Chapter

II The External Debt of Rescheduling Countries

Author(s):
International Monetary Fund
Published Date:
January 1994
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This section reviews external debt developments of countries that have rescheduled their official bilateral debts in the framework of the Paris Club since 1980. The middle-income countries, which are mainly indebted to commercial creditors, have made substantial progress in resolving their debt problems. An increasing number of debtors have reached agreements with their commercial bank creditors on debt-restructuring packages, and some have regained access to spontaneous financing.

Debt problems remain serious, however, for most of the low- and lower middle-income rescheduling countries mainly indebted to official creditors. Official creditors have continued to provide financial support, often on a large scale, to countries implementing appropriate adjustment policies. This strategy has proven successful in a number of the lower middle-income countries that are making good progress in graduating from the rescheduling process. For the vast majority of low-income countries, and a few of the lower middle-income countries, however, a durable solution to their debt problems has remained elusive.

Official creditors have implemented a wide range of measures to alleviate debt burdens and provided large-scale new financial assistance on increasingly concessional terms. These measures helped but were not sufficient to bring about a decisive improvement in the debt situation. The prospects for continued dependence on future reschedulings with uncertain terms and coverage, and uncertainties regarding the magnitude and timing of prospective disbursements of direct financial assistance, complicated economic and financial management. This contributed to difficulties in sustaining adjustment programs, especially during periods of terms of trade declines. An accumulation of external arrears usually accompanied breaks in the adjustment process and further exacerbated already difficult situations. Even with sustained adjustment efforts, most of these countries would require cashflow relief for many years to come. As Paris Club creditors have recognized, more definitive action on the stock of restructurable debt is needed to provide the low-income rescheduling countries with the clear prospect of an exit from the rescheduling process.

The Setting

Since 1980, 58 countries have needed to reschedule their official bilateral debt (Table 1). Paris Club reschedulings have generally paralleled the sharp rise in commercial bank debt restructurings but were less concentrated around the onset of the generalized debt crisis in the early 1980s. This reflected the more diversified experience of countries largely indebted to official creditors, in part because these creditors did not abruptly change their lending practices. Fifteen countries had approached the Paris Club already during 1976–82, before the emergence of more widespread debt-servicing difficulties. During the following three years, 1983–85, 19 others obtained Paris Club reschedulings, mostly middle-income countries with large debts to private creditors. Since 1986 another 24 countries have required reschedulings in the Paris Club.

Table 1Debt-Rescheduling Countries(As of the end of September 1993)
AgreementsCumulative

Period
AgreementsCumulative

Period
FirstNumberStatus1FirstNumberStatus1
Low-income countries(In months)Middle-income countries(In months)
Angola1989115ArrearsArgentina1985583Current
Benin1989361CurrentBrazil1983487Graduated
Bolivia1986469CurrentBulgaria1991217Arrears
Burkina Faso1991248CurrentCameroon1989221Arrears
Central African Republic1981572ArrearsChile1985239Graduated
Chad1989115ArrearsCongo1986241Arrears
Equatorial Guinea1985330ArrearsCosta Rica1983556Graduated
Ethiopia1992135CurrentCôte d’Ivoire1984681Arrears
Gambia, The1986112GraduatedDominican Republic1985233Graduated
Guinea1986326ArrearsEcuador1983564Arrears
Guinea-Bissau1987233ArrearsEgypt1987255Current
Guyana1989366CurrentEl Salvador1990113Graduated
Honduras1990252CurrentGabon1978558Arrears
Liberia1980460ArrearsGuatemala19931Graduated
Madagascar19817121ArrearsJamaica19847127Current
Malawi1982338GraduatedJordan1989236Current
Mali1988377CurrentMexico1983360Graduated
Mauritania1985577CurrentMorocco1983686Graduated
Mozambique1984485CurrentNigeria1986346Arrears
Nicaragua1991115ArrearsPanama1985233Graduated
Niger19837103ArrearsPeru1978593Current
Senegal19819120ArrearsPhilippines19844752
Sierra Leone1977584CurrentPoland19816119Current
Somalia1985236ArrearsRomania1982224Graduated
Sudan1979463ArrearsRussian Federation1993112Current
Tanzania1986460CurrentTrinidad and Tobago1989227Graduated
Togo19799162ArrearsTurkey1978361Graduated
Uganda1981571CurrentYugoslavia, former
Zambia1983587CurrentSocialist Federal
Zaïre197610131ArrearsRepublic of1984467
Sources: Debt-rescheduling agreements; and IMF staff estimates.

Current = rescheduling agreement effective; arrears = accumulating arrears on debt to Paris Club creditors; graduated = resumed full debt-servicing to Paris Club creditors.

Consolidation period expired, no arrears, but expect to return to Paris Club.

Sources: Debt-rescheduling agreements; and IMF staff estimates.

Current = rescheduling agreement effective; arrears = accumulating arrears on debt to Paris Club creditors; graduated = resumed full debt-servicing to Paris Club creditors.

Consolidation period expired, no arrears, but expect to return to Paris Club.

Most of the rescheduling countries have returned to the Paris Club time after time; 19 have obtained five or more reschedulings. The longest cumulative period covered by consolidations extends for more than thirteen years, and for nearly one half of the rescheduling countries the cumulative consolidation period exceeds five years. In most cases, the period of effective cash-flow relief was considerably longer because successive consolidations were seldom negotiated in an unbroken sequence (Chart 1).

Chart 1.Renegotiations of Official Bilateral Debt, Consolidation Periods of Successive Rescheduling Agreements, 1982–June 1993

Sources: Agreed Minutes of debt reschedulings; and Fund staff estimates.

Notes: 1, 2, 3, etc. - Indicates the start of succsessive consolidation periods since 1976 (see Appendix I, Table 1).

* - Indicates conditional future rescheduling or extension of consolidation period.

** - Indicates agreement to restructure stock value of debt.

< - Indicates consolidation date of arrears.

1 The following countries that have graduated from official multilateral debt rescheduling through end-1991 are no longer included in the chart: Chile, El Salvador, The Gambia, Malawi, Romania, Yugoslavia, Trinidad & Tobago, and Turkey. Representation of dates is approximate.

