III Recent Developments in Debt Restructurings by Official Bilateral Creditors
- International Monetary Fund
- Published Date:
- January 1994
This section provides information on recent debt restructurings by official bilateral creditors. The first part reports on recent debt renegotiations of official bilateral debt in the multilateral Paris Club framework; the second summarizes information on recent debt renegotiations involving other official bilateral creditors; and the third describes recent debt forgiveness initiatives implemented by a number of creditors on a bilateral basis.10
Paris Club Rescheduling Agreements
In recent years, Paris Club debt reschedulings have been increasingly adapted to the divergent experiences of different groups of rescheduling countries. This reflects a renewed focus by creditors on approaches that would promote debtor countries’ graduation from the rescheduling process. Two developments stand out.
First, the number of countries requiring cashflow relief from Paris Club creditors has been declining over the past two years for the first time since the early 1980s, as an increasing number of middle-income rescheduling countries has been making substantial progress toward resolving their debt problems. While only six countries had managed to graduate from Paris Club reschedulings during the 1980s, eight countries (all in the middle-income category) have done so over the past two years, and a number of others can be expected to do so at the end of their current Paris Club consolidation periods. Notwithstanding this progress, however, a few lower middle-income countries continue to face very difficult situations.
Second, in sharp contrast to the broadly favorable prospects for many of the middle-income countries, the debt situation of the low-income rescheduling countries has remained arduous despite repeated reschedulings and re-reschedulings, stretching back, in several cases, over the past ten or more years. In response to the protracted difficulties, Paris Club creditors adopted in December 1991 the new menu of “enhanced concessions” in reschedulings for these countries.11 This new approach recognizes that a durable solution to the debt problem of the most heavily indebted low-income countries would require both a higher degree of concessionality in reschedulings and a fundamental restructuring of the stock of pre-cutoff date debt.
The new menu provides for a two-stage approach. The first consists of continued flow reschedulings of debt service falling due, and the amounts consolidated are reduced by 50 percent (in net present value terms). In the second stage, after a period of three to four years, creditors will consider the stock of debt, provided that a number of conditions are met, notably full implementation of rescheduling agreements and continued implementation of IMF-supported programs. The terms of the debt-stock operation have yet to be determined, but, as set out in the previous section, this new focus by Paris Club creditors on a definitive resolution of the debt-servicing difficulties through a stock-of-debt operation provides low-income rescheduling countries that are implementing adjustment programs with a clear prospect of graduation from the rescheduling process.
Table A6 summarizes the current status of the 58 rescheduling countries and lists the expiration date of their current or last consolidation period. The grouping into low- and lower-middle income countries reflects the terms these countries have obtained from Paris Club creditors.12 The recent evolution of Paris Club rescheduling terms for these different groups of countries are summarized in Table A7. Chart 8 shows the resulting shift in repayments profiles on rescheduled debt for the low- and middle-income countries.
Rescheduling Agreements in 1992–93
Twenty-eight rescheduling agreements were concluded during 1992 and the first half of 1993 (Table A10). This brings the total number of Paris Club reschedulings since 1976 to 212, involving a total of 58 debtor countries and debt-service obligations amounting to $237 billion (Table 8).13 These recent agreements illustrate the continuing evolution of Paris Club rescheduling practices and the variety of terms and coverage creditors have used in tailoring debt reschedulings to the circumstances of individual countries. Twelve agreements involved middle-income countries. Of these, the agreements with Costa Rica and Guatemala covered arrears only and were considered exit reschedulings. The rescheduling agreements for Cameroon, Ecuador, Jamaica, Jordan, Morocco, and Peru incorporated longer maturities (applied since September 1990 in reschedulings for heavily indebted lower middle-income countries) and provided for comprehensive coverage of debt service. Argentina, Brazil, and Bulgaria obtained reschedulings on standard terms, incorporating, in the former two cases, a graduated repayments schedule with shorter grace periods but longer overall repayment periods. Official bilateral creditors also concluded a comprehensive rescheduling agreement with the Russian Federation. The remaining 16 rescheduling agreements involved low-income countries, all of which obtained enhanced concessions with typically comprehensive coverage.
|(Amount consolidated in billions of U. S. dollars)|
|Under Toronto terms||—||—||0.5||2.0||2.8||0.2||—||—|
|Under enhanced concessions||—||—||—||—||—||0.8||2.6||0.8|
|Cumulative total amount consolidated3||56.0||81.5||90.9||109.5||126.0||199.5||219.1||236.5|
|(Number of reschedulings)|
|Cumulative total number of reschedulings3||94||111||126||150||168||184||202||212|
|Cumulative total number of rescheduling countries3||40||42||43||50||52||55||56||58|
Over the past year, there has been a marked intensification of the trend toward multiyear consolidations on the basis of multiyear IMF arrangements. The consolidations for Argentina, Jamaica, and Peru covered a period of three years (in line with arrangements under the IMF’s extended Fund facility). Similarly, the consolidation periods for Benin, Burkina Faso, Ethiopia, Honduras, Mali, Mauritania, Mozambique, Tanzania, Togo, and Zambia all ranged between two and three years. In line with standard Paris Club practice, multiyear consolidations were tranched, with effectiveness of the second (or third) tranche linked, inter alia, to approval by the IMF Board of subsequent annual arrangements under the enhanced structural adjustment facility or structural adjustment facility or annual reviews under extended Fund facility arrangements, or under rights accumulation programs (Sierra Leone and Zambia).14
The move toward longer consolidation periods has contributed to a reduction in the frequency of Paris Club reschedulings over the recent past and an increase in the number of countries with rescheduling agreements in effect. Despite this, at the end of June 1993, only 20 of the 44 countries that require continued cash-flow relief had agreements in effect. Some countries are expected to obtain reschedulings in the near future on the basis of new IMF arrangements. In a number of other cases, discussions on an adjustment program that would allow the regularization of relations are still at an early stage. Finally, a few of the rescheduling countries have been accumulating arrears to creditors for several years.
