I Role of Export Credits in the Debt Situation An Overview
- International Monetary Fund
- Published Date:
- January 1988
The raison d’être and the primary mandate of official export credit agencies is to facilitate and promote national exports through the direct provision of export credits and/or the guarantee of privately financed transactions. At the same time, each agency operates within the objective that its activities be self-supporting over time. A clear distinction is generally drawn between export credit and cover facilities, which are to be provided on a commercial basis, and aid programs, which are intended to provide concessional finance for development.1
Until the emergence of widespread debt-servicing problems in 1982, export credit agencies encountered little difficulty in reconciling their dual objectives. All of the export credit agencies covered by the present study had until that time recorded cumulative surpluses on their operations and, while certain debtor countries had encountered payments difficulties and sought a rescheduling of their obligations to official creditors, these situations were viewed—and responded to—as isolated events. In this environment, the export promotion objective predominated and competition among the agencies was strong.
From 1982 onward the agencies faced a dramatic change in their operating environment. While over the five years 1976 through 1980 only 8 countries had sought a rescheduling of debts to official creditors, in 1983 alone Paris Club agreements were concluded for 16 countries (Chart 1). These reschedulings, as well as the accumulation of arrears by other debtor countries, resulted in substantial claims payouts on insured supplier credits and guaranteed bank credits, and the agencies recorded large operating deficits. It was at this time, and against a background of sharply contracting bank flows to developing countries, that the Fund began to focus attention on the activities of the agencies and the role officially supported export credits could play in the new, more difficult economic situation. It was considered that, in an environment of increased risk, the demand for officially supported export credits, particularly guarantees and insurance, would increase and that the export credit agencies could play an important role in maintaining trade finance and, over time, facilitate the transition back to normal debtor/creditor relations. It was in this context that the staff undertook, in the spring of 1984, what was to become the first of a series of visits to the main export credit agencies and their governmental authorities.
Chart 1.Official Multilateral Debt Renegotiations, 1976–June 19871
Source: Agreed Minutes of debt reschedulings.
Note: Numbers (1, 2, 3, etc.) represent start of successive consolidation periods. Representation of dates is approximate. An asterik (*) indicates conditional future rescheduling actually effected. The symbol 〈 indicates dates when arrears were consolidated.
1 The number of consolidation periods may exceed the number of rescheduling agreements owing to conditional future consolidations becoming effective.
2 For rescheduling agreements 2 and 3, consolidation period overlaps with previous consolidations.
The study prepared on the basis of that first series of visits emphasized in particular the policy reaction of the agencies and their authorities to countries in various stages of debt-servicing difficulties. It was found that, largely for competitive reasons and provided that significant arrears had not emerged, agencies as a group had tended to remain quite open for debtors pursuing policies that could be expected to lead to payments difficulties, thus facilitating the postponement of necessary adjustment by the debtor and increasing the likelihood of eventual debt-servicing difficulties. When, however, significant arrears emerged or the debtor requested a rescheduling, agencies normally (and most, automatically) went completely off cover for medium-term business.2 Some agencies were prepared to maintain short-term cover if short-term debt was excluded from the rescheduling request and serviced on a timely basis, and such an approach was gaining wider acceptance among the agencies. Once an agency had gone off cover for a rescheduling country, it tended to maintain that restrictive position until it considered that the debtor’s payments difficulties had been overcome and its creditworthiness reestablished. In practice, this meant that agencies were typically off cover until two to three years after the Paris Club agreement.
For countries that had experienced debt-servicing difficulties but were undertaking Fund-supported adjustment programs, the agencies’ tendency to go off cover when a Paris Club rescheduling was requested meant that officially supported export credits and cover were often withdrawn just at the time the country was beginning to implement its adjustment program and were not restored until the program had succeeded in improving the payments position and outlook. This reaction by the agencies and their authorities reflected their concern that, until a debtor had clearly passed its period of payments difficulties, any new credits would be caught up in future reschedulings. For this reason, and recognizing that most countries encountering payments difficulties would require a series of reschedulings, a key factor in agencies’ decisions about cover resumption was their assessment of the likelihood of a change in the cutoff date.3 If the original cutoff date was maintained, new credits would be protected. However, for the 12 cases in 1983 and early 1984 in which the Paris Club agreed to a second or subsequent rescheduling, the cutoff date was advanced in 10 agreements.