Progress in resolving debt difficulties through successive reschedulings remained slow. To date, only 14 of the 58 countries have resumed normal relations with creditors. Successful graduates from the Paris Club rescheduling process were mostly those middle-income countries that had been predominantly indebted to private creditors. Their success was based on the sustained implementation of macroeconomic and structural reform policies, often accompanied by comprehensive commercial bank debt restructurings.1 For the other middle-income countries that currently continue to require cash-flow relief from Paris Club creditors, prospects are generally favorable. Most are expected to graduate over the next few years, although a number in the lower middle-income range continue to face very difficult situations.

In contrast to this broadly favorable recent experience of the middle-income countries, the debt situation of the low-income rescheduling countries (most of which are in sub-Saharan Africa) has remained intractable. These countries continue to rely heavily on debt reschedulings despite large-scale direct assistance by official creditors in the form of new loans and grants (see Sections IV and V), actions by private creditors to reduce debt, official bilateral debt forgiveness initiatives, and recent moves toward concessions in reschedulings.

This protracted reliance on debt reschedulings by most low-income and some of the lower middle-income rescheduling countries can be traced to two interdependent factors. First, most have experienced long-lasting and, in many cases, very sharp declines in their terms of trade, and have thus faced severe structural and balance of payments difficulties. Had the severity and persistence of the external shocks been fully anticipated at the outset, stronger adjustment efforts and financing on more appropriate terms would have been called for. While many of these countries embarked on adjustment programs supported by the IMF, other multilateral institutions, and official bilateral creditors, many experienced difficulty in sustaining their adjustment efforts. This reflected in part the severity and duration of the terms of trade shock. Breaks in the adjustment process were usually accompanied by an accumulation of external arrears. This undermined countries’ efforts to re-establish credit-worthiness and reduced their access to new financing from official sources, including, in particular, loans on concessional terms. In these circumstances, many countries had to rely on repeated and increasingly comprehensive reschedulings and, in some cases, an accumulation of arrears, which further exacerbated already difficult situations.

Second, the move toward greater concessionality in new lending and toward grant financing gathered pace only in the late 1980s. Moreover, Paris Club reschedulings were based on market-related interest rates for the low-income countries until late 1988 and provided initially for short repayment periods. As countries found themselves unable to meet the obligations arising from previous reschedulings, they required increasingly comprehensive cashflow relief. This, in turn, resulted in obligations on rescheduled debts rising at a faster rate than the country’s capacity to service such debts.

In the following sections, the review focuses on a variety of measures of the debt burden (Box 1) and the classification for the countries is based on the terms they obtained most recently in Paris Club reschedulings (see Table A6). The classification differs from those used by the World Bank and other international organizations.2

Box 1Measures of the Debt Burden

Measuring the debt burden in the low- and lower middle-income countries presents a number of problems. The conventional index, the stock of debt relative to the resource base, such as exports of goods and services, can be seriously misleading.1 This index fails to capture the effects of new financing and of debt relief on more concessional terms, that is, lower interest rates and longer repayment periods. An attractive conceptual alternative would be to compare the present value of future debt-service obligations with the present value of future export receipts. This approach suffers, however, from a number of serious drawbacks: the sensitivity to the discount rate assumed, the uncertainty about future export receipts, and the exceptionally complex data requirements.2 Moreover, even if these difficulties could be overcome, the computed ratio would provide little or no information about the debt-service profile. It would not be operationally relevant to the most pressing concerns of the rescheduling countries under review: the immediate cash-flow requirement of debt-service obligations and the need to establish a managable medium-term debt-service profile.

In this paper, the debt burden is viewed mainly in terms of three debt-service ratios: the ratio of the scheduled total debt-service payments (i.e., principal plus interest) to exports, the ratio of scheduled interest payments to exports, and the ratio of actual debt-service payments to exports. These ratios are more readily available and capture changes in concessionality. The three ratios measure different aspects of the debt burden: the ratio of debt service to exports reflects the potential impact of debt-service obligations on foreign exchange cash flow, the scheduled interest-to-exports ratio measures the ongoing cost of the accumulated stock of debt, and the ratio of actual debt service to exports indicates the impact of actual debt service paid on the foreign exchange cash flow.

The first two ratios tell generally the same story, largely because they are influenced in the same way by developments in exports. Moreover, increases in the concessionality of interest rates are typically reinforced by lengthened repayment periods on new lending by both bilateral and multilateral sources. In the present context, however, debt-service profiles are typically dominated by the effects of reschedulings. For many countries under review, grace periods from earlier reschedulings on shorter maturities have expired and amortization payments arising from these reschedulings account for a large part of total scheduled debt-service payments. Thus, in many cases where the scheduled interest ratio declined because of increased concessionality in new lending and in reschedulings, the total scheduled debt-service ratio remained broadly unchanged.

The gap between the actual and scheduled debt-service ratio measures the extent to which countries were unable to make debt-service payments on schedule and relied on debt-related exceptional financing-defined here as the sum of rescheduling from all sources and the net accumulation of external debt arrears. Actual debt-service ratios have been lowest for countries during periods of arrears accumulation, the most disorderly form of external financing. Actual debt-service ratios are typically higher once rescheduling agreements are reached, debt-service payments are resumed and the regularization of relations with creditors leads to inflows of new financing. Finally, countries with the highest actual debt-service ratios tend to be those that are committed to a resumption of or maintenance of normal relations with creditors.

1 In this paper, debt and debt service are viewed relative to exports rather than GDP because export data are more accurate and comprehensive than GDP data and because changes in real exchange rates, which were large during recent years, produce sharp changes in ratios of debt to GDP.2 The World Bank has used a variant of this measure—the ratio of the present value of future debt-service payments to current exports.

Lower Middle-Income Rescheduling Countries

Much attention has recently been focused on the situation of the lower middle-income countries with continuing debt-servicing difficulties. Most are heavily indebted to official bilateral creditors but have not benefited from concessional treatment in the Paris Club. Moreover, given the structure of their indebtedness, they have generally not been able to achieve a significant reduction in their over-all debt burden through debt-reduction operations with commercial banks. Despite these common features, the recent experience of these countries-including the evolution of their debt situations—has been markedly different.