Coverage and Subordination Strategy
Official bilateral creditors have been assisting countries with debt-servicing difficulties not only through debt rescheduling, but also through the provision of new financial assistance. For countries that require cash-flow relief on existing obligations, Paris Club creditors have been implementing a strategy of subordinating “old” loans to “new” credits in order to preserve the flow of new credits.
The heart of this subordination strategy has been the maintenance, since May 1984, of the cutoff date in all rescheduling agreements with IMF member countries seeking successive rescheduling. The cutoff date is established in the first rescheduling agreement. Debt-service payments on old (pre-cutoff date) loans are eligible to be consolidated under the first and subsequent agreements, whereas payments due on new (post-cutoff date) loans are not covered and must be serviced on schedule.
The strategy has been crucial to the continuation of both direct financial assistance (including assistance on concessional terms) and support in the form of guarantees or insurance for exports or other credits extended by the private sector. The recent innovations in debt reschedulings have reinforced this strategy as concessional reschedulings have maintained the clear distinction between old claims and new claims. The subordination strategy has been applied strictly in all recent Paris Club reschedulings to payments falling due over the consolidation period. Creditors have also required that any arrears on post-cutoff date debts be settled promptly, often as a precondition for a new rescheduling.
Paris Club creditors have also continued their policy of excluding from rescheduling short-term debt falling due during the consolidation period. The maintenance of, or increases in, short-term credit lines by official export credit agencies has been an essential element in the financial support for countries implementing adjustment programs. In consequence, debtor countries have generally not requested a consolidation of current debt service on these debts. However, creditors have agreed, on an exceptional basis, to consolidate arrears on short-term debts for first-time reschedulers or in subsequent reschedulings when short-term arrears turned out to be much larger than had been earlier estimated.
Another aspect of the strategy is the treatment of private sector claims that are not guaranteed by the debtor government. During the early 1980s, these claims were generally included in the consolidation, except for countries with convertible currencies through their membership in currency unions. During the past years, however, these claims have usually been excluded, and exclusion of private sector debt has now become the norm rather than the exception.
Creditors have agreed to comprehensive coverage of other pre-cutoff date debts. When the payments capacity of the debtor country was severely constrained, creditors had already moved toward 100 percent coverage of interest and principal payments on original maturities (not arising from previous reschedulings), including arrears. In many cases, debt service arising from previously rescheduled debt (PRD) accounts for the largest share of debt obligations falling due, reflecting in part the terms of previous consolidations. As debt-servicing difficulties persisted for many of the repeat reschedulers, it became increasingly necessary to re-reschedule previously rescheduled debt, especially for the low- and some lower middle-income countries.
This trend toward increasingly comprehensive coverage has been accompanied by finer distinctions among various subcategories of debts arising from previous reschedulings and re-reschedulings. The agreements have typically consolidated 100 percent of interest and principal payments (as well as arrears, where necessary) of debts covered under the agreements. In most cases, creditors have, however, excluded from coverage payments arising from the previous or past two reschedulings. It has also been standard practice to exclude from reschedulings debt service arising from previous reschedulings on concessional terms for low-income countries.
Evolution of Rescheduling Terms for Low-Income Countries
Official bilateral creditors have provided cashflow relief to a large number of low-income countries. These countries account for about half of the countries that have obtained Paris Club reschedulings but have been involved in two thirds of the rescheduling agreements. Generally, the reschedulings for these countries were more comprehensive in coverage than those for other debtors. However, given the protracted nature of their balance of payments problems, many countries experienced serious difficulties in adhering to the repayment schedules from previous agreements. Creditors increasingly recognized that the repeated application of standard terms over a long period did not provide an adequate response to the medium-term debt-servicing difficulties of the poorest and most heavily indebted countries.
In late 1988, creditors took a first step toward reducing the future debt-service burden resulting from successive reschedulings. Agreement was reached to implement a menu of options, “Toronto terms.” This menu includes elements of debt and debt-service reduction (Table A7). During 1988–91, these concessional rescheduling terms were applied in 28 rescheduling agreements, involving 20 debtor countries and a total amount consolidated of some $6 billion. Reschedulings under Toronto terms provided an average grant element of well over 20 percent for nonconcessional debt. There was also a slight increase in the concessionality over time as more creditors chose the most concessional option. These reschedulings provided substantial debt relief. Together with continued flows of concessional new financing, they led to an improvement in the debt situation of a number of low-income countries.
Creditors increasingly recognized, however, that the vast majority of low-income rescheduling countries required more far-reaching concessions for a sustained improvement in their debt situation. They also recognized that a continuation of the approach—covering only those debt-service payments falling due during a limited consolidation period—would in many cases require a long series of repeated reschedulings to bring about a substantial reduction in the debt-service burden over the medium term.
The main starting point for discussions on more far-reaching debt relief for the low-income countries was the U.K. “Trinidad terms” proposal of September 1990. The discussions intensified after the Heads of State and Governments of the Group of Seven at the London Summit in July 1991 agreed that additional debt relief measures were needed for the poorest countries on a case-by-case basis and called on the Paris Club to continue its discussions on how such measures could be implemented. The IMF’s Interim Committee and Development Committee in October 1991 further emphasized the importance of these deliberations.
