- International Monetary Fund
- Published Date:
- January 1994
Three broad trends characterize recent developments in financing flows to developing countries. First, official financing flows have continued to increase at a rapid pace with net flows rising to $72 billion in 1992 from some $44 billion in 1985. Second, the form and terms of official financial assistance have become differentiated, reflecting the diverse situations and prospects facing different groups of developing countries. Particularly noteworthy is the continuing shift by both multilateral and bilateral creditors toward highly concessional financing for the low-income countries. Third, official creditors and donors have increasingly linked the availability of new financing to countries’ policy environments and performance under adjustment programs. The buildup in official support has been most pronounced for countries that established a record of policy performance; for those countries with mixed records of policy implementation, resources were less readily available. Overall, reflecting these trends, by far the most important source of financing for the vast majority of developing countries over the past decade has been official bilateral and multilateral creditors.
The paper focuses mainly on official bilateral and multilateral financing for countries that have rescheduled their debts to official bilateral creditors. In contrast to the approaches taken by private lenders, official creditors have continued to provide new financing on a large scale to countries with debt-servicing difficulties that implement adjustment and reform programs. Financial support has been provided through a wide variety of instruments and channels. Direct support from official bilateral sources has taken the form of financing through grants and loans, often on concessional terms. Indirect support has been given through insurance and guarantees by official export credit agencies for credits extended by the private sector, as well as through comprehensive cash-flow relief on official bilateral debt through the Paris Club. Multilateral financial institutions, including the International Monetary Fund (IMF), have provided a substantial and increasing share of financing, including support for debt-reduction operations on commercial bank debt.
Recent years have seen a rapid change in the debt situations of the rescheduling countries, and their experiences have been markedly different. Most of the major middle-income rescheduling countries have made significant progress in resolving their debt problems, in the context of comprehensive macro-economic adjustment and structural reform programs, and some have regained access to spontaneous private financing. Many other middle-income rescheduling countries are well advanced in re-establishing normal relations with creditors. The debt situation of the low-income and some of the lower middle-income rescheduling countries, however, remains very difficult.
Section II takes stock of recent external debt developments in these countries. While they share a number of common characteristics, the country-specific review reveals a wide variety of circumstances. The most striking feature is that heavy scheduled debt-service burdens have not resulted in net resource transfers to creditors. Instead, most of the rescheduling countries continued to obtain large, and in many cases increasing, net inflows of resources. Official creditors recognized these countries’ protracted balance of payments difficulties and heavy reliance on external financing for essential import and development needs. Their strategy aimed primarily at ensuring the availability of adequate financing in support of countries’ adjustment programs, and crucial to the success of this strategy has been the maintenance of cutoff dates in successive reschedulings. It enabled official bilateral creditors to provide assistance in the form of new financial flows while at the same time granting cash-flow relief on existing “pre-cutoff date” official bilateral debt.
For the low-income rescheduling countries as a group, total financial assistance has been about as large as these countries’ own export earnings in every year since 1986. Heavy indebtedness has thus not been associated with heavy actual debt-service burdens, which remained relatively low for most rescheduling countries. While countries that sustained their adjustment efforts and maintained broadly satisfactory relations with creditors typically made significant debt payments, they found that the payments were more than offset by inflows of new direct financial assistance. In contrast, countries with mixed records of performance, including the accumulation of external arrears for prolonged periods, saw their access to new financing reduced.
Creditors have implemented a wide range of measures to alleviate debt burdens in recent years. The measures included greater concessionality in new lending for the low-income countries, major bilateral debt forgiveness initiatives, and reschedulings for low-income countries on increasingly concessional terms. As a result of the shift toward greater concessionality in new lending by both official bilateral and multilateral creditors, debt-service payments on post-cutoff date official bilateral debt and on multilateral debt are relatively small for all but a very few countries. The measures on pre-cutoff date debt—concessionality in reschedulings and bilateral debt forgiveness—helped slow the pace of deterioration but were not sufficient to bring about a decisive improvement in the debt-service profile in most of the low-income rescheduling cases. Debt-service profiles remain dominated by debt obligations resulting from earlier reschedulings on nonconcessional terms. This is particularly true for those countries where initially high debts and small shares of concessional debt meant greater reliance on debt reschedulings as a source of financing, and where debt-service obligations on rescheduled debt grew at a faster rate than countries’ capacity to make payments on such debts.
