Chapter

IV Recent Developments in New Financing from Official Bilateral Sources

Author(s):
International Monetary Fund
Published Date:
January 1994
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Official bilateral creditors and donors are by far the most important source of financing for most developing countries. Recent developments are marked by three broad trends. First, aggregate gross disbursements increased rapidly by an average of about 11 percent a year between 1986 and 1991. Second, much of this increase took the form of ODA flows to low-income countries: bilateral ODA was the most important source of direct external financial assistance for most low-income countries. Third, new flows to both low- and middle-income countries were increasingly linked to the implementation of appropriate economic policies. Countries that pursued adjustment and reform programs and maintained orderly relations with creditors, including through reschedulings, continued to obtain large amounts of external financial support. Resources were less readily available to countries with mixed records of policy implementation.

Instruments

Official creditors provide financial support to developing countries through a wide range of instruments. Bilateral financial assistance has taken the form of direct financing (grants and new credits, often on concessional terms) as well as indirect support in the form of insurance cover and other guarantees extended by official export credit agencies for private sector loans. Bilateral creditors and donors also provide capital contributions to multilateral institutions, guarantee these institutions’ borrowing on capital markets, and have provided cofinancing in conjunction with disbursements by multilateral institutions. Finally, as described in Section III, bilateral creditors have provided cashflow relief in support of countries’ adjustment programs.

This wide variety of instruments and channels for official financial support has allowed official creditors to tailor the scope and terms of external financial assistance closely to developing countries’ circumstances and to move promptly in support of countries’ macroeconomic and structural adjustment programs. Official assistance is frequently coordinated by Consultative Groups. Such groups have traditionally met to arrange financing for low-income countries, but in the recent past similar mechanisms have been used to coordinate financial assistance to economies in transition in Central and Eastern Europe and in the countries of the former Soviet Union.

There are important conceptual and coverage differences between the creditor-based (OECD) and debtor-based (World Bank) data sources for official bilateral finance (Box 4). Neither source provides a comprehensive coverage of official resource flows to developing countries. The OECD system excludes some creditors, while the World Bank system excludes certain flows. As a consequence, no single picture of official bilateral flows to developing countries exists. This section draws largely on data compiled by the OECD and the World Bank. For the section on Officially Supported Export Credits, unpublished data compiled by the Export Credit Group of the OECD and the Berne Union have been used.

Box 4Data Sources for Official Bilateral Financing Flows

The variety of instruments used by official bilateral creditors makes a comprehensive analysis of bilateral financial flows a complex undertaking. Caution is also called for in interpreting the data because of systemic differences in the collection of statistics. World Bank data are derived from debtor-based information systems and are published annually in World Debt Tables; military debt is excluded. Data from the Organization for Economic Cooperation and Development (OECD) include comprehensive statistics on gross and net disbursements published in the Geographic Distribution of Financial Flows to Developing Countries, Preliminary estimates of aggregate net disbursements are released in press communiqués for the Report of the Chairman of the Development Assistance Committee of the OECD (DAC). The comprehensive individual country data for 1991 became available only in late 1992, while the preliminary aggregate estimates for 1992 were released in June 1993. Country groups used in the OECD reports are different from standard country classifications used in the IMF. For OECD country listings, see Table A8.

For officially supported export credits, debtor reporting systems classify disbursements from officially insured credits as disbursements from banks or suppliers. The OECD creditor reporting system provides data on creditors’ exposure, including contingent liabilities under insurance contracts, but data are generally available only with a considerable time lag. More recent data are available on a commitment basis to a number of debtor countries; these data typically include all future interest payments. Data on officially supported export credits are published in Statistics on External Indebtedness: Bank and Trade Related Non-Bank External Claims on Individual Borrowing Countries and Territories prepared jointly by the Bank for International Settlements (BIS) and the OECD.