This section examines recent developments in the 15 lower middle-income countries that had effective Paris Club agreements in 1992 or were expected to return to the Paris Club in the near future. Nine of these countries have had repeated reschedulings since the early 1980s (Costa Rica, Côte d’Ivoire, Dominican Republic, Ecuador, Jamaica, Morocco, Peru, the Philippines, and Poland). The other six approached the Paris Club only more recently (Bulgaria, Cameroon, Congo, Egypt, Jordan, and Nigeria). The review covers the period since 1986, when the terms of trade of many of these countries deteriorated and resulted in a sharp fall in export earnings. This external shock was further aggravated by increasingly restricted access to financing from nonofficial sources. It also dealt a sharp blow to those countries already in difficulty and led to the emergence of serious debt-servicing difficulties for others that until then had managed to maintain normal relations with their external creditors.

As private creditors withdrew, official bilateral and multilateral sources stepped up their support, but it was not sufficient to cover the rapid rise in scheduled debt-service payments to all creditors (Table Al). Recourse to external financing in the form of reschedulings and also external arrears nearly doubled between 1986 and 1990 but then declined for two main reasons. First, some countries reached comprehensive debt-stock agreements, which resulted in a reduction in scheduled debt-service payments. Second, some countries regained access to international capital markets, which reduced their need for exceptional financing.

Despite these recent improvements, total exceptional financing for these countries exceeded direct financial assistance in the form of grants and loans throughout the period. For many countries, the pattern became more entrenched over time, and the resulting capitalization of interest contributed to a sharp increase in total debt. Actual debt-service payments declined in nominal terms and as a ratio to exports of goods and services (from 27 percent to 18 percent). Moreover, the shift toward financing from official sources (including exceptional financing) led to a marked increase in the share of official creditors in total debt between 1986 and 1992 from about one half to two thirds; nearly all of this increase was accounted for by bilateral creditors, whose share in the total increased to over 50 percent.3

This aggregate picture masks widely divergent trends among the countries. Some made progress toward the resolution of their debt problems and regained access to private capital; others saw their debt situation deteriorate further.

Countries that Made Progress

Eight of the 15 countries experienced an often marked improvement in their situation (Costa Rica, Dominican Republic, Ecuador, Egypt, Jamaica, Morocco, the Philippines, and Poland). Their average debt-export ratio declined sharply over the past six years from over 350 percent to below 250 percent and the scheduled interest ratio dropped from 26 percent to 14 percent (Tables 2 and 3). Three factors were responsible for this recent progress.

Table 2Lower Middle-Income Rescheduling Countries: Debt and Debt-Export Ratios by Country, 1986–92
External DebtDebt-to-

Exports Ratio1
Changes from 1986 to 19922
Debt-to-

exports ratio
External

debt
Exports
199219861992ValueVolumePrices
(In billions of

U.S. dollars)
Group 1: Improving situation
Costa Rica3.4258123–74–12635310
Dominican Republic4.6263213–212141–4485
Ecuador12.434434631312011
Egypt35.9555332–51–645–146
Jamaica4.82331921935544014
Morocco17.6564263–761783048
Philippines32.0315185–5316705218
Poland48.2292296124231310
Average353244–3714502030
Group 2: Deteriorating situation
Bulgaria13.01413168110322–141163
Cameroon6.71293028569–16–4–12
Congo4.8356378651453312
Côte d’Ivoire14.32584204940–923–32
Jordan8.5168251404912–4856
Nigeria29.8354235–4115563125
Peru23.9417525234926917
Average260347355419–1433
Average all310292–33235431
Source: IMF staff estimates.

In percent of exports of goods and services.

Index expressed in log normal terms.

Source: IMF staff estimates.

In percent of exports of goods and services.

Index expressed in log normal terms.

Table 3Lower Middle-Income Rescheduling Countries: Debt-Service Indicators by Country, 1986–921(In percent of exports of goods and services)
Total Scheduled

Debt Service
Actual

Debt Service
Scheduled

Interest

Payment
198619921986199219861992
Group 1: Improving situation
Costa Rica63193419268
Dominican Republic482429201413
Ecuador816536352923
Egypt732455243513
Jamaica773356292912
Morocco1144559362919
Philippines512632172411
Poland54192192214
Average703240242614
Group 2: Deteriorating situation
Bulgaria1551157816
Cameroon1643168824
Congo665725222320
Côte d’Ivoire396228231631
Jordan19421926818
Nigeria716926312917
Peru78582593038
Average435522181723
Average all584232212218
Total (weighted average)504027182018
Source: IMF staff estimates.

Including the IMF.

Source: IMF staff estimates.

Including the IMF.

First, most of the eight countries in the group made sufficient progress in their macroeconomic and structural reforms that the growth of exports significantly exceeded the growth of debt. Export growth was particularly rapid in Costa Rica, Jamaica, Morocco, and the Philippines.

Second, several countries benefited from substantial debt-reduction operations. Costa Rica and the Philippines achieved a sizable reduction of their commercial bank debt; Egypt and Poland obtained an exceptional debt-restructuring from Paris Club creditors; and Egypt and Morocco also benefited from debt forgiveness by non-Paris Club official bilateral creditors. Collectively, these operations helped keep the average growth rate of debt to only 2 percent a year over the period 1986 to 1992.

Third, a number of countries, and in particular Jamaica, Morocco, and the Philippines, managed to maintain broadly satisfactory relations with official bilateral creditors in the context of successive reschedulings. They were thus able to attract large amounts of financial assistance from these creditors on concessional terms, which helped reduce the average interest rate on outstanding debt to less than 6 percent. While the overall debt situation improved, the debt itself became increasingly concentrated on official creditors.

