To address the debt burden of the low-income countries, the international financial community (including Paris Club creditors, non-Paris Club bilateral and commercial creditors, and multilateral institutions) has over the past decade introduced and implemented a wide range of traditional mechanisms to alleviate the debt burden of these countries. In general, the main trend has been a move toward increasing the concessional element of the external assistance provided to the low-income countries.

To address the debt burden of the low-income countries, the international financial community (including Paris Club creditors, non-Paris Club bilateral and commercial creditors, and multilateral institutions) has over the past decade introduced and implemented a wide range of traditional mechanisms to alleviate the debt burden of these countries. In general, the main trend has been a move toward increasing the concessional element of the external assistance provided to the low-income countries.

The traditional mechanisms can be summarized as follows: (1) the adoption of stabilization and economic reform programs supported by concessional loans from the IMF and the World Bank; (2) in support of these adjustment programs, flow-rescheduling agreements with Paris Club creditors on concessional terms followed by a stock-of-debt operation after three years of good track records under both IMF arrangements and rescheduling agreements; (3) agreement by the debtor country to seek at least comparable terms on debt owed to non-Paris Club bilateral and commercial creditors facilitated by International Development Association (IDA) debt-reduction operations on commercial debt; (4) bilateral forgiveness of official development assistance debt by many creditors; and (5) new financing on appropriately concessional terms.

This process has significant advantages in that it ensures that new concessional financing and debt relief both under flow reschedulings (directly) and under stock-of-debt operations (via the required track record) are given in support of an adjustment effort by the debtor. Moreover, the process provides for a case-by-case treatment of individual debtors—reflecting, as noted above, their widely different external positions—both by creditors (with Paris Club creditors tailoring effective debt relief to financing needs) and by donors (in the consultative group process).

Paris Club Creditors

In the early 1980s, Paris Club creditors provided reschedulings for low-income countries on nonconcessional standard terms with relatively short grace (five years) and maturity (ten years) periods and on market-related interest rates. Although the reschedulings for the low-income countries were more comprehensive in coverage and provided for more cash relief than for other debtors, many of these countries continued to have difficulties adhering to the resulting repayment schedules. Consequently, the rescheduling of interest led to rapid accumulation of debt. By the late 1980s, Paris Club creditors recognized that repeated reschedulings on standard terms over a prolonged period would not solve the debt problems of the low-income countries and that most of these countries needed not only cash-flow relief but also reductions of debt. Thus, in late 1988, Paris Club creditors agreed to provide concessional reschedulings for low-income countries on Toronto terms, a menu of options for debt and debt-service reduction to reduce the net present value (NPV) of rescheduled amounts by up to one third (Table 4). Although these reschedulings provided for substantial debt reduction, it became increasingly obvious that for many low-income countries more far-reaching concessions would be needed if their debt situation was to be improved on a durable basis.

Table 4.

Evolution of Paris Club Rescheduling Terms

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Source: Paris Club.

Since the 1992 agreements with Argentina and Brazil, creditors have made increasing use of graduated payments schedules (up to 15 years’ maturity and 2-3 years grace for middle-income countries; up to 18 years’ maturity for lower-middle-income countries.

DR refers to the debt-reduction option; DRS to the debt-service-reduction option; CMI denotes the capitalization of moratorium interest; LM denotes the nonconcessional option providing longer maturities. Under London, Naples, and Lyon terms, there is a provision for a stock-of-debt operation, but no such operation took place under London terms.

These have also been called “Enhanced Toronto” and “Enhanced Concessions” terms.

Most countries are expected to secure a 67 percent level of concessionality; countries with a per capita income of more than US$500 and an overall indebtedness ratio on net present value loans of less than 350 percent of exports may receive a 50 percent level of concessionality decided on a case-by-case basis. For a 50 percent level of concessionality, terms are equal to London terms, except for the debt-service-reduction option under a stock-of-debt operation that includes a three-year grace period.

Fourteen years before June 1992.

Interest rates are based on market rates (M) and are determined in the bilateral agreements implementing the Paris Club Agreed Minute. R = reduced rates.

The interest rate was 3.5 percentage points below the market rate or half of the market rate if the market rate was below 7 percent.

Reduced to achieve a 50 percent net present value reduction.

Reduced to achieve a 67 percent net present value reduction; under the DSR option for the stock operation, the interest rate is slightly higher, reflecting the three-year grace period.

Reduced to achieve an 80 percent net present value reduction.

The reduction of net present value depends on the reduction in interest rates and therefore varies. See footnote 7.

