IV Export Credits and Economic Development Some Issues Outstanding
- International Monetary Fund
- Published Date:
- January 1988
In this period of sharply curtailed capital flows it is to be expected that attention has focused on the volume of new credits, and this paper has that same focus. Nevertheless, questions concerning the quality of spending that is financed by foreign borrowing and its impact on the debtor’s economic development are fundamental. They are important at the present time, and they will be crucial when the developing world is firmly launched on a recovery from the present period of debt difficulties and capital flows are again more readily available. For officially supported export credits, there would appear to be at least two key questions that will need to be addressed. The first is the quality of the projects financed by officially supported export credits, and the second is whether the policies of export credit agencies are such that they can be responsive to the increasing role for the private sector that many developing countries now see as a key part of their development strategy.
In the competitive environment prevailing prior to 1982, little attention was, by and large, focused on the economic merits of the many large projects that were being financed or insured by the export credit agencies, particularly where the repayment of the export credit was guaranteed by the debtor government.18 There is, however, a growing realization that the earlier tendency to give very large weight to export promotion was not in the debtor countries’ interests, not in the creditor countries’ interests, and certainly not in the interests of the agencies. Moreover, it is becoming apparent that such an approach was also not even in the long-run interests of industrial country exporters, who would be best served by stable, growing markets in the developing countries.
While there is not at present a coordinated strategy to address project selection, some individual agencies are making greater efforts to ensure, at least for certain debtor countries, that projects receiving official export credit support contribute to the development and growth of the borrowing country. Agencies reported that the economic benefits of a particular project are most likely to be an important element in decision making where demand for credits and cover exceeds the agency’s desired increase in exposure.
The quality of export credits is given particular attention by some agencies for countries that have had debt-servicing difficulties and where the agency is reopening on a limited basis. For example, two of the agencies visited have introduced special programs for early cover resumption for such countries, and in both agencies the program incorporates certain criteria for the types of projects to be financed—for example, projects that contribute to the near-term recovery of the economy and/or to the foreign exchange earning capacity of the country. One agency program specifically provides as well for cover for essential inputs. A number of agencies said they attach particular importance to the assessment of the World Bank in these instances. Indeed, some agencies have said that they are willing to provide cover for projects supported by the multilateral development banks, even if they are off cover for the debtor on normal programs.
In a limited reopening of cover the question is likely to be one of selecting the very highest priority projects; where an agency is more open but still seeking to ration demand, the question becomes one of approving or rejecting applications for cover on a wider range of projects. Some of the bigger agencies have in-house capacity for project assessment, but most agencies do not have a large staff trained in project appraisal. Often they rely on a detailed project appraisal provided by the exporter; only a few agencies have regular procedures for obtaining an independent review of the exporter’s submission. Sometimes agencies rely on their embassies to provide an opinion on the project. Nevertheless, many of the agencies, particularly the smaller agencies, said they do not have and could not afford to develop the in-house capacity to assess the economic impact of all important projects. Two approaches that have been adopted in these circumstances are to ask the debtor government to establish priorities or to seek the assessment of the World Bank and other multilateral development banks.
Systems under which the debtor government does the rationing are consistent with the tenet, generally expressed by agencies, that public investment planning, including project appraisal and selection, is the responsibility of the debtor government. Indeed, where the government has in place a well-formulated investment program, such an approach could help ensure that the credit and cover decisions of agencies support that program. Also, agencies sometimes have considered that a government’s indication of priorities might facilitate payments transfers should difficulties arise. Agencies did not, however, think such approaches could provide a general solution to the problem of project selection, since arrangements between the debtor government and particular creditors could not ensure that projects not on the priority list would not be financed from other foreign or domestic sources. They considered that adherence to an investment program was best enforced domestically between the government and the various borrowers.
Agencies were turning increasingly to the World Bank and other multilateral development banks for assistance in project assessment. Most agencies viewed favorably projects where there was direct financial involvement of the multilateral development banks and often were prepared to grant cover on such projects, even outside their current policies for the debtor country concerned. The World Bank has in recent years been circulating to agencies lists of projects which the agencies might consider cofinancing, and most of the agencies had responded to this initiative.
Some agencies, however, also sought to look to the development banks, particularly the World Bank, for broader guidance on project selection, either in the context of a debtor’s overall investment program or in the appraisal of specific projects in which the multilateral development banks were not directly involved. In this context, agencies welcomed recent indications from the World Bank that the Bank is prepared, if requested, to provide assistance in reviewing the quality of large projects in which it is not directly involved. A number of agencies said that they had appreciated the opportunity provided by the ad hoc meeting of agencies on Mexico in September 1986 to hear the views of the World Bank and the Inter-American Development Bank on Mexico’s investment program and sectoral development priorities.