The New Menu—Enhanced Concessions
In December 1991, Paris Club creditors reached agreement on the modalities of implementing deeper concessions for the low-income countries through a new menu of options that was designed to allow creditors to provide concessional debt relief while taking account of their varying institutional and budgetary constraints. The new menu contained a number of innovative features, including an approach to debt restructuring in two stages, which combine the flexibility of the flow approach during the adjustment period with the possibility of a later stock-of-debt operation that could provide a definitive resolution of the debt problem.
This new menu of “enhanced concessions” provides for a 50 percent reduction (in net present value terms) of debt service consolidated on non-ODA debts through two main options. Under the first option, debt reduction, 50 percent of the debt service consolidated is canceled; the remainder is rescheduled at market interest rates over 23 years with a graduated repayments schedule including a grace period of 6 years. Under the second option, debt-service reduction, consolidated debt service is rescheduled at reduced interest rates to reduce the present value by 50 percent. Principal repayments are graduated over a 23-year period with no grace period. The cash-flow implications under these two main options are broadly equal. There is also a variant of the debt-service reduction option that combines a lesser reduction of interest rates with a partial capitalization of moratorium interest, which also provides a 50 percent present value reduction.15 Consolidated debt service on ODA credits is rescheduled over 30 years, including a grace period of 12 years, at concessional ODA interest rates, entailing a substantial reduction in the net present value of debt. Finally, the menu also includes an option providing for long maturities but without concessions and provides for the possibility of debt conversions on a bilateral and voluntary basis.
The rescheduling agreements based on the new menu contain the provision that Paris Club creditors would be willing to consider the matter of the stock of debt after a period of 3-4 years. Creditors also continue to review the possibility of earlier stock operations. For such consideration, the debtor country must have fully implemented the earlier rescheduling agreements, obtained comparable debt relief from other creditors, and continued appropriate arrangements with the IMF. Creditors have emphasized that the application of concessions was to be limited to those poorest countries not in a position to service debts on commercial terms. The Agreed Minutes for concessional rescheduling refer, in particular, to very heavy debt-service obligations in conjunction with very low per capita income, chronic balance of payments problems, and the implementation of a strong adjustment program.
An important feature of the menu of enhanced concessions is its graduated repayment schedule, which avoids the humps at the end of the grace period of repayment terms under conventional reschedulings. Under this new schedule, debt-service payments on restructured debt in nominal terms increase at an annual rate of about 3 percent. With exports projected to increase at higher rates in nominal terms (which would be consistent with little or no growth in real terms), the debt-service burden on restructured debt could be expected to decline steadily over time. This would mean that these debts by themselves should not become cause for serious debt-servicing difficulties.
Implementation of the New Menu
To date, all 17 low-income countries that have concluded rescheduling agreements with the Paris Club since December 1991 have benefited from enhanced concessions (Table A10). Coverage of pre-cutoff date debts under the reschedulings was typically comprehensive, including arrears on debt covered by the agreement. For repeat reschedulers. debt service arising from previous reschedulings on nonconcessional terms was also covered. In a few cases, the agreements also provided cash-flow relief on debt service from previous reschedulings on Toronto terms, but without further concessions and over shorter repayment periods.
In these agreements on enhanced concessions, creditors agreed to cover all obligations due on pre-cutoff date debt (i.e., original maturities not arising from previous reschedulings) for a total of nearly $2 billion. In addition, creditors agreed to consolidate $2.4 billion of $2.7 billion due on previously rescheduled debt. This brought the total amount consolidated on enhanced concessions to $4.4 billion (close to the total $5.5 billion consolidated in 28 reschedulings on Toronto terms between late 1988 and late 1991). The average debt reduction under enhanced concessions has been about 46 percent, thus involving a debt reduction of about $2 billion in net present value terms.16 The reschedulings reduced actual payments on pre-cut-off date debt to some 6 percent of amounts due. Taking into account some $0.2 billion in moratorium interest, actual debt-service payments to Paris Club creditors were reduced to about $0.5 billion on an annual basis. In addition, countries made payments of about $0.5 billion due on post-cutoff date debt (Table 9).
|Arrears as of|
|Pre-cutoff date debt|
|Debt service due||1,895||2,848||4,744|
|Not previously rescheduled||1,047||989||2,036|
|Not previously rescheduled||1,045||989||2,034|
|Amount to be paid as percent of amount due||(7.6)||(5.3)||(6.2)|
|Not previously rescheduled||(—)||(—)||(—)|
|Post-cutoff date debt||214||278||492|
|Total debt service to be paid after consolidation||357||650||1,007|
Rescheduling Terms for Middle-Income Countries
The rescheduling terms for middle-income countries have depended on the country’s income level and extent of indebtedness. The coverage of debts rescheduled has reflected these countries’ wide variety of circumstances.
Lower Middle-Income Countries
In September 1990, Paris Club creditors agreed on a new set of rescheduling terms for lower middle-income countries. The new terms extended the standard maturities of 10 years (with 5 or 6 years’ grace) to 15 years (with a maximum grace period of 8 years) for commercial credits; and up to 20 years (with a maximum grace period of 10 years) for ODA credits. The agreements also specified that ODA debt would be rescheduled at concessional interest rates. While this had been the practice of most creditors in the past, it was not required under previous agreements. Eligibility for these terms is determined on a case-by-case basis taking account of the level of per capita income, the share of external debt owed to bilateral creditors in relation to that owed to commercial banks, and a number of indicators of the severity of the countries’ indebtedness. An innovative feature of the new terms was the provision for debt conversions on a voluntary basis in the form of debt-for-equity, debt-for-aid, debt-for-nature, and other debt-for-local-currency operations.17
Repayment terms applied to rescheduled current maturities of nonconcessional previously rescheduled debt have generally been the same as those granted on original maturities and creditors also continued to grant the same repayment terms for rescheduled arrears. Coverage of debts for the middle-income countries reflected these countries’ wide variety of circumstances. In two cases (Costa Rica and Guatemala), a rescheduling of arrears was sufficient; others required more comprehensive cashflow relief.