Recent Developments

Total net bilateral disbursements by Development Assistance Committee (DAC) member countries (the OECD system) are estimated to have increased in 1992 to $47 billion, from $46 billion in the previous year, and again accounted for about two thirds of ODA flows from all sources, including multilateral institutions (Table 12). Bilateral ODA remained broadly constant at $41 billion during 1992 (87 percent of total official bilateral financing to developing countries—the same percentage as in 1985). The share of bilateral ODA channeled to low-income countries, however, continued to increase, and reached 60 percent in 1992, compared with 52 percent in 1989 and 45 percent in 1985 (Table 13).

Table 12Official Financing Flows to Developing Countries, 1985–921
1985199019911992219851990199119922
(In billions of U. S. dollars)(In percent of total)
Total official flows net44.469.470.172.3100.0100.0100.0100.0
By category
Bilateral28.646.046.247.364.466.366.065.4
Official development assistance (ODA)324.839.241.341,355.956.559.057.1
Other3.86.84.96.08.39.77.08.3
Multilateral15.823.423.925.035.133.734.034.6
ODA38.113.216.117.018.219.223.023.5
Other7.110.27.88.016.014.711.011.1
By income group4
Low-income20.537.540.342.246.254.057.658.4
Middle-in come17.524.721.322.139.435.630.430.6
Memorandum items
Total net flows578.2130.5134.0175.6
Official in percent of total56.853.252.241.2
Bilateral ODA as percent of bilateral86.785.289.487.3
Multilateral ODA as percent of multilateral51.356.467.368.0
Source: Organization for Economic Cooperation and Development (OECD).

Official development finance including grants and bilateral and multilateral loans, and excluding export credits.

Preliminary.

Excluding debt forgiveness of non-ODA claims in 1990–92.

OECD income group classification. Unallocated amounts (mostly ODA) account for the difference between the sum of the components and the total.

Including official development finance, export credits, foreign direct investment, international bank and bond lending, grants by nongovernmental organizations, and other private flows.

Source: Organization for Economic Cooperation and Development (OECD).

Official development finance including grants and bilateral and multilateral loans, and excluding export credits.

Preliminary.

Excluding debt forgiveness of non-ODA claims in 1990–92.

OECD income group classification. Unallocated amounts (mostly ODA) account for the difference between the sum of the components and the total.

Including official development finance, export credits, foreign direct investment, international bank and bond lending, grants by nongovernmental organizations, and other private flows.

Table 13Distribution of Net ODA Disbursements to Developing Countries by Income Group, 1985–92
198519861987198819891990199119921
Total net official development assistance (ODA)2

(in millions of U.S. dollars)
32.939.143.847.548.652.657.458.3
Of which share (in percent)3
Middle-income countries30.127.926.723.623.527.824.924.5
Low-income countries52.054.253.457.156.861.460.163.0
Bilateral net ODA (in millions of U. S. dollars)24.829.833.836.436.339.241.341.3
Of which share (in percent)3
Middle-income countries36.332.931.427.226.933.229.529.1
Low-income countries45.247.346.150.851.856.956.959.8
Memorandum item
Share of multilateral in total net ODA24.623.822.823.225.225.528.029.2
Sources: OECD; and IMF staff estimates.

Preliminary estimate.

Excludes intra-developing country reserve flows.

The residual includes unallocated amounts that exist when geographical distribution of flows is unavailable or not possible, for example, in the case of foreign-financed regional projects, scholarships in the donor country, etc. These amounts declined as a proportion of total net disbursements from 18 percent in 1985 to 13 percent in 1992.

Sources: OECD; and IMF staff estimates.

Preliminary estimate.

Excludes intra-developing country reserve flows.

The residual includes unallocated amounts that exist when geographical distribution of flows is unavailable or not possible, for example, in the case of foreign-financed regional projects, scholarships in the donor country, etc. These amounts declined as a proportion of total net disbursements from 18 percent in 1985 to 13 percent in 1992.