Thus, in December 1991, creditors introduced London terms and increased the level of debt relief on eligible debt in NPV terms to 50 percent. Subsequently, in December 1994, the level of concessionality for most countries was again increased to 67 percent of eligible debt in NPV terms under Naples terms (see Box). Under both London and Naples terms, the flow-rescheduling agreements included a goodwill clause, in which participating creditor countries agreed to consider a stock-of-debt operation for countries that had established a good track record of performance for at least three years under an IMF-supported program and on debt-service payments to Paris Club creditors. Such a stock-of-debt operation was viewed as an “exit rescheduling,” and creditors had to be confident that the debtor country would be able to meet future debt-service obligations without the need for additional debt relief. Since early 1995, six countries (Benin, Bolivia, Burkina Faso, Guyana, Mali, and Uganda) have agreed comprehensive stock-of-debt operations with Paris Club creditors under Naples terms.

In September 1997, agreement was reached between Russia and Paris Club creditors on the basis for Russia’s participation in the Paris Club reschedulings as a creditor. This agreement provides that Russian claims inherited from the former Soviet Union will be reduced by an upfront discount, with a higher discount applied to claims on the poorest countries (eligible for Naples terms). After this discount, Russia will apply debt reduction or debt relief on the same basis as other Paris Club creditors. This agreement is expected to facilitate the regularization of financial relations between many developing countries and Russia.

Commercial and Non-Paris Club Bilateral Creditors

To ensure concerted support by the international community, Paris Club rescheduling agreements include a comparability clause under which the rescheduling country commits itself to seek at least comparable debt relief from commercial and non-Paris Club bilateral creditors. The clause is intended to ensure equitable burden sharing among the various categories of creditors. In addition, in recent years, low-income countries were able to buy back most of their debt to private creditors that was being traded in the secondary market at a large discount from the face value using funds from the Debt Reduction Facility of IDA and from bilateral donors (Table 5).

Table 5.

Commercial Bank Debt- and Debt-Service-Reduction Operations, 1987-March 19971

(In millions of U.S. dollars)

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Source: IMF staff estimates.

Debt and debt-service reduction are estimated by comparing the present value of the old debt with the present value of the new claim, and adjusting for prepayments made by the debtor. The methodology is described in detail in Annex 1 of Private Market Financing for Developing Countries (Washington: International Monetary Fund, December 1992). The amounts of debt reduction contained in this table exclude debt extinguished through debt conversions. Year in parentheses refers to the date of the agreement in principle.

The figure for debt-service reduction represents the expected present value of the reduction in future interest payments arising from the below-market fixed interest rate path on the new instruments relative to expected future market rates. The calculation is based on the estimated term structure in interest rates for U.S. treasury bonds at the time of agreement in principle.

Excludes past due interest. Includes debt restructured under new money options for Mexico (1989), Uruguay (1991), Venezuela (1989), the Philippines (1992), Poland (1994), Panama (1995); the Philippines’ (1989) new money option was not tied to a specific value of existing debt.

Excludes prepayment of principal and interest through guarantees.

Cost at the time of operation’s closing. Includes principal and interest guarantees, buyback costs, and, for Venezuela, resources used to provide comparable collateral for bonds issued prior to 1990. Excludes cash downpayments related to past due interest.

Includes estimated value recovery clauses.

Assumes an allocation of 30 percent to the straight buyback option, 6 percent to the discount bond, and 64 percent to the Front Loaded Interest Reduction Bond.

Assumes an allocation of 50 percent each to the par and discount bonds and no buyback.

With respect to official creditors outside the Paris Club, there has been little progress in normalizing relations between creditors and debtors.1

Paris Club Naples Terms

Key elements of Naples terms, which at end-1994 replaced the previous concessional (Toronto or London) terms, for low-income countries are as follows.

  • Eligibility. Decided by creditors on a case-by-case basis, based primarily on a country’s income level Countries that have previously received concessional reschedulings (on Toronto or London terms) are eligible for Naples terms.

  • Concessionality. Most countries receive a reduction in eligible nonofficial development assistance (ODA) debt of 67 percent in net present value (NPV) terms. Some countries with a per capita income of more than US$500 and a ratio of debt to exports in present value terms of less than 350 percent—decided on a case-by-case basis—receive a 50 percent NPV reduction.