Since 1991, there have been 13 reschedulings incorporating the longer maturities for lower middle-income countries. These covered $9.6 billion of $10 billion due on original maturities and $6.2 billion of $8.7 billion due on previously rescheduled debt.18 After taking into account moratorium interest payments of $1.3 billion, actual debt service of these countries on Paris Club pre-cutoff date debt was reduced to $4.2 billion compared with $18.7 billion debt-service obligations falling due in that period (Table 10). Creditors also concluded comprehensive debt reductions and reorganizations with Poland and Egypt in April and May of 1991 (Box 3).
|Arrears as of|
|Pre-cutoff date debt|
|Debt service due||9,320||9,406||18,726|
|Not previously rescheduled||6,209||3,794||10,003|
|Not previously rescheduled||6,115||3,505||9,620|
|Amount to be paid2||12.4||18.8||15.6|
|Not previously rescheduled2||1.5||7.6||3.8|
|Post-cutoff date debt||1,272||2,905||4,177|
|Total debt service to be paid after consolidation3||2,431||5,943||8,374|
|On pre-cutoff date debt||(1,159)||(3,038)||(4,197)|
|Stock as of start of consolidation||56,981||—||56,981|
|Pre-cutoff date debt||44,043||—||44,043|
|Post-cutoff date debt||12,938||—||12,938|Box 3Paris Club Debt Restructurings for Egypt and Poland
In early 1991, Paris Club creditors concluded comprehensive debt restructuring agreements with Egypt and Poland. These agreements, considered exceptional, had four important features.
First, in contrast to previous Paris Club practice, the agreements covered the total stock of pre-cutoff date debt rather than consolidating debt service falling due over a limited period. In both cases, the debt restructuring covered about $30 billion.
Second, the agreements provided for a debt reduction of 50 percent (in net present value terms). Creditors could choose among three equivalent options: an out-right cancellation of debt by 50 percent, a reduction of interest rates, and a lesser interest rate reduction combined with a partial capitalization of moratorium interest at longer maturities (but no interest on capitalized moratorium interest).
Third, the implementation of the debt reduction was staged over three years. Some reduction became effective at the outset, with the remainder to take place at specified intervals provided certain conditions were met regarding the debtors’ implementation of IMF-supported adjustment programs. For Poland, creditors agreed to an immediate reduction of 30 percent to be followed by an additional 20 percent reduction after three years. For Egypt, creditors agreed to three stages: an immediate debt reduction of 15 percent, to be followed by an additional debt reduction of 15 percent in the second stage, and a final reduction of 20 percent. The agreements are subject to cancellation if conditions regarding the requirements of comparability of treatment of other creditors are not substantially fulfilled.
Fourth, the repayment schedules were specifically tailored to the circumstances of the two countries, taking into account both immediate cash-flow requirements and repayment capacity over the medium term. For the first three years, repayments were fixed at a constant percentage of scheduled interest payments on the (pre-reduction) stock of debt: 20 percent for Poland and 70 percent for Egypt, reflecting the latter’s higher initial payments capacity. Over the medium term, however, Egypt was granted a longer repayment schedule, with gradually rising payments over 25 years and over 35 years for concessional debt. The maturity for Poland was 18 years, with payments steeply rising toward the end of the period.
Other Middle-Income Countries
Standard terms continue to be applied for middle-income countries in the upper income range or where official bilateral creditors account for a small portion of the total debt. These terms have been applied to five countries since 1991. For these cases, Paris Club creditors consolidated nearly all of $7.9 billion due on original maturities but coverage of previously rescheduled debt was more limited ($8.2 billion of about $13.7 billion due). Taking into account moratorium interest of $1.6 billion, total actual debt-service payments on pre-cutoff date debt were reduced from $22.4 billion due to $7.9 billion (Table 11).
|Arrears as of|
|Pre-cutoff date debt|
|Debt service due||11,2592||11,132||22,3912|
|Not previously rescheduled||3,537||4,364||7,901|
|Not previously rescheduled||3,500||4,364||7,864|
|Amount to be paid3||33.2||23.1||28.1|
|Not previously rescheduled3||1.0||—||0.5|
|Post-cutoff date debt||296||2,426||2,722|
|Total debt service to be paid after consolidation||4,031||6,596||10,627|
|Pre-cutoff date debt||(3,735)||(4,170)||(7,905)|
|Stock as of start of consolidation||52,110||—||52,110|
|Pre-cutoff date debt||45,080||—||45,080|
|Post-cutoff date debt||7,030||—||7,030|
Official bilateral creditors meeting as the “Group of Official Creditors of the Former U.S.S.R.” concluded a rescheduling agreement with the Russian Federation in early April 1993. As part of the agreement, Russia accepted full responsibility for the foreign debts of the former Soviet Union. The rescheduling covered arrears and debt-service obligations falling due during 1993 of about $15 billion.