In 1991, total gross bilateral disbursements to all developing countries increased by 8.5 percent to around $85 billion (Tables A13 and A14),24 while ODA flows increased by over 23 percent, to $54 billion. Both ODA loans and grants recorded strong growth while other official bilateral credits and loans declined for a second consecutive year.

Recent years witnessed important changes in the composition of official bilateral flows. For the low-income countries, concessional debt restructuring and ODA debt cancellations accompanied a continued increase in the concessionality of new financial flows as official bilateral creditors shifted new flows further toward pure grant financing and away from debt-creating flows. This was particularly evident for the least-developed countries. For this group, total flows have remained broadly unchanged at $8.5 billion, but total grants increased by 9 percent to reach $7.5 billion while disbursements of ODA loans contracted by 39 percent to less than $1 billion (Table A13). For other low-income countries, a sharp increase in total official flows, from $27 billion in 1990 to $31 billion in 1991, reflected a near doubling in ODA loan disbursements to $12 billion, mostly accounted for by loan disbursements from the United States and Japan to Egypt.

Official bilateral flows to the lower middle-income countries, increased by some 5 percent (Table A13). Here, too, the composition shifted toward grants and ODA loans, which together increased by 17 percent to $7.5 billion. In contrast, reported flows to upper middle-income countries recorded a sharp fall in non-ODA official loans. Official bilateral flows to all middle-income countries declined by 2 percent in 1991 to $33 billion, partially reversing the upward trend of recent years. Official bilateral financing of middle-income (and especially upper middle-income countries) continued to include large flows of officially supported export credits, and disbursements under cofinancing arrangements with multilateral institutions (discussed below).

There were also marked changes in the geographical distribution of gross official bilateral flows in 1991 (Table A14). The decline in total financing to sub-Saharan Africa, for example, reflected in large part the impact of uneven policy implementation as evidenced by the emergence of arrears, particularly in Cameroon, Côte d’Ivoire, and Kenya. The sharp increase in disbursements to North Africa and the Middle East reflected exceptional disbursements of concessional financing to countries affected by the Gulf crisis.

Official Bilateral Financing to Rescheduling Countries

Official bilateral creditors have continued to provide extensive new disbursements to countries that required debt reschedulings. A crucial factor in enabling financial support to continue despite debt-servicing difficulties has been the maintenance of fixed cutoff dates in Paris Club rescheduling agreements. Gross flows to all rescheduling countries reached $39 billion in 1991, an increase of 22 percent since 1989 (Table 14). While the figures for 1991 may overstate the underlying level on account of the exceptional flows in connection with the Gulf crisis, over the period 1989–91, official bilateral flows were equivalent to about 44 percent of these countries’ own foreign exchange earnings from exports and were almost three times as large as disbursements by multilaterals.

Table 14Official Financing Flows to Low-Income Rescheduling Countries, 1989–91
Total Official

Bilateral Flows1
Share of ODA

Total Bilateral Official2
Bilateral

ODA

Flows
Memorandum

Multilateral

Disbursements3
1989199019911989199019911989–911989–91
(In millions of U. S. dollars)(In percent)(In percent of exports)4
Total low-income8,05610,45010,9927688927023
Angola22423513140669231
Benin23415117167871004321
Bolivia3823718288498945024
Burkina Faso2292702849192947432
Central African Republic10310911810094864832
Chad1281801381001001006730
Equatorial Guinea262014741001005118
Ethiopia4585614858791947121
Gambia, The211675628871003513
Guinea2081802329885742315
Guinea-Bissau73654872959915584
Guyana361422198045713027
Honduras2403906758598943310
Liberia1607127789
Madagascar2504464228395866828
Malawi2142512388990945630
Mali304313291100100988624
Mauritania15910212710098962612
Mozambique5507378661001009422729
Nicaragua1912699269610010014015
Niger2242713149899887014
Senegal565791532999890458
Sierra Leone965367827599423
Somalia3352591168610010024242
Sudan460409385100100967829
Tanzania73292089695979814333
Togo121184154958784207
Uganda21528329575909910174
Zaïre6121,4191,0207550603011
Zambia5038418706391794812
Memorandum item
All rescheduling countries31,99234.57839,1586275804415
Sources: OECD; World Bank Debtor Reporting System; and IMF staff estimates.Note: ODA denotes official development assistance; DAC denotes Development Assistance Committee of the OECD.