Some of these lower middle-income countries have already resumed normal relations with creditors (Costa Rica, the Dominican Republic, and Morocco) (Table A2). For most others, an exit from the rescheduling process is a reasonable prospect, provided that they broaden and sustain their adjustment efforts. For countries that obtained debt-stock restructurings from commercial banks (Costa Rica and the Philippines) or official bilateral creditors (Egypt and Poland), scheduled amortization payments have been substantially reduced from 1992 onward. Longer maturities in Paris Club reschedulings for the other countries had a similar but less pronounced effect, and reschedulings might be required in some cases for several more years, given the heavy amortization payments falling due from previous reschedulings. For Ecuador and Poland, further reductions in scheduled debt service could be achieved through commercial bank debt reduction. Such debt operations, combined with continued strong support in the form of new flows, should help bring scheduled payments in line with actual payments capacity and thus eliminate the need for exceptional financing.

Countries Whose Situation Deteriorated

The progress achieved by the first group stands in sharp contrast to the marked deterioration in the debt situations of the other seven countries (Bulgaria, Cameroon, Congo, Côte d’Ivoire, Jordan, Nigeria, and Peru). The cumulative external current account deficits of these countries over the past six years were larger than those of the first group both in relation to exports of goods and services and their initial stock of external debt. These large and growing external imbalances led to a rapid buildup of debt and, as exports grew only marginally, debt and debt-service indicators worsened steadily. For the group as a whole, the ratio of debt to exports of goods and services rose from 260 percent in 1986 to around 350 percent in 1992 (Table 2). Scheduled debt service rose from 43 percent to 55 percent, while actual debt-service payments declined from 22 percent to only 18 percent of exports of goods and services (Table 3). In sharp contrast to the experience of the first group, the scheduled interest ratio rose from 17 percent to 23 percent, reflecting both the rapid buildup of debt and weak export performance. These debt indicators would suggest more difficult prospects for an early return to external viability, even in the context of strong adjustment efforts.

In two of the cases (Bulgaria and Jordan), debt-servicing difficulties emerged only more recently. While the debt and debt-service indicators of these two countries deteriorated sharply, they were in 1992 at about the average of the first group (though moving in the opposite direction). Moreover, for Bulgaria, the share of debt owed to official bilateral creditors is less than 20 percent, and a resolution of its debt difficulties could be advanced through appropriate debt reduction by private creditors and steps to increase access to new flows from official bilateral sources. Jordan has been subject to a large structural shock, compounded by a loss of traditional grant financing, and thus faces somewhat greater difficulty in servicing its bilateral debt (Table A2).

Among the remaining countries. Côte d’Ivoire and Peru face particularly difficult situations. The stock of external debt is four to five times larger than annual exports, and most all of the debt is nonconcessional. For Peru, the increase in indebtedness from already high levels in 1986 is largely due to a capitalization of interest arrears. By contrast, Côte d’Ivoire maintained relations with official creditors in the context of successive reschedulings over most of the period under review. It thus obtained new financing as well as an interest rate reduction on previous rescheduled debt on a bilateral basis, but experienced a continued decline in exports. In both cases, available resources during the past two years have been directed largely to payments on multilateral and post-cutoff date debt.

The Congo and Nigeria also face severe difficulty despite rapid export growth since 1986. In Cameroon, export declines have led to a rapid deterioration despite low initial indebtedness. These three countries have a high share in bilateral debt in total debt, and they would therefore be more dependent on this group of creditors.

Low-Income Rescheduling Countries

In contrast to the diversified experience of the lower middle-income countries over the past few years, the low-income rescheduling countries have seen little improvement in their debt situation and many have experienced a further marked deterioration. Most have been facing protracted balance of payments difficulties throughout the past decade. Creditors have given increasing recognition to the special situation of these countries over the past years. Recent actions have gone a long way to help slow the pace of deterioration, although in most cases decisive improvements have yet to be achieved.

Main Features of Recent Experience

Three main features characterize developments since 1986. First, the combined noninterest current account deficit has risen steadily to nearly to $9 billion in 1992 (above 50 percent of annual exports of goods and services) (Table A3). This meant that these countries’ capacity to service debt out of own resources has declined further both in nominal terms and relative to exports and that their overall need for external assistance has increased rapidly. Creditors and donors have responded by providing financial support on an increasing scale. Total financial assistance in the form of grants, new loan disbursements, and exceptional financing has been about as large as these countries’ own earnings from exports of goods and services in every year since 1986 (Chart 2).

Chart 2.Low-Income Rescheduling Countries: Exports, External Financing, and Scheduled Debt Service, 1986–921

Source: IMF staff estimates.

1 See Table 1 For listing of countries.

2Exceptional financing consists of debt-related financing in the form of debt rescheduling and arrears: total external financing includes exceptional financing.

Creditors and donors have also recognized that financing on such a large scale would need to be provided on highly concessional terms. Thus, the proportion of financing in the form of grants has risen from around one fourth to one third (Table A3), New loans, including those from the multilateral institutions, have been provided on increasingly concessional terms. Finally, Paris Club creditors have been providing, since 1988, concessional reschedulings, first under Toronto terms and, since December 1991, on enhanced concessions.

Reflecting the increased concessionality of available financing, the average interest rate on debt obligations declined from about 5 percent in 1986 to less than 4½ percent in 1992.4

Second, the overall indebtedness of these countries remains extremely heavy and well above that of any other group of countries. It has increased rapidly over the past years, reaching over $100 billion at the end of 1992, over 550 percent of annual exports of goods and services. The combined scheduled interest ratio has remained broadly unchanged at some 24 percent despite the wide range of measures implemented by creditors to reduce debt through ODA debt forgiveness and concessional reschedulings, and to increase the concessionality of remaining debt. About one fourth of the debt was owed to multilateral creditors, 20 percent to private creditors, and the remainder to official bilateral creditors. Although official bilateral creditors provided the largest share in financial flows during this period, their share in total debt has declined slightly during the past few years following the cancellation of ODA debts, the effects of concessional reschedulings since 1988, and the shift towards grant financing.

The third and most striking feature of the situation of the low-income countries is the extent to which country circumstances differ. This underscores the difficulties of reaching generalized conclusions, especially since the aggregate picture is heavily dominated by a few large countries (Angola, Nicaragua, Sudan, Tanzania, and Zaïre account for nearly 50 percent of the debt of the low-income rescheduling countries). It also illustrates the need to approach individual country situations on a case-by-case basis.