Recent Experience with Debt Restructurings Involving Official Bilateral Creditors Not Participating in the Paris Club
Countries that request reschedulings from Paris Club creditors in support of their arrangements with the IMF typically also have debt-service obligations to official bilateral creditors that do not participate in Paris Club reschedulings. Paris Club creditors require as a condition for reschedulings that debtor countries seek debt relief on comparable terms from other creditors.19 The IMF also has an interest in promoting agreements on these obligations because of its role in ensuring that relations between debtor countries and their creditors are conducted in an orderly manner and because the financing of IMF-supported programs usually requires appropriate relief on their obligations from all official bilateral creditors. The major official bilateral creditors that have not generally participated in the Paris Club include some Middle Eastern countries, some countries in the Western Hemisphere, and certain previously centrally planned economies (Eastern Europe, the former Soviet Union, and China).
This section first describes the policy of the Paris Club regarding comparability of treatment and then summarizes some of the agreements that have been reached between debtor countries and creditors outside the framework of the Paris Club. The experience of the last several years suggests that in most cases, where nonparticipating creditors have provided debt reschedulings on a bilateral basis, the agreements reached have been broadly in line with the terms granted by the Paris Club. The wide variations in the terms of the agreements, however, make direct comparisons with the terms applied by Paris Club creditors difficult. Moreover, agreements have not been reached in all cases.
Comparability of Treatment
A major objective of debt-rescheduling operations in the multilateral framework of the Paris Club has been to assure equitable burden sharing among different groups of creditors and between individual creditors. The Paris Club attaches great importance to the principle that all creditors should bear their part of the burden of financial support for a debtor country. Creditors that do not participate in reschedulings should not benefit unfairly from relief offered by participating creditors. For this reason, all Paris Club agreements contain clauses under which the debtor country agrees to seek terms comparable with those obtained in the Paris Club rescheduling from other creditors, including private creditors and suppliers. The provisions for debt relief from other official bilateral creditors are set out in a specific “most favored nation clause,” which requires the debtor not to extend more favorable treatment to nonparticipating creditor countries than that accorded to Paris Club creditors. The general policy applies to all creditors to which the rescheduling country has significant debt-service obligations with the notable exception of multilateral institutions, whose preferential status has long been accepted by official bilateral creditors.
In assessing whether action taken by nonparticipating creditors is comparable, Paris Club creditors are concerned not with the form that the debt restructuring takes, but rather with the effective relief provided in cash-flow terms.20 Also, in keeping with the underlying concern that all creditors should participate in financial support for the debtor country, Paris Club creditors have generally made some allowance in assessing comparability for continuing financial contributions by nonparticipating creditors. There is no presumption that the cutoff date established in the Paris Club Agreed Minute should apply to nonparticipating official bilateral creditors, but Paris Club creditors have generally accepted the exclusion from the comparability provisions of debt-service obligations arising from new credits if a specific cutoff date has been agreed between the debtor and the nonparticipating creditor and if the creditor continues to provide direct financial assistance to the debtor country concerned.
Approaches Taken by Nonparticipating Official Bilateral Creditors
Creditors that have not participated in Paris Club reschedulings have adopted a wide variety of approaches in bilateral agreements with debtor countries. In some cases, creditors have provided new financing to meet their obligations in a manner consistent with the Paris Club requirements of comparability. In most cases, however, creditors have negotiated rescheduling agreements. Reflecting the absence of an established institutional forum for negotiations, individual creditor countries have developed different approaches, which have then been adapted to the individual circumstances of debtors. Some approaches have been innovative and have resulted in agreements on terms that go beyond those agreed by the Paris Club, including substantial concessions and stock-of-debt reductions to low-income countries. Table A11 provides a listing of some recent bilateral debt-restructuring agreements concluded in parallel with Paris Club agreements.21
Latin American Creditors
Recent bilateral debt-restructuring agreements concluded by Latin American creditor countries in parallel with Paris Club agreements contained innovative features. Several creditors have explicitly provided for debt exchanges at a discount. In some cases, debtors were offered the option of buying the creditors’ debt to commercial banks at a discount on the secondary market and then exchanging it for official debt of an equivalent face value owed to the creditor. This approach was used by Mexico in the case of Costa Rica in 1988, and has since been used extensively by Brazil, notably in the cases of Bolivia, Costa Rica, and Guyana.
Latin American creditor countries have generally agreed to reschedule most credits to other Latin American countries that are not channeled through and serviced by multilateral payments mechanisms. For example, in addition to the rescheduling agreed between Mexico and Costa Rica described above, Mexico and Venezuela both rescheduled on non-concessional terms debts owed by Costa Rica in 1991 and by Honduras in 1992 and 1993, respectively. Venezuela has rescheduled on nonconcessional terms debts owed by Jamaica, in the period 1990–92, and by Guyana, in 1991.
Some creditors have also applied more innovative arrangements for low-income countries. For example, in 1989, Argentina and Bolivia reached agreement on the mutual cancellation of Bolivian debt to Argentina and Argentinean debt to Bolivia. This resulted in the effective forgiveness of 72 percent of Bolivia’s debt in 1992. Mexico and Venezuela agreed to a buy-back of debt owed by the Dominican Republic at a discount of 68 percent. A similar agreement was concluded between Brazil and the Dominican Republic in 1993. Guyana was able to secure, in 1989, reschedulings on concessional terms of debt owed to Trinidad and Tobago and to Barbados and other members of the Caribbean Multilateral Clearing Facility.
