In the current environment of payments difficulties, a principal role of the Fund remains the encouragement and support of timely adjustment policies of member countries. For their adjustment efforts to be sustainable, adequate financing is needed, which in turn calls for a critical and realistic assessment of financing possibilities and their implications for adjustment strategies. The adjustment programs of many debtor countries have been supported by the use of Fund resources, and in helping country authorities to design these programs, the Fund management at times needs to confirm assumptions concerning the availability of financing from various sources during the program period.

In the current environment of payments difficulties, a principal role of the Fund remains the encouragement and support of timely adjustment policies of member countries. For their adjustment efforts to be sustainable, adequate financing is needed, which in turn calls for a critical and realistic assessment of financing possibilities and their implications for adjustment strategies. The adjustment programs of many debtor countries have been supported by the use of Fund resources, and in helping country authorities to design these programs, the Fund management at times needs to confirm assumptions concerning the availability of financing from various sources during the program period.

It is in this context that efforts have been intensified to understand better the three main sources of financing open to debtor countries: official development assistance and other bilateral official lending, commercial bank credit, and commercial export credit, whether direct or insured. An understanding of the first two elements is being refined through collaborative efforts among governments and commercial banks. A better understanding of the third element is equally desirable.

Export credit flows are vital for the smooth functioning of the international trade system. These credits have grown rapidly over the years and, given their sheer size, have become an important source of financing. According to recent estimates by the Bank for International Settlements (BIS) and the Organization for Economic Cooperation and Development (OECD), trade credits extended or guaranteed by official creditors to developing countries increased by 7 percent to $190 billion at the end of 1983 from $178 billion at the end of 1982, amounting to roughly one fourth of the outstanding external debt of these countries (see Table 1, p. 19). In this period, such credits increased from the equivalent of 39 percent of non-guaranteed commercial bank credits to 41 percent. Furthermore, because of widespread payments difficulties, a large proportion of insured export credit has been subject to debt rescheduling (see Table 2, p. 20). Credit risks have increased generally, and the response of the agencies to this increase will have a major influence on the mix as well as the sustainability of future financing flows to developing countries.

The conclusions of the study focus on issues of current policy interest and are presented under three headings: the debt buildup phase, the debt-servicing difficulty and rescheduling phase, and the recovery phase and beyond. It should be stressed that this presentation is chosen for expositional convenience, and there is no implication that it is regarded as normal or inevitable that borrowing countries pass beyond what is termed the debt buildup phase.

Debt Buildup Phase

The agencies with whom discussions were held agreed that there are built-in tendencies for them as a group, though not necessarily for each agency, to remain on cover too long—even if unintentionally—for countries not in evident difficulties but pursuing policies that could contribute to future debt-servicing problems. They felt that this systemic weakness continued for certain borrowing countries not encountering problems that are apparent. It was agreed that these tendencies helped to postpone adjustment efforts in some borrowing countries beyond when adjustment measures would entail a comparatively light effort.

The agencies stressed that it is in the first instance the borrowing country’s responsibility to exercise prudence, and noted that discipline on the lenders’ side is complicated by

—the fact that advance warning signals, or leading economic indicators, are rarely fully conclusive;

—given this fact, and in an intensely competitive environment, the difficulty that any single agency faces in attempting to tighten cover policy ahead of other agencies;

—the perception that an individual agency’s action may be marginal in the overall outcome;

—the need to ensure that agencies as a group move gradually rather than abruptly so as to avoid precipitating a liquidity crisis for the borrower. It was accepted that a counterpart to the delay in restraining cover was a delay in resuming cover after improvements in debt-servicing capability had occurred.

In the light of recent experience, the agencies have attempted to strengthen their country risk assessment procedures by placing greater emphasis on leading economic indicators, such as the direction of economic policies in the borrowing country and the medium-term payments and external debt outlook, but further improvements are possible. Efforts are also under way to strengthen project appraisals and, for some agencies, country limits have been adjusted to more appropriate levels. Aside from these steps within the agencies, there remains an interest in exploring collaborative steps on a case-by-case basis to develop sounder lending standards. The agencies agreed that progress in this field would be an important influence on the role they could play, and the magnitude of credit extended/insured by them, in future years. (See also the section, Recovery Phase and Beyond, below.)

Debt-Servicing Difficulty and Rescheduling Phase

A number of observations and issues emerged from the discussions concerning the agencies’ policies and practices when debtors experience serious payments difficulties and when debt reschedulings or other special efforts may be needed. The debt-servicing difficulties in evidence since 1982 have seriously affected the agencies’ financial operations and have influenced the application of cover policy in important ways. Debt reschedulings and the attendant heavy claims payments by the agencies have caused an unprecedented deterioration in the agencies’ financial position. Flexibility in policy application has had to be circumscribed by the need for agencies to adhere to the principle of being financially self-supporting over the medium term. Keeping this requirement in view, the agencies have become convinced of the need to remain pragmatic and have, in diverse ways, exercised greater flexibility in policy applications.

