prospects on a sustained basis and to strengthen the financial outlook of the agencies by enhancing the long-term creditworthiness of the debtor countries. With respect to the debtor countries, the objectives are to assure an adequate flow of officially supported export credits and to catalyze the flow of private trade and project credits. For the export credit agencies, the main underlying consideration is the need, notwithstanding an environment of strong competitive pressures, to remain financially self-supporting over the medium term.
In this connection, two main policy issues were discussed with the export credit authorities. Both issues relate to debtor countries that are implementing adjustment policies and have reasonable prospects for a return to commercial creditworthiness. The first issue concerns providing cover for export credits as either a substitute for, or a complement to, official debt rescheduling in the context of assuring both adequate financing flows and equitable burden sharing with bank creditors. The second issue relates to ways of ensuring a more effective use of new export credits and the importance of better project selection.
Provision of Cover for Export Credits as a Substitute for, or Complement to, Official Debt Rescheduling
Over the last year and a half, as official export credit cover policies have become more flexible and differentiated, both debtors and creditors have become more aware of the close relationship between debt rescheduling and access to new export credits. In a few recent instances, questions have been raised concerning the possibilities and the desirability of providing cover for export credits as either a substitute for, or a complement to, debt rescheduling. Also, both governments and commercial banks attach increasing importance to the question of equitable burden sharing among creditor groups in their efforts to assist debtor countries that are implementing appropriate adjustment policies.
The question of new export credits as a possible substitute for official debt rescheduling arose in two recent reschedulings. In both reschedulings, commercial bank debt was of overwhelming importance and the amount of official debt service was relatively small. Also, both countries could have expected an increase in export credit exposure in the absence of official debt rescheduling; and the official debt rescheduling in both instances was explained more by the need to achieve comparability of action with commercial banks than to meet residual liquidity needs. In these circumstances, two related questions may be considered. The first is whether some expression by creditor governments of their willingness to provide cover for export credits might have been desirable and sufficient to obviate the Paris Club debt rescheduling, particularly in the context of comparable action with commercial banks. The second question is whether, in cases where an official debt rescheduling cannot be avoided, a strictly limited form of rescheduling combined with some provision of cover for export credits might, for all parties concerned, be preferable to meeting the financing need through rescheduling alone.
Questions concerning the complementarity of export credits and debt rescheduling were raised in practical terms in connection with a few concerted financing arrangements for certain debtor countries in the past. The experience of both debtor and creditor governments with such pledging efforts has not been encouraging. Nonetheless, in the current circumstances where a number of debtor countries continue to face payments difficulties notwithstanding their recent adjustment efforts, the desirability and feasibility of an informal approach to integrating export credits into the adjustment and financing strategy in certain circumstances may be considered. Such efforts could help maintain adequate credit flows and would be compatible with the priority being attached to maintaining trade flows and to renewing growth in debtor countries that are undertaking appropriate adjustment.
A possible shortcoming of existing arrangements may be the absence of a vehicle through which creditor governments can show debtor countries and other creditors their agencies’ efforts in the area of export credits and the important role of export cover in catalyzing private sector credits. At present, many debtor countries in temporary difficulty and their commercial bank creditors may see only the Paris Club debt rescheduling option as a reliable means of official financing and of achieving precise and verifiable comparability of action with commercial banks when the latter are the dominant creditor group. The official creditors’ response to difficulties in some debtor countries, and more particularly official action to achieve broad comparability with commercial banks, may therefore be biased toward the rescheduling solution.
In certain circumstances there is a choice, in practice as well as theory, between official debt rescheduling and new cover. There is also a choice between a more conventional debt rescheduling and a strictly limited form of rescheduling (e.g., excluding interest due from rescheduling) combined with some new credits. In these circumstances, the alternatives that entail a provision of cover for new export credits might, by helping to restore normal debtor/creditor relations, lead to greater financing over the medium term for the debtor country than when continued reliance is placed on debt relief. Provided project selection is appropriate (see below), this type of alternative might more directly help the debtor country meet the growth objective through financing a higher level of investment spending, including that of the private sector. It would also be consistent with the general preference and shift of commercial banks away from balance of payments finance and toward trade and project finance, and thus help catalyze the provision of private credit.