Paris Club creditors have become more aware that a durable solution to the debt problem of the low-income countries calls for a fundamental reorganization of the stock of pre-cutoff date debt. In December 1991, they adopted a phased approach to debt restructuring, which combined continued flow reschedulings on more concessional terms with consideration of a debt-stock operation after a track record of adjustment had been established. Section II, inter alia, examines the impact on countries’ debt-service profiles of such possible debt-stock operations by Paris Club and other bilateral and private creditors. A number of broad conclusions emerge.
First, while the terms of the stock operations are yet to be determined, the approach followed by the Paris Club, if implemented with sufficient flexibility, should be adequate to deal decisively with the debt problems of most of the low-income rescheduling countries. A debt-reduction incorporating a 50 percent reduction in net present value terms would go a long way to reduce the debt-service profile on restructurable debt to managable levels. Substantially deeper reductions, however, will be required in a number of cases to reduce debt-service payments to levels that can be sustained, even in the context of ambitious and sustained adjustment programs.
Second, the solution to the debt problem of some rescheduling countries lies largely outside the Paris Club. Some of these countries require special action by non-Paris Club creditors. These creditors have already shown considerable flexibility.
Third, a few countries are heavily indebted to multilateral institutions. They are therefore particularly dependent on adequate new flows on concessional terms in support of continued policy adjustment.
Fourth, given their long-term development needs, these countries will continue to require large amounts of external financing. It is crucial that debt-restructuring operations do not reduce new financial flows. To be sustainable, the profile of restructured debt must feature flat or only gradually rising payments, and the rate of increase must be well below the projected rate of export growth. This will make room for debt service on nonrestructurable debts and new financial flows. The magnitude of resource requirements also means that the role for debt-creating flows is very limited. Instead, these countries will have to rely on grants and highly concessional loans for most of their financing needs and on increasing direct investment.
Finally, debtor countries must strengthen and broaden their adjustment and reform efforts. While external debt problems have contributed to their protracted balance of payments difficulties, heavy indebtedness has not been a fundamental obstacle to growth and development in the low-income rescheduling countries. Conversely, the resolution of external debt problems by itself cannot be expected to lead to a fundamental improvement in the economic and financial situation and prospects unless accompanied by comprehensive and sustained macroeconomic adjustment and structural reform. As the experience of recent graduates from the rescheduling process demonstrates, a return to normal debtor-creditor relationships is a necessary, but far from sufficient, condition for these countries to attract non-debt-creating flows, which are essential for long-term development and growth, and, in particular direct foreign investment.
Against this background, the subsequent sections of the paper provide more detailed information on recent developments in the three main areas of official financial support: debt reschedulings, direct financial flows from official bilateral sources, and lending by multilateral institutions. Section III reviews recent developments in official bilateral debt restructurings from three perspectives. Its main focus is on recent experience with debt reschedulings in the multilateral framework of the Paris Club. It also reviews recent debt renegotiations involving official bilateral creditors that are not participating in the Paris Club, and reports on recent debt forgiveness initiatives that have been implemented on a bilateral basis.
Section IV reports on recent developments in direct financing from official bilateral creditors, with particular emphasis on the various instruments of support, and on experience in financing of the rescheduling countries. It brings out clearly the three main features of recent experience: increases in the overall levels of financial support, increasing adaptation of the terms to country circumstances, and increasing links to the implementation of appropriate adjustment policies.
Section V provides information on lending by multilateral institutions, including the IMF. The review highlights three major developments that mirror the three broad trends characterizing official bilateral financing in recent years. First, multilateral lending has increased sharply both in absolute terms and as a share of total financing flows to developing countries. Second, countries that established a strong record of sustained policy implementation witnessed the most pronounced increase in multilateral lending. Third, multilateral institutions have increasingly adapted the terms of their lending to country circumstances and this has been reflected in a marked shift toward concessional lending to the low-income countries. As a consequence, debt-service obligations to multilateral creditors have increased only modestly and at a much slower rate than the stock of debt owed to these creditors. In a few cases, however, where the shift toward concessional financing has been less pronounced, in part because of mixed adjustment records, obligations to multilateral institutions remain substantial.
These recent trends in official financing have important ramifications for developing countries. Access to external financing from official sources is likely to remain high for those countries whose adjustment and reform efforts provide assurances that resources will be used efficiently. Conversely, countries with uneven records of policy implementation (particularly as regards payments arrears) are likely to find difficulty in attracting financial support.