From DAC countries only, including grants, and gross disbursements of ODA loans, and official and officially guaranteed export credits. In 1990 and 1991 include large debt forgiveness and debt reorganization.

Arithmetic average of individual country ratios.

Excluding use of IMF credit.

In percent of exports of goods and services. Arithmetic average of annual ratios in 1989–91.

Sources: OECD; World Bank Debtor Reporting System; and IMF staff estimates.Note: ODA denotes official development assistance; DAC denotes Development Assistance Committee of the OECD.

From DAC countries only, including grants, and gross disbursements of ODA loans, and official and officially guaranteed export credits. In 1990 and 1991 include large debt forgiveness and debt reorganization.

Arithmetic average of individual country ratios.

Excluding use of IMF credit.

In percent of exports of goods and services. Arithmetic average of annual ratios in 1989–91.

Official bilateral flows to low-income rescheduling countries witnessed a particularly sharp increase averaging 17 percent a year over 1989–91, to reach $11 billion in 1991 (Table 14). The importance of these flows can be gauged by the fact that they were equivalent to 70 percent of these countries’ export earnings over the period. Moreover, there was a pronounced shift toward more concessional financing as 92 percent of official bilateral flows qualified as ODA in 1992, compared with 76 percent two years earlier. A number of countries with IMF-supported adjustment programs experienced particularly marked increases in official bilateral flows between 1989 and 1991. During this period, these flows more than doubled for Bolivia, Guyana, Honduras, and Nicaragua and increased by more than 50 percent for Madagascar, Mozambique, and Zambia.

The combination of appropriate economic policies and increased availability of concessional financing has enabled several low-income rescheduling countries to make some progress toward external viability as noted in the recent review of experience under ESAF arrangements.25 This progress is attributable to both concessional debt relief (cancellation of existing debts as well as concessional rescheduling) and to strong export growth. However, as underlined in Section II, progress has not been sufficient to enable these countries to graduate from the rescheduling process. In countries where program implementation was uneven and where export growth was adversely affected by external factors, the impact of concessional debt relief on scheduled interest payments was generally offset by the burden of new debt, including arrears. Furthermore, slippages in adjustment programs or project implementation tended to delay disbursements of aid, thereby leading to a hardening of average financing terms.

Officially Supported Export Credits

Following the onset of the debt crisis, there was a precipitous decline in export credit activity, and new export credit business remained low throughout the 1980s.26 In 1989, however, lending activity to middle-income countries started to pick up again, and recent data indicate that this upswing has continued.27 Data compiled by the Export Credit Group of the OECD suggest that the net flow of export credits to middle-income countries increased by 17 percent in 1991, although lending to low-income countries declined by about 2 percent. Preliminary data for 1992 confirm the continued growth in export credit activity. The main reason for this upturn was the volume of new credits extended to countries in Eastern and Central Europe.

The Berne Union survey on the commitments of export credit agencies to selected developing countries28 shows that agencies’ medium- and long-term exposure remained broadly unchanged during 1992, while short-term business expanded by over 60 percent. The data on the flow of new commitments show that Berne Union agencies’ new business is concentrated in middle-income countries that have either avoided, or successfully addressed, debt-servicing difficulties, including, for example, Argentina, the Czech Republic, Hungary, Mexico, the Philippines, and Venezuela. Countries with uneven policy records, particularly as regards payments arrears, have generally received only modest new commitments. The significant new commitments to low-income countries (particularly China, India, and Indonesia) reflect, in part, the commercial element of mixed (or “tied aid”) credits (discussed below). Finally, the Berne Union data also record large new commitments to the Russian Federation.