From the point of view of export credit authorities, the potential benefit of such an alternative might be that the financing would be linked directly to their trade. Furthermore, although agencies’ accounting practices vary, the cash flow position of most agencies would be better if new export credit guarantees or insurance were provided instead of paying out claims in connection with debt rescheduling. The exception would be those agencies with ready recourse to refinancing of the rescheduled claims.26 The willingness to provide cover for new export credits could assure bank creditors of equity in burden sharing if an appropriate channel of communication with commercial banks on this matter could be established.
In discussing these ideas, export credit authorities mentioned a number of conflicting considerations. There was, however, general agreement that rescheduling and new cover are closely interrelated, that official financial assistance could in theory be provided through either means or through different mixes of these two components in cases where the debtor’s liquidity difficulties are not preponderant, and that ways should be explored to avoid Paris Club debt reschedulings that may not be strictly necessary. However, it was stressed that in cases of clear liquidity problems, only debt rescheduling can provide the needed cash relief and would, therefore, be the appropriate form of official assistance. In these cases, rescheduling efforts by both banks and official creditors would help restore confidence, and a well-designed rescheduling operation could improve the long-term creditworthiness of the borrowing country.
Most export credit authorities expressed strong reservations about the effectiveness and appropriateness of specific export credit target amounts or commitment pledges made either collectively or by individual authorities as an integral part of international arrangements intended to fill a financing gap. They stressed that medium-term export credits cannot be an instrument for balance of payments financing because credit flows would arise only if and to the extent that there is project demand from the borrowing country. In any case, credit disbursements giving rise to such flows would follow commitments only after considerable delay. Also, for a country undertaking an adjustment program, past experience on the demand for cover does not provide a useful guide for future demand. In particular, demand for medium-term project financing may decline significantly.
On the other hand, short-term export credits that are vital in normal trade financing could be considered a form of balance of payments financing in the sense that the withdrawal of such credits represents a negative financing flow heavily burdening official reserves. However, special arrangements for short-term cover would normally be redundant because such cover is already being maintained, provided that appropriate conditions are fulfilled by the debtor country. Moreover, with respect to medium-term credits, there would be substantial difficulties in estimating the ex ante financing requirements, in predicting the impact of cover policy decisions on demand for credits, and in establishing the individual authorities’ commitments and targets. The experience of past arrangements, where there were considerable shortfalls in demand and disbursements relative to pledged amounts, was instructive. The targets established for special facilities were not, by wide margins, achieved within the expected time, partly because administrative arrangements were cumbersome and partly because most exporters and banks apparently found the normal cover facilities that continued to be available sufficient for their needs.
In the light of recent experience, the export credit authorities stressed that any future efforts concerning the provision of export credits should not focus on commitment pledges. Efforts should instead focus on the general consistency in the cover policy stance of creditor governments with a country’s phase of adjustment and with broad-based international efforts to support an adjustment program. If creditor governments were willing to consider a move in this direction, any forward-looking expression of their cover policy attitude for certain countries could not be unconditional, but would have to be linked to the borrowing country’s adherence both to negotiated rescheduling agreements and to a well-formulated economic program supported, where appropriate, by the use of Fund resources. The borrowing country concerned should also be at a stage where it is not facing serious and protracted debt-servicing problems and where renewed access to commercial credits is justified by an improvement in its creditworthiness and prospects.
An indication by creditor governments of their general policy stance vis-à-vis certain borrowing countries would help inform the borrowing country of the availability of commercial trade and project finance under certain circumstances and to assure commercial banks of creditor governments’ comparable financing action. This approach would be consistent with supporting the borrowing country’s economic program that seeks to re-establish the conditions for growth, although the impact on financing flows is likely to be stronger over the medium term in view of delays inherent in developing projects and in the uptake of new credits to finance these projects. For reasons that may only partly be self-interest, commercial banks generally remain skeptical of creditor government policies in the export credit field. A greater transparency of creditor governments’ past record and policy direction could offer more assurance and help maintain the appropriate degree of cooperation among all parties. Such an approach would seem not to compromise the sovereignty of national decision making in the export credit field, an element that all export credit authorities have stressed must be preserved.