During that first series of visits the staff also explored with the agencies and their governmental authorities the reasons why efforts to mobilize export credit support in the context of concerted financing had been largely unsuccessful, despite the cooperation of the creditor governments concerned. The discussions focused in particular on Brazil and Mexico, where creditor governments had indicated amounts of officially supported export credits that could be available to these countries in the context of their Fund-supported programs, and also on the efforts undertaken for Turkey under the OECD Consortium agreement and for Yugoslavia within the 1983 Berne Agreement. Several factors were identified as contributing to the limited success of these efforts. First, for project financing there is generally a lag of several years between a credit or cover offer and disbursement, making such credits an ineffective vehicle for near-term balance of payments financing. Second, the volume of new credits and cover depends not only on the stance of the agencies but also on the volume of imports, particularly capital goods imports, which had tended to drop sharply in the countries concerned. Third, in several instances the effort to mobilize export credit support had taken the form of each agency establishing a special credit line outside its normal cover procedures and programs. This approach proved administratively cumbersome and the lines were little utilized or used much more slowly than anticipated.
The study prepared after the 1984 staff visits, being the first such staff study, covered a wide range of issues, including the importance of project selection (see Section IV below). Certain of its conclusions had particular relevance when seen in the light of the evolution since then of export credits and their role in the debt strategy. First, efforts in the area of export credits had to focus on the stance of credit and cover policies, that is, the availability of official support; consequent flows would depend on demand and come with a lag. Second, export credit agencies and their authorities needed to reflect more closely in their credit and cover stance the evolution of economic policies in debtor countries, rather than responding to the delayed consequences of those policies; such a change in approach would not only support the adjustment process but also better serve the needs of the agencies and of exporters. Third, maintenance of the cutoff date was essential if agencies were to resume cover for debtors requiring a series of reschedulings.
These conclusions were broadly shared by the export credit agencies and their authorities and were reflected in subsequent developments. Most important, the Paris Club developed, and negotiated rescheduling agreements in accordance with, a debt subordination strategy specifically intended to facilitate the maintenance or more timely resumption of cover for rescheduling countries. The cornerstone of that strategy was a decision to fix the cutoff date firmly at the outset of a series of reschedulings and to give clear priority to the servicing of post-cutoff-date credits, even where that necessitated very comprehensive rescheduling, and even re-rescheduling, of medium-term loans contracted before that date. From mid-1984 through the time of the staff visits in the spring of 1987, there had been 39 Paris Club agreements for Fund member countries that represented the second or more in a series of reschedulings, and in none of those agreements was the cutoff date changed. This firm fixing of the cutoff date, combined with the practice of giving priority to the servicing of short-term trade credits, provided a framework in which export credit agencies generally considered they could have greater confidence that new credits would be serviced on a timely basis.
A second important development was the decision in early 1985 to initiate, within the framework of the OECD Export Credit Group, what was to become a regular exchange of views both on broader issues related to export credits and on policies toward and the outlook for specific debtor countries. While information on actual cover policy stance had for years been exchanged within the Berne Union, whose members are the individual export credit insurance agencies, the absence of governmental representation had, at least for certain creditor countries, precluded a more forward-looking or policy-oriented exchange. In the OECD Export Credit Group, however, it is the governments that are represented. The increasing attention being paid to these questions was also reflected in the discussions at the spring 1985 and subsequent meetings of the Interim and Development Committees. For example, the April 1985 Interim Committee communiqué stated:
For those countries whose external debt has been rescheduled, whose prospects of economic progress are good, and which are undertaking satisfactory adjustment policies, the industrial countries should consider resuming export credit cover, subject to standard national policies.
By the time of the second series of staff visits to the export credit agencies and their authorities, in the fall of 1985, there had indeed been a noticeable shift in cover policy attitudes toward countries that had experienced debt-servicing difficulties. First, the practice of maintaining short-term cover when a rescheduling of short-term debt was not requested had become more generalized. Second, provided the debtor was adhering to its adjustment program, most agencies were prepared to reopen medium-term cover after they had concluded with the debtor the bilateral agreement implementing the Paris Club rescheduling, and provided any payments due under that agreement were being made. While this was an important change, the fact that most reschedulings are on an annual basis and that, typically, bilateral agreements are not concluded until six to nine months after a Paris Club, meant that even this more open stance generally left only a very small “window” during which cover applications could be considered and offers made. Although a number of agencies reported at the time of these staff visits a noticeable decline in applications and offers, the weakness did not appear to be general and data available through 1984 indicated a strong increase in officially supported export credits.