Debt Burdens: Where Do We Stand?

The great diversity of country circumstances and experiences comes out clearly in Tables 4, 5, and 6 which provide country-specific information on the balance of payments structure and the composition of external financing in 1986 and 1992. (See also Table A4.) A detailed review of the experience of these countries and the interaction of the effects of internal policy adjustment, the external environment, and actions by creditors and donors is well beyond the scope of this paper.5 Nevertheless, a number of broad conclusions emerge from the tables.

Table 4Low-Income Rescheduling Countries: Debt and Debt-Export Ratios by Country, 1986–92
External DebtDebt-to-

Exports Ratio1
Changes from 1986 to 19922
Debt-to-

exports ratio
External

debt
Exports
199219861992ValueVolumePrices
(In billions of

U.S. dollars)
Angola8.0208218597926725
Benin1.2182264375215–2438
Bolivia5.65627202533850–42
Burkina Faso1.1308283–956361450
Central African Republic0.72155309061–29–4213
Chad0.6562491491995060–10
Equatorial Guinea0.233042626724758–11
Ethiopia4.15117343615–22–22
Gambia, The0.3254125–7116864046
Guinea2.6315354123220911
Guinea-Bissau0.51,7391,7365656–50106
Guyana1.9607587–324281216
Honduras3.6266257–4283239–7
Madagascar3.0746533–34–1–33–2356
Malawi1.7324398206545413
Mali1.3581332–56–1442348
Mauritania1.7357339–538–210
Mozambique5.21,5931,325–18506882–14
Nicaragua10.42,1862,957305020119
Niger1.32493703931–86–14
Senegal4.12242782255331320
Sierra Leone1.2640556–1421639–23
Somalia2.11,2971,8983831–7–3932
Sudan16.51,2504,08411861–57–56–1
Tanzania5.9799561–354392316
Togo1.218122220311022–12
Uganda2.32411,14515688–6842–110
Zaïre10.432264068626–6054
Zambia5.5705463–42344–852
All countries104.1486555134128127
Average5957792144231111
Median3304632033231311
Source: IMF staff estimates.

In percent of exports of goods and services.

Index expressed in log normal terms.

Source: IMF staff estimates.

In percent of exports of goods and services.

Index expressed in log normal terms.

Table 5Low-Income Rescheduling Countries: Debt-Service Indicators by Country, 1986 and 19921(In percent of exports of goods and services)
Total

Scheduled

Debt Service2
Actual

Debt Service2
Scheduled

Interest

Payment
198619921986199219861992
Angola354517101113
Benin283778813
Bolivia835835323223
Burkina Faso35162119127
Central African Republic2225171089
Chad121210165
Equatorial Guinea514733421720
Ethiopia31663123716
Gambia, The49112411152
Guinea362926171210
Guinea-Bissau8926163173572
Guyana816020473323
Honduras354424331621
Madagascar818241163532
Malawi63254325208
Mali474625141210
Mauritania453926201614
Mozambique2471604247852
Nicaragua32936437668882
Niger493034121811
Senegal37242613139
Sierra Leone893231163315
Somalia1611774585247
Sudan108325311961209
Tanzania704317152518
Togo3021274108
Uganda6311062751145
Zaïre51963131941
Zambia956432483826
Average748129222629
Total (weighted average)636428202324
Source: IMF staff estimates.

Including the IMF.

Including cash payments of arrears.

Source: IMF staff estimates.

Including the IMF.

Including cash payments of arrears.

Table 6Low-Income Rescheduling Countries: Structure of External Financing, 1992(In percent of exports of goods and services)
Noninterest

Current Account

Deficit

(–: surplus)
Total

Scheduled

Debt

Service1
Financing
TotalGrantsDisbursementsExceptionalOther2
Angola6455171235–3
Benin41377815142919
Bolivia175875294926–29
Burkina Faso90161069041–3–22
Central African Republic8125106694815–26
Chad12312135984111–15
Equatorial Guinea8047127105365–20
Ethiopia9366159794343–6
Gambia, The1911302111–3
Guinea3829671829128
Guinea-Bissau150261411200215244–248
Guyana96069181347
Honduras44448163811–16
Madagascar2282104242866–14
Malawi8825113352256
Mali6646112783732–36
Mauritania3039691827194
Mozambique16716032715763136–29
Nicaragua1463645101103929864
Niger5130813425185
Senegal182442212211–12
Sierra Leone743210619111661
Somalia276177453187107169–10
Sudan2073255325912330644
Tanzania1164315955252850
Togo212142155175
Uganda3271104371219835183
Zaïre–396932293–4
Zambia546411854241624
Average83811646043593
Source: IMF staff estimates.

Including the IMF.

Including other net capital flows and change in net reserves (increase –), including IMF purchases and disbursements.

Source: IMF staff estimates.

Including the IMF.

Including other net capital flows and change in net reserves (increase –), including IMF purchases and disbursements.

First, debt-service indicators have improved in nearly half of the rescheduling countries, but most continue to face unsustainable debt burdens. Debt stocks have increased in all but a few, even though the increased concessionality in new lending and in reschedulings has contributed to declines in scheduled interest ratios in nearly two thirds of the cases. These trends were particularly evident in countries that sustained their adjustment and reform efforts and obtained concessional financing in support of these efforts. Only two countries, however, have managed to graduate from Paris Club reschedulings (The Gambia and Malawi).

Second, a number of countries experienced a further, and often marked, increase in their debt burdens. Most of these countries faced very difficult initial balance of payments situations. For many, the situation was further exacerbated by uneven policy performance, often reflected in an accumulation of external arrears. These countries had, therefore, only limited access to new financing on concessional terms, including concessional reschedulings. Some countries (such as Uganda) did sustain their adjustment efforts, but a sharp decline in exports more than offset the positive effects of adjustment and creditor actions.