Recent debt-servicing difficulties have been attributed in part to unproductive use of some past borrowings. In light of this experience, both the export credit authorities and the debtor countries are increasingly conscious of the need to avoid projects of doubtful economic value and to institute mechanisms to ensure better project selection in future. Better project selection has become a central issue in providing adequate medium-term financing, particularly for those debtor countries that are returning to commercial finance. For these countries, improved project selection is regarded as an important policy step along with other measures in macroeconomic management. Furthermore, for those developing countries dependent on bilateral development assistance, it is considered that financing on commercial terms, if available, should be confined to the most productive projects. Officially supported export credits offer the first realistic step for such countries toward a return to some limited form of commercial credits. Better project selection for official export credits is a crucial precondition for the success of such a process.
In principle, export credit authorities hold the view that overall public investment planning, including project appraisal and selection, is a sovereign decision and the primary responsibility of the debtor country. It must also be recognized that one of the main objectives of the export credit system is to promote national exports, an objective which may not always be fully consistent with the need to maximize the economic returns of the debtor country’s investment program. Nonetheless, creditor authorities recognize that improved project selection is in their interest as well, particularly because productive projects provide a better chance of debt repayments, even in the situation of general payments difficulties in the debtor country concerned. On balance, export credit authorities have therefore made greater efforts to improve procedures for project appraisal; they have tended to select projects more on the basis of economic criteria; and some agencies report that nonviable projects are being turned down in spite of their commercial interest to the exporters. For some agencies, country exposure limits have been adjusted downward in an effort to ensure a more rigorous project selection and higher quality projects, although, in the experience of a few agencies, this effort has not been entirely successful. Furthermore, official institutions that provide long-term export credit financing have already moved strongly in the direction of more comprehensive project assessment.
In strengthening the internal procedures for project appraisal, greater use has been made of information from outside sources, in particular the World Bank’s sector reports and the overall investment program appraisal as contained in its country reports. Reliance has also been placed on information made available at Consultative Group meetings on the debtor country’s public investment program. Nonetheless, a few agencies acknowledged that their own available resources, including staffing, do not permit a very careful evaluation of the economic merits of each project.
Most authorities have indicated an increasing interest in undertaking project financing in collaboration with the World Bank (e.g., in the form of cofinancing or parallel financing arrangements) as a means to ensure the high quality of projects. This approach is seen as being particularly useful in the initial stages of cover resumption. Furthermore, in countries placed under special programs for early resumption of cover, such collaboration could help reopen some cover in advance of the bilateral agreement. In countries where cover is already open, it might lead to a larger increase in exposure than would otherwise be the case.
A comprehensive project-select ion approach relying primarily on the debtor country authorities has been selectively attempted by a few major agencies, initially as a means to ration demand. The experience with this approach, which has been used in Jamaica, the Philippines, Turkey, and Yugoslavia, illustrates its possibilities and the potential drawbacks. In resuming cover for Turkey in early 1983, one major agency recognized that after several years of adjustment and investment restraint, there was a large pent-up demand for new projects of considerable commercial interest. The national suppliers were particularly interested in a variety of very large projects all of which could not have been accommodated at once, and a certain rationing of demand became necessary. To ensure effective rationing and given that assigning investment priority was seen as the prerogative and responsibility of the Turkish authorities, specific guidelines were introduced. These provided for a certain commitment ceiling for public sector investment projects and called for the Government of Turkey to set priorities and choose the projects. Initially, considerable administrative delays were encountered in Turkey in determining which projects should receive priority, and it was not until late in the program year that a commitment was finally made. The results for the second year of the program were considerably improved and the commitment ceiling was reached. The arrangement remained in force for the third year, but the total commitment limit was no longer considered necessary, as competition among export credit agencies and self-discipline on the part of the Turkish authorities were expected to keep the exposure within prudent limits, A similar arrangement has been introduced for Jamaica. Another agency, also in resuming medium-term cover for Turkey, has required as an additional condition for cover a declaration of priority from Turkish authorities.