Finally, in the case of Nicaragua several Latin American creditors agreed to substantial debt cancellation. Under agreements reached in 1991, Columbia, Mexico, and Venezuela reached agreements that provided for debt cancellation equivalent to about 95 percent of the debt in net present value terms. Under the agreements with Mexico and Venezuela, repayment of debts will be made in 40 years, with the full face value of principal obligations being secured through a zero coupon bond. Payment of interest charges begins only in the seventh year, provided that Nicaragua’s exports have increased substantially. Resources to purchase the zero coupon bonds were obtained from the reactivation of partial financing of oil purchases from Mexico and Venezuela. A similar agreement is currently under discussion with Argentina.
Most of the outstanding loans made by Arab creditors are to countries in North Africa and sub-Saharan Africa. Arab creditors have generally been responsive to requests from these countries for reschedulings, and have on occasion agreed to reschedulings on concessional terms and to debt cancellations. For example, in 1990, Saudi Arabia canceled some $5.7 billion of debt owed by countries affected by the Gulf War, including $2.8 billion owed by Morocco and $2.3 billion owed by Egypt. Kuwait canceled $1.9 billion owed by Egypt, United Arab Emirates canceled $304 million owed by Egypt, and Qatar canceled $93 million owed by Egypt at this time. Moreover, Saudi Arabia also canceled in 1991 some $300 million in official credits owed by low-income countries in sub-Saharan Africa. More recently, Saudi Arabia and Kuwait have concluded individual reschedulings with some low-income African countries, including Burkina Faso, Mauritania, and Mali.
In recent years, China has agreed to reschedulings on highly concessional terms for a number of debtor countries, including conversion of payments into local currency. For example, the Chinese Government has agreed to a moratorium on debt-service payments from Mali, has repeatedly rescheduled loans to Guyana and Benin interest free, and has provided interest-free reschedulings for other countries.
Former Soviet Union
Progress on the very substantial outstanding debts owed by a number of rescheduling countries to the former Soviet Union has been slower as the uncertainties resulting from the transition in the former Soviet Union led to considerable delays in the initiation of discussions.22 While the Russian Federation (which has assumed the claims of the countries of the former Soviet Union) has now begun discussions with most of the countries concerned and has concluded a number of agreements, in many cases discussions are still at a preliminary stage. Moreover, agreements on debts owed to the countries of the former Soviet Union have been made more complex by unresolved issues of data verification and reconciliation as well as the fact that most of these debts are denominated in rubles but are subject to conversion at an exchange rate linked to a basket of currencies. This implies an exchange rate very different from the current market rate.
Reflecting these difficulties, only a few agreements have been finalized between the Russian Federation and rescheduling countries. Under a comprehensive agreement reached with Jordan in 1992, Jordan bought back at a discount (in cash and kind) debt from the Russian Federation with a face value of $614 million.23
In other cases, the Russian Federation has agreed to the continuation of rescheduling agreements reached between debtor countries and the countries of the former Soviet Union. For example, for Afghanistan, Mongolia, Mali, and the Lao People’s Democratic Republic, the Russian Federation has continued agreements for reduction or deferral of scheduled payments originally negotiated between the countries concerned and the former U.S.S.R.. In some cases, these agreements have implied substantial debt relief. For example, for Mali, the Russian Federation accepted a complete moratorium on debt-service payments made in 1992 and very limited payments in local currency to cover payments falling due in 1993. Negotiations are under way with other rescheduling countries that have substantial debts to the countries of the former Soviet Union, including Benin, Ethiopia, Mozambique, and Nicaragua.
Official Bilateral Debt Forgiveness Initiatives
This subsection reviews recent experience with official bilateral debt forgiveness initiatives. Over the past decade, there have been two distinct rounds of actions in this area. First, in response to the 1978 resolution of the United Nations Conference on Trade and Development (UNCTAD), a number of creditors canceled ODA debts of the least-developed countries and provided all new ODA to these countries in the form of grants. Some $3 billion was canceled under this initiative through 1988. Over two thirds of the total amount was owed by developing countries in sub-Saharan Africa. Donor countries acting in response to the resolution included Canada, Denmark, Finland, France, Germany, the Netherlands, Sweden, Switzerland, and the United Kingdom.
During 1985–91, the most recent years for which data are available on a consistent basis, the total amount of debt cancellations by official bilateral creditors totaled $26.0 billion (Table A12). These debt cancellations have all been implemented on a purely bilateral basis in contrast to the multilateral reschedulings by Paris Club creditors. Countries benefiting from these initiatives have included both rescheduling countries and those that have avoided debt-servicing difficulties.
Debt Forgiveness Initiatives in 1989–90
A second round of debt forgiveness, focused on heavily indebted countries, started in 1989. In contrast to the first round, the more recent cancellations have typically been linked to debtor country policy performance. They covered mostly ODA credits extended in the more recent past, and in some cases other loans made or guaranteed by creditor governments; eligibility for debt forgiveness was broadened to other low-income and some middle-income countries; debt conversion mechanisms were often included. Countries benefiting from these initiatives have included both rescheduling countries and countries that have avoided debt-servicing difficulties. Many of the initiatives were directed at heavily indebted low-income sub-Saharan African countries:
In May 1989, the Government of France announced that it would cancel ODA debts owed by 35 low-income African countries. The initiative covered debts contracted before the end of 1988 with a face value of $3.1 billion.
In 1988–89, the Government of Germany undertook cancellation of ODA credits with a face value of some $1.4 billion. This initiative covered loans to least-developed countries and other low-income African countries and also included arrears that had not been covered in the previous initiatives.
In July 1989, the Government of the United States announced its intention to forgive some $500 million of ODA loans to certain low-income African countries, and to provide future ODA to these countries on a grant basis. The cancellations were to be tranched and conditioned on implementation of structural adjustment programs supported by the IMF and the World Bank.