Third, while scheduled debt-service burdens remain unsustainably high in most of the low-income rescheduling countries, actual payments on debt remained comparatively low as the result of debt reschedulings and, in some cases, the accumulation of arrears. Actual debt-service ratios remained typically lower than those of other low-income countries that have not rescheduled their debts. The actual cash impact of debt service was therefore in most cases markedly lower than scheduled debt service.

Finally, all of these countries obtained substantial net resource transfers (over and above actual debt-service payments) as demonstrated by their continuing large noninterest current account deficits. The noninterest current account balance (excluding grants) provides a measure of the net recourse to foreign savings, or, conversely, the net transfer of resources. As shown in Table 6, the average net transfers, measured in this fashion, amounted to 83 percent of countries’ own export earnings in 1992. In a fourth of the cases, such net transfers exceeded own export earnings by substantial margins.

External debt and debt service have thus generally not been as burdensome as conventional debt measures would seem to indicate. From a cash-flow perspective, the strategy by official bilateral creditors of providing relief on debt-service obligations falling due has proven successful. It has also allowed creditors and donors to continue to provide substantial new financing, provided that the debtor countries maintained orderly relations through reschedulings. External viability has remained elusive, however, for nearly all of the low-income rescheduling countries: graduation from reschedulings would in most cases require continued successive reschedulings on a flow basis for many years.

It is for this reason that Paris Club creditors decided that more definitive action on the stock of debt was needed for a durable solution to the debt problem of these countries. This renewed focus on medium-term debt-service burdens provides the low-income rescheduling countries with a clear prospect of graduation from the rescheduling process. The following sections examine the potential impact of such exit restructurings of the stock of debt by official bilateral creditors on the structure and the profile of debt-service obligations (Box 2).

Box 2External Viability

There are no clear-cut criteria for assessing external viability because viability depends on the willingness of creditors to finance a country’s current account deficits. Often, assessments of viability are based on market tests: access to spontaneous commercial borrowing, developments in secondary market prices of debt, or reliance on exceptional financing. A concept closely related to viability and central to an assessment of medium-term prospects is the sustainability of a country’s external position, that is, the capacity of a country to finance a continuation of recent trends in the current account deficit without compromising its ability to meet debt-service payments.

Sustainability can be evaluated in terms of the evolution of ratios of debt and debt service to some domestic resource base, such as exports of goods and services. When these ratios are so high as to make a country unable to meet its contractual debt-service payments and resort to debt rescheduling, and the ratios can be expected to remain at high levels, the external position is unlikely to be sustainable; when debt-service ratios are falling and contractual obligations can be met, the external position is more likely to be sustainable.

In most of the rescheduling countries, conventional criteria for assessing external viability are not applicable because of the severity of these countries’ initial debt problems, and the structure of their debt. This means that the traditional indicators of external viability, secondary market prices of commercial bank debt and access to spontaneous commercial borrowing, are either not applicable or so far out of reach as to be meaningless. Moreover, in many of these countries, debt burdens remain clearly excessive, and progress toward viability will entail a comprehensive restructuring of their debt.

In these circumstances, the appropriate measure of sustainability would be the extent to which scheduled debt-service ratios need to be reduced to eliminate exceptional financing, defined here as rescheduling of scheduled debt-service obligations and the accumulation of arrears to external creditors. While the need for debt reduction cannot be assessed on the basis of debt-service ratios alone, the experience of a wide range of countries suggests that actual debt-service ratios above 30 percent have been met only for short periods (though there were a few exceptions), and that ratios above 20 percent are difficult to sustain over the longer term, particularly for countries that have limited access to external financing that is not tied to imports of goods and services.

Structure of Debt-Service Obligations

The extent of the debt-servicing difficulties currently faced by low-income rescheduling countries and the structure of debt-service payments for 1992 are illustrated in Chart 3 (Table A5). The chart distinguishes between payments on debts that cannot be restructured and debts that have been subject to debt restructurings. The first category includes debt to multilateral institutions (including the IMF), post-cutoff date and short-term debts, as well as other debts that have been excluded from reschedulings, such as debt of the private sector, and obligations arising from previous Paris Club reschedulings on Toronto or enhanced concessional terms.6 The category of restructurable debt includes pre-cutoff date debt to Paris Club creditors and other official bilateral and private creditors, including debts previously rescheduled on nonconcessional terms.

Chart 3.Low-Income Rescheduling Countries: Structure of Scheduled Debt-Service Payments, 1992

(In percent of exports of goads and services)

Source: IMF staff estimates.

Chart 3 also shows the extent to which debt-service payments are related to debts that cannot be restructured and are therefore not amenable to actions by official bilateral creditors. Chart 4 provides further detail on the structure of these obligations and, in particular payments to multilateral institutions. Obligations to the IMF remain a relatively small fraction of total debt payments in all but a few cases (such as Uganda and Zambia), but a number of countries face heavy debt obligations to other multilateral institutions. For Guyana, Madagascar, Mauritania, and Zambia, the debt-service ratio to multilateral (excluding the IMF) exceeds 10 percent, and for Bolivia, Honduras, Nicaragua, and Uganda, the ratio ranges from 15 percent to 25 percent. By contrast, current obligations on post-cutoff date debts to official bilateral creditors remain very small in all cases, reflecting the highly concessional nature of these debts.

Chart 4.Low-Income Rescheduling Countries: Structure of Payments on Nonrestructurable Debt, 1992

(In percent of exports of goods and services)

Source: IMF staff estimates.

Debt-Stock Operations for Low-Income Countries

The new menu of enhanced concessions agreed by Paris Club creditors in December 1991 provides for the possibility of a stock-of-debt operation provided certain conditions are met. This subsection provides an assessment of the potential impact of stock-of-debt operations by official bilateral creditors.

Impact of Debt-Stock Restructurings

Countries have returned to the Paris Club time after time because of continuing heavy debt-service burdens. This is illustrated for 1992 by Charts 3 and 5. As can be seen from these charts, for most countries, the bulk of scheduled debt-service payments arises on restructurable debt; this results mainly from previous reschedulings on nonconcessional terms that had relatively short grace and repayment periods. A durable exit from the rescheduling process can therefore only be achieved by a fundamental restructuring of the total stock of restructurable debt. As described in more detail in Section III, Paris Club creditors have recently established a broad framework for action on the stock of pre-cutoff date debt through the adoption of the menu of enhanced concessions, although the terms of the stock operation have yet to be determined.