  • Coverage. The coverage (inclusion in the rescheduling agreement) of non-ODA pre-cutoff date debt is decided on a case-by-case basis in the light of balance of payments needs. Debt previously rescheduled on concessional (either Toronto or London) terms is potentially subject to further rescheduling, to top up the amount of concessionality given.1

  • Choice of options. Creditors have a choice of two concessional options for achieving a 67 percent (or 50 percent) NPV reduction,2 namely

A debt reduction (DR) option (repayment over 23 years with 6 years’ grace), or

A debt-service reduction (DSR) option, under which the NPV reduction is achieved by concessional interest rates (with repayment over 33 years).3,4

There is also a commercial or long maturities (LM) option, providing for no NPV reduction (repayment over 40 years with 20 years’ grace).5

  • ODA credits. Pre-cutoff date credits are rescheduled on interest rates at least as concessional as the original interest rates over 40 years with 16 years’ grace (30 years’ maturity with 12 years’ grace for 50 percent NPV reduction).6

  • Flow reschedulings provide for the rescheduling of debt service on eligible debt falling due during the consolidation period (generally in line with the period of the IMF arrangement).

  • Stock-of-debt operations, under which the entire stock of eligible pre-cutoff date debt is rescheduled concessionally, are reserved for countries with a satisfactory track record for a minimum of three years with respect to both payments under rescheduling agreements and performance under IMF arrangements. Creditors must be confident that the country will be able to respect the debt agreement as an exit rescheduling (with no further reschedulings required) and there must be a consensus among creditors to choose concessional options.

1 Under such topping up, the NPV reduction is increased from the original level given under Toronto or London terms to the new level agreed under Naples terms, namely 67 percent or 50 percent2 For a 50 percent NPV reduction, the debt-service reduction option provides for repayment over 23 years with 6 years’ grace and the long-maturities option for repayment over 25 years with 16 years’ grace.3 For flow reschedulings, there is no grace period, and for stock-of-debt operations the grace period is three years.4 There is, in addition, a capitalization of moratorium interest (CMI) option, which also achieves the NPV reduction by a lower interest rate over the same repayment (and grace) periods as the DSR option.5 Creditors choosing this option undertake best efforts to change to a concessional option at a later date when feasible.6 Creditors can also choose an option reducing the NPV of ODA debt by 67 (or 50)

Multilateral Creditors

Multilateral creditors have participated in the efforts of the international community by helping debtor countries to design and implement adjustment and structural reform programs that have been supported by concessional loans from the IMF and the World Bank. Multilateral financing over the past decade shows three major trends: (1) the share of multilateral debt in the total for HIPCs has increased as multilateral continued to make large-scale contributions to the financing of these countries; (2) increasingly, financing has been provided on concessional terms, especially from the IMF (first under the Structural Adjustment Facility (SAF) and then under the Enhanced Structural Adjustment Facility (ESAF)) and the World Bank (through IDA including supplemental credits under the Fifth Dimension Facility, which provides financial support to IDA-only eligible countries2 with outstanding IBRD debts to cover part of their interest obligations on these loans) providing de facto debt relief as more expensive debt (such as non-concessional exposure to the IMF) was replaced by concessional debt (such as ESAF); and (3) despite the increase in multilateral debt to the HIPCs, debt-service payments on multilateral debt have remained relatively stable at about 8½ percent of exports each year during 1985-95, reflecting the increased concessionality of loans.3

Positive Net Resource Transfers and New Financing on Concessional Terms

It is important to note that the amounts of grants and new loan disbursements from the creditor/donor community to most HIPCs have exceeded actual debt-service payments on interest and amortization and as a result net transfers were positive. For example, multilateral as a group have provided to the 41 HIPCs positive net disbursements averaging over US$3 billion a year from 1990 to 1996 and positive net transfers averaging about US$1.5 billion a year over the same period (Table 6). Official bilateral creditors and donors have, through such forums as Consultative Group meetings and the Special Program of Assistance for Sub-Saharan Africa, provided new concessional financing in the form of grants or highly concessional loans partly to meet the financing requirements identified under adjustment programs. Thus in 1994, inflows of grants and concessional assistance from official donors were more than three times actual debt service paid. During 1990-94, net resource flows (gross flows less principal repayments) including bilateral grants to HIPCs have averaged around 8 percent of GNP (Table 7).

Table 6.

HIPCs: Net Disbursements from Multilateral Institutions1

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Sources: World Bank Debtor Reporting System; and IMF, International Financial Statistics.Note: Disbursements on medium- and long-term public and publicly guaranteed debt, including to the IMF. The data are derived from the Debtor Reporting System except for the data on lending by the IMF.

Annual average of net disbursements in percent of exports of goods and services is calculated only for selected years due to the lack of export data.

Table 7.

HIPCs: Net Concessional Flows, Debt Service Due and Paid1

(In percent of GNP)

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Source: World Bank Debtor Reporting System.

Net concessional flows consist of net concessional flows from multilateral and bilateral creditors and grants (excluding technical cooperation). Debt service due and debt service paid include payments related to the regularization of arrears.