In extending emergency credit assistance to the Philippines, one major agency indicated that a careful examination was made of the Philippines’ project priorities. For another major agency, the Yugoslav authorities are informed of the annual limit of export credit cover on transactions with a maturity of over two years, and there is an understanding that cover would be available within this limit only for transactions that have been granted a certificate of priority by the National Bank of Yugoslavia.
In assessing experience with this approach to project selection, authorities indicated that the arrangements appeared to be broadly effective in ensuring adequate control on the amount and type of public sector projects financed. While most were not in a position to undertake a comprehensive and independent check of the commercial viability of the individual project, they were nonetheless reasonably certain of the soundness and financial viability of the projects, partly on the basis of subsidiary information such as the World Bank’s sector reports.
While some major agencies have developed procedures to encourage borrowing countries to present for financing only projects that are clearly high-priority, other agencies believe that such individual efforts by each agency are likely to be inefficient and inconsistent. Most authorities also acknowledged considerable practical difficulties in rejecting nonviable projects that are of important commercial interest to their exporters. More importantly, it is recognized that commercial viability at an individual project and agency level does not provide adequate assurances for payments viability for all projects in the aggregate and for the debtor country as an entity, and that an important weakness in the current system is the absence of a mechanism for such assurances. It was also noted that while reliance has frequently been placed on individual sector reports of the World Bank in cover policy decisions, much less emphasis has been placed on studies on the aggregate investment program of the particular country. More fundamentally, while a comprehensive World Bank appraisal of the overall investment program would be helpful in cover policy decisions, this appraisal in itself might not be sufficient to prevent the undertaking of low priority projects.
Different types of difficulties have been encountered for smaller markets with weaker commercial demand. In such cases, the agencies’ involvement would tend to be more passive, owing to a lack of interest on the part of suppliers and in the absence of knowledge on the precise scope and nature of the investment program of the country. Ordinarily, and unlike banks, export credit authorities would not actively solicit applications for projects in a recovering market. Some authorities may convey to the host governments the general cover policy attitudes, whether positive or negative, but initiatives for project financing would have to be taken by exporters or by the debtor country. Nevertheless, export credits could have a more catalytic role in those economies that are traditionally dependent on bilateral assistance and that have undertaken adequate adjustment and implemented Paris Club reschedulings, but which have not yet experienced significant new commercial credit flows. In the transition toward normal access to commercial credits, these debtor countries could be encouraged to prepare, perhaps with the assistance of the World Bank, an investment program consisting of high priority projects for which export credits are being sought. In general, the export credit authorities indicated a strong interest in the possibility of an expanded World Bank role in reviewing projects and investment programs in this context and in making these results available for export credit decisions.
In particular, there is support for an arrangement applicable to a few selected debtor countries that may be creditworthy for financing on commercial terms, but for which such financing normally would be available initially only with creditors’ insurance cover. Under this arrangement, and with certain safeguards and perhaps in the context of World Bank lending programs, the borrowing country could undertake to confine authorization of external borrowing to an appropriate central body. The country could establish and implement an effective control mechanism, and could undertake to limit borrowing only to those projects specified in a list that has been discussed with and reviewed by the World Bank, and periodically updated. It would be essential in this connection that the debtor government enforce the undertakings, and not the creditor governments. Such a project review would normally cover only projects with public sector involvement. With respect to the private sector, the Fund and Bank staffs could usefully comment on whether appropriate market incentives are in place to assure an efficient selection of investments.
Most export credit authorities indicated that, provided suitable methods could be worked out to develop such a preapproved project list, and provided the arrangement could be executed and implemented by the debtor country on a sustained basis, the existence of such an arrangement would be an important positive element in cover policy decisions and in unlocking additional export credits. It was emphasized, however, that the inclusion of a project on the list would be an important but not a sufficient condition for export financing and that the individual agency’s decision would still have to be made on a case-by-case basis, taking full account of the country’s other circumstances. Several export credit authorities indicated a willingness to consider exploring the feasibility and means of such an arrangement by the World Bank in a few test cases, provided some borrowing countries were interested. Some authorities also suggested that there is scope, applied to a wider group of debtor countries, for the World Bank to design its financing of projects in a way that improves the possibility of parallel financing with export credits. In this fashion, limited medium-term cover could be attracted directly into the World Bank-financed projects on a more considerable scale.