A restructuring of the debt stock with long repayment periods would, by reducing principal payments, contribute significantly toward bringing debt-service profiles more in line with countries’ underlying payments capacities. A restructuring alone without concessions would, however, not reduce scheduled interest payments. It would thus leave most of the countries concerned with debt-service burdens that would offer little prospect of a durable graduation from reschedulings. Scheduled interest payments will also need to be reduced to achieve a debt-service profile consistent with external viability. This would require a debt-stock reduction or equivalent interest concessions.

Chart 5.Low-Income Rescheduling Countries: Structure of Payments on Restructurable Debt, 1992

(In percent of exports of goods and services)

Sources: Chart 3; and IMF stall estimates.

1Assuming a Stock-of-debt restructuring that incorporates a reduction of 50 percent in net present value terms, us currently implemented by the Paris Club on a flow basis.

The immediate impact of a possible stock-of-debt reduction on debt-service payments in 1992 can be seen in Chart 5 and Table 7. A restructuring of the stock of debt into a mortgage-type repayment schedule would initially eliminate or reduce scheduled principal payments to a very small fraction of the restructured debt stock. It would also reduce scheduled interest payments by the amount of the net present value reduction of the debt stock. For example, if creditors applied to the stock of debt the 50 percent net present value reduction currently implemented by the Paris Club on a flow basis, payments on the restructured stock would be reduced to about half of the currently scheduled level of interest payments.7 For most countries, such a hypothetical stock of debt reduction would reduce total payments on restructurable debts to well below 5 percent of exports of goods and services.

Table 7Selected Low-Income Rescheduling Countries; Effect of Debt-Stock Operations1,2(In percent of exports of goods and services)
Scheduled Debt ServiceDebt Service After a

Hypothetical 50 Percent

Stock-of-Debt Operation
Restructurable debt4Restructurable

debt

(4) =

50 percent of (3)
Total

(5) =

(1) + (4)
Nonrestructurable debt3PrincipalInterest
(1)(2)(3)
Angola62811612
Benin62110511
Bolivia30199534
Burkina Faso1132112
Central African Republic1482116
Ethiopia22368426
Guinea12125214
Guyana192615727
Honduras241110529
Madagascar254017934
Mali10306314
Mauritania20145323
Mozambique2599351743
Nicaragua38256703573
Niger13116316
Senegal1365315
Sierra Leone1796320
Tanzania142010519
Togo785310
Uganda7112271484
Zaïre1647331732
Zambia38206341
Sources: Table A5; and IMF staff estimates.

Totals may not add due to rounding.

The debt-service structure for 1992 is broadly representative of the debt-service profile over the medium term. Liberia, Somalia, and Sudan are excluded due to data limitations.

Includes short-term debt and other debt that have been excluded explicitly or implicitly from rescheduling, such as private sector debts as well as debt service from previous concessional rescheduling on Toronto terms and on enhanced concessions.

Includes pre-cutoff date debt to Paris Club, other official bilateral, and private creditors.

Sources: Table A5; and IMF staff estimates.

Totals may not add due to rounding.

The debt-service structure for 1992 is broadly representative of the debt-service profile over the medium term. Liberia, Somalia, and Sudan are excluded due to data limitations.

Includes short-term debt and other debt that have been excluded explicitly or implicitly from rescheduling, such as private sector debts as well as debt service from previous concessional rescheduling on Toronto terms and on enhanced concessions.

Includes pre-cutoff date debt to Paris Club, other official bilateral, and private creditors.

Degree of Reduction

In most cases, debt reductions by Paris Club creditors beyond 50 percent would make only small additional contributions to improvements in the debt-service profile. For the bulk of cases where a net present value reduction by 50 percent would, based on the 1992 position, lower debt payments on restructured debt to 5. percent of exports, a move to a 75 percent reduction, for example, would result in an additional reduction of debt-service ratios by only 2½ percentage points.

A number of countries, however, face exceptionally difficult debt situations and their debt problems will not be resolved by a 50 percent net present value reduction (e.g., Guyana, Madagascar, Mozambique, Nicaragua, Uganda, and Zambia, in particular).8 Substantially deeper debt reductions will be required to reduce debt-service payments to managable levels, even with ambitious and sustained adjustment efforts by the countries themselves.

In some of these cases, the solution to the debt problem lies largely outside the Paris Club, because the bulk of restructurable debt is owed to creditors that do not participate in the Paris Club, including the former Soviet Union. As reported in Section III, some of the non-Paris Club creditors have already shown in a number of cases considerable flexibility in adopting innovative approaches, including very comprehensive debt reductions. Similarly flexible responses will be required for other debtors.

Sustainability

The discussion so far has concentrated on debt-service obligations in 1992. The conclusions hold, and indeed are reinforced, for future debt-service obligations. For restructured debt, under a graduated repayment schedule (as currently employed under the menu of enhanced concessions), debt-service obligations would increase at an annual rate of only 3 percent in nominal terms (the first panel of Chart 6). With nominal export growth expected to be higher (which would be consistent with little or no growth in real terms), the debt-service burden on such debt would thus be projected to decline steadily over time (as illustrated in the second panel of Chart 6). For existing nonrestructurable debt, the same conclusion holds. Both official bilateral post-cutoff date debt and multilateral debt have increasingly been provided on concessional terms and for longer maturities. Hence, no pronounced hump of debt-service payments is expected. In real terms, therefore, the debt-service burden on this debt should also decline over time. Provided new disbursements are provided on appropriately concessional terms, as is discussed further below, and reasonable export growth is achieved, the overall debt-service picture as a result of stock of debt operations should improve from the illustrative snapshot provided of the impact in 1992.

Chart 6.Hypothetical Debt-Service Profile and Export Growth After Debt Restructuring1

Source: IMF staff estimates.