In July 1989, the Government of Belgium announced forgiveness of some $330 million of bilateral official and officially guaranteed credits to several African countries.
In the second half of 1989, the Government of Canada canceled some $570 million of ODA loans to 13 sub-Saharan African countries, while continuing the policy of providing ODA on a grant basis only.
There were also initiatives in 1990 for countries outside of sub-Saharan Africa including the following:
In March 1990, the Government of Canada announced its intention to seek the cancellation of some $150 million of ODA credits that had been extended to 11 countries in the Caribbean region.
In November 1990, the Government of Germany agreed to cancel about $500 million of ODA credits to Poland and to convert a further $350 million into domestic currency funds to finance investment projects.
In the second half of 1990, the Government of the United States canceled some $6.6 billion of credits that had originally been extended on commercial terms to Egypt under certain bilateral assistance programs, some of which were in arrears. Prior to cancellation, the terms on these credits had been adjusted to those on ODA credits.
More Recent Initiatives
Several creditor countries have recently announced further debt-reduction initiatives that involve various forms of debt conversions, cancellations or buy-backs. Four initiatives by the governments of the United States, Canada, Switzerland, and France are described below. In all cases, the implementation of the initiatives is linked to appropriate policy performance by debtor countries.
The U.S. Enterprise for the Americas Initiative (EAI), announced in June 1990, aims to enhance development prospects through action in the areas of trade, investment, and debt. Under the EAI, debts owed by developing countries in the Western Hemisphere to the U.S. Government can be reduced provided that the country (1) is undertaking macroeconomic and structural reforms; (2) is liberalizing its investment regime; and (3) has concluded a debt-restructuring agreement with its commercial bank creditors.
The initiative provides for a reduction of concessional debts, including loans disbursed under programs of food assistance (Public Law 480) and development assistance (Agency for International Development (AID)). Countries benefiting from debt reductions may make interest payments on the remaining debt in local currency if they negotiate “Framework Agreements” under which these resources would be committed to environmental or child development projects. The remaining principal is to be repaid in U.S. dollars. In addition, some part of the nonconcessional debt owed to U.S. Eximbank and the Commodity Credit Corporation may either be bought back by the debtor or used to facilitate debt-for-equity, debt-for-nature, or debt-for-development swaps.
Under the EAI, the United States has reduced about $875 million of the bilateral foreign assistance and food assistance obligations of Argentina, Bolivia, Chile, Colombia, El Salvador, Jamaica, and Uruguay. If bilateral framework agreements have been negotiated, $154 million in local currency resources could be channeled to environmental and child survival projects in these countries. The U.S. Congress has authorized the reduction of AID debt, and swaps of nonconcessional loans; and appropriations have been obtained for a further $90 million for EAI debt reduction in fiscal year 1993.
At the 1992 “Earth Summit” in Rio de Janeiro, the Canadian Government proposed its Debt Conversion Initiative for Sustainable Development. Under this initiative up to $145 million of ODA loans owed by developing countries in the Western Hemisphere can be converted into local currency funds to help finance environmental and other sustainable development projects. Countries eligible for debt relief under this initiative include Brazil, Colombia, Costa Rica, Cuba, Dominican Republic, El Salvador, Guatemala, and Peru. Debt conversions will be negotiated and implemented on a case-by-case basis. They will be subject to specific conditions related in particular to the promotion of human rights and democratic principles, as well as to economic policies. The schedule of payments in local currency is to be determined on the basis of a country’s capacity to pay and of the financing requirements of the projects being supported. Provision will also be made to safeguard scheduled payments against erosion of their real value.
The Swiss Debt Reduction Facility became operational in January 1991, with an original endowment of Sfr 100 million, which was later expanded to Sfr 500 million. The facility can be used for debt relief measures over a period of five to seven years. It is estimated that the facility will help eliminate debts of around $1.8 billion. The aim of the facility is to support highly indebted low-income countries that have established strong reform records, provided they (1) have acceptable conditions of governance; (2) have adequate debt-management systems; and (3) implement programs supported by multilateral financial institutions. The 45 countries eligible for debt relief under this facility include the least-developed countries and other developing countries that either obtain Paris Club reschedulings on enhanced concessional terms or are recipients of Swiss ODA that has been rescheduled under the Paris Club framework.
The resources of the facility can be used for a wide range of measures, including buy-backs of officially insured Swiss export credits and commercial noninsured debt, contributions to the clearing of arrears, and the financing of payments to the multilaterals. Alternatively, debt cancellation can be linked to the creation by the debtor government of a local currency counterpart fund that would be used to finance development projects.
In March 1992, the facility contributed $42 million to a buy-back from Swiss exporters (95 percent participated) of the noninsured portion of officially supported claims on 22 mostly African countries; this retired debt of a face value of $0.2 billion. The total value of debt eliminated under this operation, including the portion guaranteed by the Swiss export credit agency that will be written off as it falls due, is estimated at $1 billion.
The French Government announced a new debt initiative at the 1992 Franco-African Summit held in Libreville (Gabon), known as the Libreville Debt Initiative, under which France would cancel or convert ODA debts through a debt conversion fund of FF 4 billion set up at the end of 1992. The initiative applies to Cameroon, the Congo, Côte d’Ivoire, and Gabon. The cancellations would occur as counterparts to the development projects included in the government investment programs and approved by the Caisse Française de Developpement (CFD). These projects can be in the areas of environmental protection, social and educational development, productivity improvements, and agricultural development. Individual investment projects eligible under the initiative may reach up to FF 100 million.