The upswing in export credit activity that began in 1989 now seems to be well established, and while many middle-income countries are emerging from debt-servicing difficulties and are regaining access to capital markets, further increases in officially supported export credits appear likely. Export credit agencies’ involvement could, however, be constrained by a number of factors. The demand for long-term financing for large-scale infrastructural projects will be limited by reductions in public sector investment budgets. The scale and composition of private sector investment has tended to require more modest external financing of somewhat shorter maturities. Moreover, export credit agencies have become more commercially oriented based on a more stringent evaluation and management of risk, a tendency that has been reinforced by the privatization of a number of agencies. Finally, agencies have generally taken the view that highly concessional flows are more appropriate for low-income countries than normal export credits.

Cofinancing

In recent years, official bilateral creditors (including export credit agencies) were the largest source of cofinancing with multilateral creditors. They provided over two thirds of cofinancing by the World Bank during its fiscal years 1992 and 1993. The largest share was provided by Japan;29 substantial contributions were also made by the United States and several European countries.

In the fiscal years 1992 and 1993 together, the World Bank approved 234 projects for cofinancing with an average total value per year of $12 billion, compared with $9 billion in the 1991 fiscal year.30

This reflected mostly a surge in 1992 in World Bank operations in sectors such as power and water, which attract cofinancing. The decline in such infrastructure projects, together with reductions in the aid budgets of several donors in the fiscal year 1993, led to a 15 percent fall in the total value of projects cofinanced with the World Bank.

The second largest source of cofinancing of World Bank operations was cofinancing by other multilaterals. During the World Bank’s fiscal years 1992 and 1993, cofinancing by the Inter-American Development Bank (IDB) amounted to nearly $3 billion and accounted for 32 percent of cofinancing in this category. The recent increase in IDB cofinancing reflects the introduction of sector lending into its lending program. Cofinancing by the Asian Development Bank (AsDB) usually takes the form of parallel financing of separate projects within a sector rather than cofinancing of a single project. Cofinancing by the AsDB increased to around $400 million last year. Cofinancing by the African Development Bank (AfDB) of World Bank projects increased from $170 million in 1985 to $525 million in 1991 and focused on several key programs, such as women in development, private sector development, and regional economic cooperation. A new cofinancing program (Export Credit Loan Arrangement Technique) has recently been introduced by the European Bank for Reconstruction and Development (EBRD). This program offers several advantages to export credit agencies and seeks to streamline the complex procedures and negotiations entailed in more conventional cofinancing techniques. While private creditors’ involvement in cofinancing has increased, it remains small.

Mixed Aid Finance

“Mixed credits” encompass all forms of commercial tied-aid credits that have a concessional element—as defined by the OECD Consensus on officially supported export credits (the “Consensus”)—produced either by mixing grants and commercial loans or by direct subsidies on commercial loans. To limit the general subsidization of exports through export finance, export credit agencies have agreed to be bound by the provisions of the Consensus that established guidelines concerning financial terms and also set minimum concessional element requirements for mixed credits. These guidelines have gradually eliminated concessionality for richer countries and raised the minimum concessional element for poorer countries (see Box 5).

Box 5Guidelines for Officially Supported Export Credits

The Arrangement on Guidelines for Officially Supported Export Credits, established in 1978, initially followed the Development Assistance Committee (DAC) criterion for determining the concessional element of mixed credits, using a concept of the grant element calculated at a flat 10 percent discount rate. This gave countries with low interest rate currencies a competitive advantage over countries with high interest rate currencies; as nominal interest rates were low, only small interest subsidies were required for loans to yield a high grant element. Similarly, for credits that mixed concessional and commercial loans, comparatively small portions of concessional assistance were needed to meet the required grant element. To redress this situation, the participants in the consensus decided in June 1986 to move in two steps (July 1987 and July 1988) to a formula for calculating the concessional element of aid credits, now to be called the “concessionality level.” The formula gives 75 percent of the weight to a market-related rate and a 25 percent weight to the flat 10 percent discount rate, and thus more closely reflected market interest rates. In addition, the minimum concessionality level for Category III (low-income) countries was raised to 50 percent, and for Category II (middle-income) countries, to 30 percent on July 15, 1987 and to 35 percent a year later (except for ships and untied aid).