1 Export growth in nominal terms. Assuming a restructuring of $100 million in debt on the terms currently applied under enhanced concessional terms on a flow basis, with a reduction of 50 percent in net present value terms; a market rate of 9 percent: an equal distribution over the debt-reduction and debt-service-reduction options; and initial exports of $100 million. Note that for the debt-service-reduction option in the current Paris Club menu, which effects the net present value reduction through concessional interest rates, interest rates are reduced by more than half. This has been offset in the current menu by eliminating the grace period for this option in order to arrive at broadly equivalent cash payments under the debt-reduction and debt-servicing-reduction options.

To be successful, debt-stock operations must ensure that debt-service obligations are brought to levels that are sustainable over the medium term. This underlines the importance of a primary focus on the debt-service profile resulting from debt-stock restructurings rather than other debt indicators. A comprehensive assessment would also need to be based on detailed country-specific medium-term scenarios to take into account the wide variations among countries as regards the stage of the adjustment process and, more particularly, their export prospects and ability to attract new financing.

The debt profile resulting from a stock-of-debt operation would typically require higher payments on restructurable debts than countries are currently making. This reflects large immediate cash-flow relief provided under most current reschedulings. This raises the question whether countries would be able to meet the higher payments following a stock-of-operation or whether they would continue to require additional cash-flow relief.

For most countries that had effective rescheduling agreements in 1992, payments resulting from a hypothetical stock operation would, however, not be significantly higher than total payments actually made in 1992. This is due to two factors. Both are related to the resumption of regular relations with official creditors. First, many countries were required to clear arrears on Paris Club debts that are not normally covered by reschedulings. These were one-time payments typically associated with a return to reschedulings after a period during which arrears accumulated. Second, in some cases, very comprehensive Paris Club reschedulings provided room for a regularization of relations with multilateral institutions. The same approach will be required for countries that are currently without effective rescheduling agreements and are accumulating arrears on nonrestructurable debts. In these cases, the need for cash payments on nonrestructurable arrears could add significantly to the actual debt burden during the initial years.

The phased approach to debt reduction, as currently implemented by the Paris Club, takes account of these initial difficulties. It assists countries in regularizing relations, establishing a record of performance, and adjusting into the more inflexible payments stream that will result from a restructuring of the debt stock. At the same time, creditors continue to review the possibility of earlier exit restructurings on a case-by-case basis.9 Earlier operations would be particularly relevant for countries that have already established a record of sustained implementation of comprehensive programs of adjustment and reform, and have maintained orderly relations with creditors in the context of existing rescheduling agreements. In such cases, timely action on the stock of debt would provide debtors with clear assurances that official bilateral creditors are prepared to provide definitive exit restructurings through stock-of-debt reductions. It would thus improve the confidence of policy makers and the environment for investor decisions in these countries. It would also help eliminate the uncertainties that currently cloud assessments of the prospects for external viability.

Finally, as noted earlier, the rescheduling countries remain heavily dependent on continued direct financial assistance in the form of grants and new disbursements from official sources. As illustrated in Chart 7, these new flows are typically several times larger than actual debt-service payments. The high level of grants and the concessionality of debt in many of these countries raises the question of whether donors would continue to provide grants and concessional financing on the scale experienced in the past, once normal relations with creditors are re-established and the debt burden is reduced to a sustainable level (given concessional terms). For most of the countries under review, the magnitude of resource requirements severely circumscribes the potential role of debt-creating flows. External viability would be out of reach if financing needs had to be met exclusively by debt on market-related terms. Moreover, even marginal changes in the level of new financial support could have serious repercussions on these countries’ ability to remain current on their debt obligations. The adequacy of debt reduction will therefore need to be assessed in the context of medium-term scenarios that give a realistic view of likely new flows.

Chart 7.Low-Income Rescheduling Countries: Debt-Service and Direct Financial Assistance, 1992

(In percent of exports of goods and services)

Source: IMF staff estimates.

These considerations also underscore the need for debtor countries to reinforce and broaden their efforts to improve domestic savings and growth performance, through continued structural change. The experience of countries that have recently reestablished normal relations with creditors demonstrates that a successful resolution of debt problems requires not only actions on existing debt but must be based on sustained implementation of appropriate policies. These include policies that will attract foreign investment and reduce reliance on debt-creating flows in order to bring about a decisive strengthening of the overall balance of payments position over the medium term.

Recent developments in commercial bank debt restructurings are reported in Private Market Financing for Developing Countries, World Economic and Financial Surveys (Washington: International Monetary Fund, December 1993).

The World Bank issues a list of low- and lower middle-income countries on an annual basis. Other international organizations use different per capita income levels in their definitions or update their country composition of income groups less frequently (see Table A8), For example, Bolivia and Senegal are classified by the World Bank as lower middle-income countries but are included here among the low-income countries because they obtained concessional reschedulings. By contrast, Nigeria is classified by the World Bank as a low-income country but is included here in the lower middle-income group, as the most recent Paris Club rescheduling did not incorporate concessional terms and because of the structure of its debt.

The payment of claims on export credit insurance in the context of reschedulings accounts for a large part of the increase in the direct exposure of official bilateral creditors (see Chart 10).

This decline in the average interest rate was achieved despite the substantial cancellations of official development assistance (ODA) debts, which, taken by themselves, resulted in an increase in the average interest rate on the stock remaining after cancellation.

For a detailed discussion of the experience of countries that implemented IMF-supported programs, see Susan Schadler and others, Economic Adjustment in Low-Income Countries, Occasional Paper, No. 106 (Washington: International Monetary Fund, September 1993).

The subordination strategy of Paris Club creditors regarding pre-cutoff and post-cutoff date debts and their policies regarding debt-service obligations arising from previous reschedulings on concessional terms are described in Section III.

Two important assumptions underlie this assessment of payments due after a stock-of-debt reduction. First, other official bilateral and private creditors are assumed to provide comparable treatment. Second, interest on ODA debts is not reduced under the current Paris Club menu, and if this was also the case for stock operations, there would be a correspondingly smaller reduction in scheduled interest payments.

This also holds for Liberia, Somalia, and Sudan, which are not included here because of data limitations.

This was noted in the July 1993 Tokyo Summit communiqué of the Group of Seven major industrial countries.

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