Debt Conversions Under Paris Club Agreements
In September 1990, Paris Club creditors introduced in debt-rescheduling agreements for lower middle-income countries a provision for debt conversions on a voluntary basis in the form of debt-for-equity, debt-for-aid, debt-for-nature, and other debt-for-local currency operations. The amount of debt that could be converted under this provision was limited to the greater of $10 million or 10 percent of consolidated commercial credits; however, 100 percent of ODA and direct government loans could be included. The provision was subsequently included in the new menu of enhanced concessions.
To date, debt-conversion agreements have been concluded by France and the United Kingdom. The agreement between France and Egypt, concluded in March 1993, provides for a conversion of bilateral claims into investments. The conversions are to take place in several tranches, each of which will be subject to competitive bidding from investors. In the projects approved by the authorities in the first tranche, claims worth FF 550 million were auctioned. The Export Credit Guarantee Department (ECGD) of the United Kingdom has concluded debt conversions with Egypt, Nigeria, and Tanzania, mostly for developmental, health, and education projects.
While debt-conversion agreements are a potentially useful option for debtors and creditors, experience has shown the need for caution in approaching such schemes. Unless financed through privatization proceeds, conversion schemes typically imply the creation of domestic debt that can be costly to service or is monetized, and thus can undermine macroeconomic stabilization. Moreover, once all the features of the scheme are fully taken into account, such schemes may involve the provision of a substantial implicit subsidy to the investor. Finally, even with a large subsidy, the true additionality of the new investment may be dubious. Governments need to be careful to ensure that such schemes do not undermine macro-economic policies, are transparent, and avoid excessive subsidization.
Multilateral official debt renegotiations that took place through 1990 and Paris Club general practices are described in Michael G. Kuhn, with Jorge P. Guzman, Multilateral Official Debt Rescheduling: Recent Experience, World Economic and Financial Surveys (Washington: International Monetary Fund, November 1990).
The new menu has yet to find a commonly accepted name. This paper uses the term “enhanced concessions.” The menu has also been called “enhanced Toronto terms.” While the term “Trinidad terms” has been used by some, the term has been misleading, since Trinidad terms refer to an earlier proposal by the then Chancellor of the Exchequer Major in Trinidad (calling for a flat two thirds reduction of the stock of pre-cutoff date debt). This proposal was not implemented, though the Paris Club menu incorporates some of its features.
The determination of eligibility for concessional terms has been made on a case-by-case basis. The country classification differs from those used by the Organization for Economic Cooperation and Development (OECD) and the World Bank.
Table A9 provides a complete listing of Paris Club rescheduling agreements since 1976. The starting date of 1976 is to some extent arbitrary, since multilateral official debt reschedulings through the Paris Club date back to 1956, although the pattern of reschedulings has changed considerably. The ten countries that concluded reschedulings during 1956–75 all resumed normal relations with creditors after a brief series of reschedulings. Most of the countries that have rescheduled since 1976, however, have remained in a rescheduling situation almost without interruption. Both creditors and debtors thus frequently refer to specific exercises by the numbers as indicated in Table A9.
For information on the various facilities of the IMF and how they work, see Financial Organization and Operations of the IMF, IMF Pamphlet Series, No. 45 (Washington: International Monetary Fund, 2d ed., 1991).
No interest accrues on capitalized moratorium interest.
The average debt reduction on non-ODA debt is less than 50 percent because the menu also contains a nonconcessional option. In May of 1993, the U.S. administration announced that it would request congressional authorization and budgetary appropriations to allow the United States to choose a concessional option in Paris Club reschedulings on enhanced concessions.
In practice, creditors have limited the use of swaps to the higher of $10 million or 10 percent of consolidated commercial credits, but no restrictions have been set on ODA and direct government loans.
Côte d’Ivoire, Dominican Republic, Jamaica, Nigeria. Peru, and the Philippines in 1991; Cameroon, Ecuador, Jordan, and Morocco in 1992: and Guatemala, Jamaica, and Peru in 1993. Congo, El Salvador, Honduras, Morocco, and Poland benefited from the longer maturities during 1990, after these repayment terms were adopted by Paris Club creditors in September of that year. The debt-restructuring and debt-reduction agreements with Egypt and Poland are excluded from these figures.
Paris Club negotiations are open to all governments that have extended credits to the debtor country and that are prepared to accept the policies and procedures of the Club. The regular participants tend to be creditors from industrial countries, though a number of developing country creditors have participated in recent reschedulings.
Paris Club creditors have recognized the diverse institutional constraints faced by other official bilateral creditors and that both rescheduling and refinancing operations can be used to provide comparable debt relief. However, Paris Club creditors have emphasized that refinancing loans must provide untied cash relief over the relevant consolidation period. Thus, disbursements from tied project financing or linked directly to imports do not qualify as refinancing loans for comparability purposes.
In many cases, obligations due to official bilateral creditors that do not participate in Paris Club reschedulings are small, and the coverage in this table is not exhaustive. However, it does cover most of the major agreements that have been reached since 1987.
Available information on discussions between other former countries of the Council of Mutual Economic Assistance (CMEA) and their rescheduling country debtors is limited, but it appears that difficulties and delays have also been experienced in these cases, and that few agreements have been concluded with other former CMEA countries. Where such agreements have been reached they have often been based on debt-conversion schemes.
The Russian Federation has also concluded a comprehensive rescheduling agreement with India, with part of India’s debt to the former Soviet Union being rescheduled on nonconcessional terms, and part of it being rescheduled on highly concessional terms, involving an even stream of payments over 45 years.