The new rules agreed on February 15, 1992 specify the following.

  • For “better-off developing countries: Tied aid financing shall not be extended to countries whose per capita GNP makes them ineligible for 17 or 20 year loans from the World Bank.”

  • “Commercial viability: Tied and partially untied concessional or aid credits, except for credits to LLDCs (Least Developed Countries), shall not be extended to public and private projects that normally should be commercially viable if financed on market or Arrangement terms.”

  • The Participants also agreed to two key tests for evaluating whether projects are eligible for aid financing:

    • whether the project lacks capacity, with appropriate pricing determined on market principles, to generate cash flow sufficient to cover the project’s operating costs and to service the capital employed, or

    • if it is reasonable to conclude, based on communication with other participants, that it is unlikely that the project can be financed on market or Arrangement terms.

An important development was the agreement on February 15, 1992 among Consensus participants to amend the guidelines on tied-aid credits to “better-off developing countries.” The new rules limit the use of tied aid for projects in those countries and thus reinforce the trend away from concessional financing for commercially attractive projects that could be financed by export credits and private financing. This move toward eliminating subsidies for private sector projects in middle-income countries should lead to a more careful evaluation of projects. It should also permit a shift in ODA resources and thus greater concessionality in lending to the poorest countries.

Over the past years, the minimum concessionality level on credits to the poorer countries allowed under the OECD Consensus has been increased in several steps and a large portion of aid credits is provided with a concessionality level just over the minimum level. The poorest developing countries continue to receive over half of all mixed credits, even though the share of these credits to the better-off developing countries has increased somewhat.

In 1991, all categories of mixed-aid finance rose substantially after three years of decline. Particularly strong increases were registered in aid with a concessionality level of 80 percent or more, although aid with a concessionality level of less than 50 percent still predominated (with a majority of aid finance containing a concessionality level of less than 80 percent).

These statistics do not capture large gross disbursements to countries in Central and Eastern Europe, which continue to receive substantial assistance from the DAC member countries, including on concessional terms. The DAC Secretariat has been recently asked to begin collecting and publishing data on financial flows to these countries. The data on gross and net disbursements are not strictly comparable: net disbursements exclude officially supported export credits, while these are included in gross disbursements.

See, Susan Schadler and others, Economic Adjustment in Low-income Countries; Experience Under Enhanced Structural Adjustment Facility, Occasional Paper, No. 106 (Washington: International Monetary Fund, September 1993).

The interpretation of developments in officially supported export credits is hampered by the lack of reliable and timely data (Box 4).

For more details on officially supported credits, see G. G. Johnson, Matthew Fisher, and Elliott Harris, Officially Supported Export Credits: Developments and Prospects, World Economic and Financial Surveys (Washington: International Monetary Fund, May 1990).

In the Berne Union data, commitments of export credits include agencies’ contingent liabilities in respect of principal (disbursed and not disbursed), as well as all covered interest. Country-by-country developments must be interpreted with caution as they are sensitive to the timing of individual large contracts. The flow of new commitments provides a leading indicator of actual disbursements.

Japan has also provided cofinancing of Asian Development Bank (AsDB) and Inter-American Development Bank (IDB) operations, as well as parallel lending with the IMF.

This includes both financing in parallel with adjustment operations, and financing of investment projects. The total cost of these projects was $72 billion, of which $24 billion was financed by the World Bank.

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