Overall, agencies considered that the World Bank’s endorsement of a debtor’s investment program could be particularly important when they were in the process of reopening cover for countries that had experienced debt-servicing difficulties. Indeed, the existence of such an investment program could facilitate the reopening of cover, and more resources might become available if high-priority projects were identified clearly and creditors could have confidence that uneconomic projects would not be undertaken. Moreover, in these instances and more generally, confidence that the debtor government was effectively controlling foreign borrowing by various public sector entities would facilitate a more open cover policy stance. Nevertheless, while these positive indications regarding the quality of the investment program or individual projects might elicit more resources than would otherwise be forthcoming, agencies considered that the obverse was less likely to be true, that is, that the absence of a positive assessment or of a well-formulated investment program would be less likely to restrain agency activity in markets where they were actively seeking new business. The role of officially supported credits in supporting sound investment programs will, therefore, need to be kept under review by both debtor and creditor governments.
Role of Private Sector
While most export credit agencies have to varying degrees always been willing to provide credits and cover for private buyers without government guarantee, officially supported export credits traditionally have been oriented toward the financing of large public sector investment projects. At a time when an increasing number of countries are adopting development strategies that call for a much larger role for the private sector in investment and production, the question arises how export credit and cover for private buyers might be facilitated.
The main factor cited by most agencies as contributing to their reluctance to cover private sector buyers in developing countries, while actively seeking such business in OECD markets, was the lack of adequate legal protection for foreign creditors. In covering private buyers, an agency’s first concern is to obtain adequate security. In some developing countries, however, agencies found it difficult to obtain appropriate security, and in many more they found it difficult to enforce such security through the courts in cases of default. Some developing countries, particularly in Asia, had legal systems with clear and enforceable provisions regarding such commercial transactions, and in such cases agencies tended to be quite willing to cover private buyers without a government or bank guarantee. In the agencies’ view, therefore, a necessary precondition for a substantial increase in credit and cover to private buyers in many developing countries would be a revision of laws governing commercial transactions to enable foreign creditors to acquire adequate security, for example, liens, and to enforce the relevant provisions in a manner that would not discriminate against foreign creditors.
Another important factor cited as facilitating the provision of cover to private buyers was a well-developed local banking system. Although a few agencies that already did substantial business with private buyers had credit records and could do credit assessments on a large number of private firms in developing countries, other agencies considered that they did not have the capacity to do an independent assessment of the creditworthiness of any but the largest private buyers. In such circumstances, the provision of cover to private buyers could be greatly facilitated by a relationship with a local bank in which the agency had confidence, since this could substantially reduce the costs of credit assessment and documentation. For some agencies, the guarantee of bank-to-bank lines of credit had facilitated their private sector business, although others had had a less positive experience with these types of arrangements.
In addition to proper security and credit assessment, which were related to commercial risk, some agencies also noted that problems that originated in the public sector were often reflected in payments difficulties of the private sector. The provision of cover to the private sector would be greatly facilitated if transfers by the private sector were permitted freely or on a priority basis when debt-servicing difficulties were encountered. Agencies indicated, in particular, that they were much more likely to be open for cover for the private sector in countries where there was no transfer risk, such as in the CFA franc zone. Agencies further noted that, contrary to earlier practice, the Paris Club had on a number of occasions over the past two years excluded private sector debt from reschedulings. Some agencies considered this an effective strategy for developing countries that wished to insulate the private sector from debt-servicing problems that originated primarily in the public sector; it was, of course, also necessary that private sector payments be transferred on a timely basis. In such cases these agencies were generally willing to maintain a less restrictive stance toward the private than the public sector. Other agencies, however, never draw a distinction, apart from security requirements, between the private and public sectors in setting cover policies, since they believe that problems originating in the public sector are most likely to result eventually in a bad payments experience with the private sector.
Finally, agencies said that a factor particularly influencing private sector business at present was the bad experience over recent years, from the viewpoint of both the borrowers and the agencies, when a number of developing countries first let their exchange rates become severely overvalued and then corrected them sharply downward. Many agencies had as a consequence faced widespread commercial defaults, making them wary of further private buyer business. More important, the firms that had survived these sharp swings in exchange rates were reluctant to take on new foreign currency debt. As a result, demand for cover for private buyers was at a very low level in some Latin American markets. Another result of this experience was that some agencies were now focusing more on the appropriateness of exchange rates and other prices in assessing commercial risk.
Overall, however, the main factor agencies cited as inhibiting or facilitating cover for private buyers was the lack of adequate security and legal protection. This might, therefore, be an area where the provision of technical assistance, or at least further investigation of these problems, by an international institution with appropriate expertise, perhaps the International Finance Corporation (IFC), could facilitate the provision of official export credit support to the private sector in developing countries. The IFC could, for example, be called on to help in the development of financial institutions and in their relationship with the private sector. It should be noted, however, that efforts in financial institution development take substantial time to bear fruit, while changes in legal provisions could have a more immediate impact.