Two notable policy developments are the maintenance of short-term credit flows and the role of internationally coordinated arrangements to provide export credit assistance to countries undertaking appropriate adjustment. All of the agencies have shown a willingness to maintain short-term credit cover for rescheduling countries to ensure financing for essential imports, provided that appropriate conditions are met. A rescheduling country could maximize its chances of continued short-term cover if it makes clear its intention to not seek a rescheduling of short-term debt and if it is seen as being able to honor current short-term obligations. It was broadly accepted that, while trade finance should not be viewed as balance of payments financing, the absence of short-term cover would drain the foreign exchange reserves of the rescheduling countries and would constitute a negative balance of payments financing, which should be avoided. Furthermore, depriving the debtor of short-term credit cover could also result in a deterioration of the terms of trade, since suppliers tend to raise prices to build in a risk premium against delays in payment. Such risk premiums in trade would only compound the payments difficulties.

There was broad support, in principle, for an internationally coordinated arrangement on a case-by-case basis to provide export credit assistance to those debtor countries undertaking appropriate adjustment to achieve an early return to full creditworthiness. However, most of the agencies were skeptical of the effectiveness of formally pledging commitment targets, regarding export credit financing as an inappropriate tool for balance of payments support, and had strong reservations about the provision of export credits on soft or abnormal terms. The agencies felt that future case-by-case efforts would be more effective and better received if they were conceived as achieving consistency in the cover policy stances among agencies. If that were accomplished, and subject to the decision-making sovereignty of the agencies and the condition that the borrowing country’s adjustment policies remained on track, requests for cover of the type informally discussed (especially for short-term credits and selected high-priority medium-term credits) could be better accommodated.

In other broader areas concerning debt rescheduling, the agencies’ approaches appeared to have been refined in order to more clearly distinguish between debtor countries that face transitional or liquidity problems and those that face longer-range difficulties. For the former, most agencies seemed ready to take a more flexible attitude. Already, a few were prepared to maintain some cover for rescheduling countries, provided credible efforts were being made to redress the situation. In this connection, most agencies regarded the existence of Fund-supported adjustment programs as evidence of credible efforts and compliance with performance criteria as a sign of economic progress. Increasingly, the agencies seemed to be refining their long-standing approaches to the provision of cover for types of debt not subject to rescheduling, and a few agencies had gone further by retaining cover on a limited scale, even for categories of debt that are rescheduled. These steps are to be welcomed when they help to strengthen international cooperation by supporting those debtor countries that are making progress to resolve their difficulties.

The agencies stressed that country decisions were taken on a case-by-case basis with no hard-and-fast rules. Nonetheless, there are several important practical points that would help debtor countries gain the cooperation of the agencies. In particular, there is need for an improved awareness by the borrower of the close practical link between the terms of a debt rescheduling and the provision of new cover, especially short-term cover. In successive reschedulings, an advance in the cutoff date1 is best avoided, since in that event the agencies are likely to take severely restrictive actions intended only for countries in prolonged difficulty. Attempts to reschedule debt on a unilateral or bilateral basis would also not be well received. These “ground rules” have not formally been made known to the debtor countries by the agencies, either individually or as a group. It was agreed that inadequate knowledge of the ground rules by some debtors may have been counterproductive, in that the disruption in trade and credit flows may have been more severe than was necessary.

Given the practical link between the terms and conditions of debt rescheduling and the provision of new cover, debt rescheduling can hardly be viewed by a debtor country as a low-cost option, and the relevant trade-offs need to be explored as far as feasible. These trade-offs exist when the debtor is assured of a realistic prospect of continued export credit flows, if appropriate conditions are fulfilled. Unless these conditions are made known in broad terms, debtors in only temporary difficulty may seek overly generous rescheduling terms that could adversely affect the cover policy decisions of the agencies. In this connection, the agencies emphasized that their attitudes could be favorably influenced when a debtor country maintains open communication regarding its economic problems and the intended solutions, makes clear its intentions regarding a debt rescheduling, promptly adopts a Fund-supported adjustment program, and concludes a Paris Club (or a similar official creditor group) rescheduling exercise, if necessary.

Recovery Phase and Beyond

It was generally agreed that in the period ahead a shift away from general balance of payments financing for developing countries toward increased reliance on trade and project financing (including equity finance) should be actively encouraged. At the same time, owing to a system-wide increase in credit risk against the background of accumulated external debt, a general increase in demand for export credit insurance (a shift in the demand curve) is virtually certain, even for countries with good track records and prospects. The prospective willingness of export credit agencies to accommodate this demand, and the form and conditions of such accommodation, will strongly influence the mix and availability of credit flows to developing countries.

All of the agencies considered it important that there should be an orderly and timely resumption of normal cover policies for debtor countries successfully pursuing their adjustment strategies. In this regard, however, and following from the discussion in the section, Debt Buildup Phase, above, the agencies were preoccupied with avoiding the financing/insuring of dubious ventures, and they were under pressure to demonstrate domestically that they would succeed in these endeavors. As a result, a few agencies were turning their attention to developing a procedure whereby a borrowing country would be encouraged to present to them for financing only clearly high-priority projects. Other agencies, while sharing the objective, believed that individual efforts by each of them were likely to be inconsistent as well as inefficient. They were searching for ways in which international organizations such as the World Bank could step up their assistance to borrowing countries in the field of overall public investment planning, including project appraisal and selection.

While it was understood that complex issues would need to be resolved, it was felt that constructive interests converge in a mutually beneficial direction. Those borrowing countries undergoing adjustment to lay the basis for sustained growth must reactivate their investment spending to renew growth. At the same time, it is clearly in the interest of lenders to accommodate the demand for financing for well-conceived projects.