Against the background of the strengthened debt strategy that had been proposed by U.S. Treasury Secretary James Baker III at the 1985 Annual Meetings of the Fund and the Bank, the Berne Union decided at its general meeting in February 1986 to establish a task force on the role of export credits in the debt situation. The report of that task force, which was submitted to the June 1986 Berne Union meeting, concluded:
There appears to be general agreement that, for a country which has concluded a rescheduling agreement and is beginning to implement a recovery program, the provision of new credits can help ensure the success of that recovery program and that it is in the interests of the export credit agencies to play their part, in parallel with the IMF, IBRD, the regional development banks and the commercial banks.
The report noted the important flexibility that agencies were already exercising in such cases and identified a number of areas where further efforts could be made. With respect to the bilateral “window” problem discussed above, the report noted the importance of speeding up bilateral negotiations and suggested certain procedures that agencies might wish to consider to avoid or minimize the interruption of cover where the bilateral agreements from the previous rescheduling had been negotiated smoothly and were being implemented. The report recommended that, in resuming cover, support should be concentrated on exports that would contribute to the debtor’s recovery. Finally, the report suggested that the efforts of agencies might be facilitated by the convening of ad hoc meetings for a timely exchange of information and views in certain cases for debtors undertaking adjustment programs; it was considered that such meetings, which would not be meetings of the Berne Union, should be exceptional and take place only with the agreement of three of the five agencies that had the largest exposure in the market.
In September 1986, shortly after the Fund had approved in principle a stand-by arrangement for Mexico, a group of 12 export credit agencies convened a two-day meeting on Mexico in Brussels. This meeting was attended by staff of the Fund, the World Bank, and the Inter-American Development Bank, and specific sessions were devoted to exchanges of views with the Mexican authorities and with a representative of Mexico’s bank advisory committee. The discussion focused not only on Mexico’s adjustment strategy but also on Mexico’s investment program and the identification of projects and sectors where official export credit support could contribute most effectively to the recovery of the Mexican economy.
The findings of the most recent series of Fund staff discussions with the export credit agencies and their authorities, undertaken in April and May 1987, are presented in the following sections. Most important, agencies’ attitudes and actual policy stance toward countries that have experienced debt-servicing difficulties have changed substantially from those that the staff encountered in the spring of 1984. This is true particularly for countries that are in the process of a series of reschedulings and following through on their adjustment strategy. Provided such countries have established a good track record in concluding and implementing bilateral agreements from previous Paris Club agreements, most agencies are now prepared to remain on cover without tightening policies either before the Paris Club meeting or during the subsequent negotiation of bilaterals. Where cover is temporarily withdrawn for such countries, a number of the agencies are now prepared to continue processing applications on a conditional basis during the off-cover period. Furthermore, several agencies had recently decided, or were considering decisions, to, in one stroke, open cover or reduce restrictions for debtors meeting certain criteria. Short-term cover is now generally available except for countries that have significant short-term arrears or for which short-term debt has been rescheduled.
The agencies and their authorities were virtually unanimous in citing, as the most important reason for this more open stance for rescheduling countries, the successful efforts of both debtors and Paris Club creditors to keep cutoff dates firmly fixed and, in most cases, ensure that short-term debt is serviced on a timely basis. On the other hand, for countries undertaking a first rescheduling, it is still the general practice to maintain a very cautious stance until the debtor has established a track record of implementing both its adjustment program and its rescheduling agreements. For debtors that have been erratic in their adherence to an adjustment strategy or lax in implementing previous rescheduling agreements, agencies are generally off cover.
Juxtaposed against this increased willingness of agencies to provide new credits and cover was a reported decline in new business. It was the general view that business had been sustained through 1984 or 1985 by projects initiated before debtor countries, including those that had not had debt-servicing difficulties, had begun to respond to the more difficult international environment by cutting back sharply on public expenditures, particularly the very large projects for which official export credit support had typically been sought. More recently, this trend had been compounded by the spending cutbacks in oil producing countries. While the experience differed somewhat between agencies, the overall picture was generally one of a slowing in disbursements, a fairly marked decline in new commitments, and a precipitous drop in new applications and offers.