Export credit agencies are in the business of export promotion through the provision or coverage of export credits, often on terms better than those available in the market. But this involves taking risks.9 This means that financial results hinge crucially on two factors: realistic pricing and diversification of risks. Agencies thus face a dilemma between assuming risks that threaten their financial positions and eschewing such risks at the cost of a loss of business for exporters. Their experiences over the past decade and, in particular, their continued weak financial performance, have heightened this dilemma.

Export credit agencies are in the business of export promotion through the provision or coverage of export credits, often on terms better than those available in the market. But this involves taking risks.9 This means that financial results hinge crucially on two factors: realistic pricing and diversification of risks. Agencies thus face a dilemma between assuming risks that threaten their financial positions and eschewing such risks at the cost of a loss of business for exporters. Their experiences over the past decade and, in particular, their continued weak financial performance, have heightened this dilemma.

New Emphasis on Risk Assessment

The reaction of agencies has been to refine and to systematize their country risk assessment, and to reinforce links between the risk assessment process and cover policies. All agencies have now moved toward more realistic pricing of political risk. Risk diversification has proved to be more difficult, however, because of the strong links to particular markets for historical and geographic reasons and because of adverse selection: official support for export credits is only sought for exports for which private sector insurance is either not available or is more costly and for which self-insurance is seen as too risky by the exporter. All agencies have therefore strengthened and refined risk-sharing and risk-reducing techniques to improve the quality of the portfolios.10

Approaches to Risk Assessment

While agencies approach country risk assessment in different ways, one common feature of the systems now in use is that they place countries into risk categories. The number of categories and the implications for cover policy vary, but all agencies attempt to order and give numerical rank to countries in terms of the risk attached to new business.

Some agencies go much further in attempting to quantify risks, and attach specific credit scores to countries. For example, the portfolio management system of ECGD (United Kingdom) assigns to each new credit a probability of default and an expected loss coefficient. A similar quantitative approach to risk assessment is taken by COFACE (France) and OND (Belgium). More generally, the export credit agencies of the European Union (EU) are collaborating on the design of a country risk assessment system, in the context of the ongoing discussions on harmonization of export credit policies. U.S. Eximbank also employs a quantitative system of risk assessment.11

Other agencies use a more qualitative approach and place less reliance on credit scores resulting from quantitative models, believing that highly standardized models fail to deal adequately with the individual characteristics of countries, making it difficult to give an appropriate weight to inherently subjective judgments on, for example, the political sustainability of economic policies. However, even those agencies that favor a more eclectic approach have evolved a set of criteria, including quantitative indicators, as the basis for their country risk assessments. Several of these agencies pointed out that the outcomes of their assessments usually differ little from those produced by more elaborate quantitative systems.

Criteria Used in Evaluating Risk

All agencies covered in this study considered payments performance the single most important factor in their assessment of country risk. Countries that have established a solid track record of servicing their debts according to agreed schedules are regarded as good risks. Erratic payments performance, such as recurrent delays, even on small amounts, is seen as a clear indication of a bad or deteriorating risk. Alack of attention to payments can thus have strong effects on a country’s access to export credits and the cost of such credits.

Agencies also give significant weight to economic performance. Most agencies emphasized that they attached considerable importance to borrowing countries’ relations with the IMF and the World Bank and to countries’ track records under IMF arrangements, and many observed that they made extensive use of IMF staff reports in assessing countries’ economic and financial situations and medium-term prospects.12 Agencies also use a wide range of financial indicators and look particularly carefully at external debt and debt-service ratios and the adequacy of and developments in countries’ reserve positions.13

Sharing Risks

Collaboration Among Agencies

Export credit agencies collaborate with each other in a number of ways. Most agencies require that a certain pro-portion of the value of an insured export be produced in their own country, so that it is generally not possible for an agency to finance exports from other countries. Therefore, when a project requires exports from exporters in more than one country, agencies usually get together to provide support for the project as a whole, with each agency insuring exporters from its own country.

Agencies have also developed a number of channels for exchanging information and opinions both on individual countries and on more general issues. Recent experience has led them to seek ways to strengthen further the effectiveness of information exchanges. Most of the main agencies hold regular bilateral consultations covering issues, countries, and projects of common interest. Government authorities and many agencies also have access to reports from the multilateral institutions (including the IMF), and to reports from embassies, and also make extensive use of commercial sources of information.

The Berne Union holds regular meetings at which the stance of cover policies and a wide range of technical issues are discussed. In addition, the Berne Union provides information to members on the level of activity, the stance of cover policy and payments experience of member agencies for some 40 countries covered in its quarterly survey. Membership in the Union does not include representatives of guardian authorities, so discussions on some policy issues are limited.

The process of consultation in the OECD Export Credit Group and the participants in the OECD Consensus (which includes representatives from the guardian authorities) has intensified in recent years. Regular exchanges of information and discussions on a wide range of policy issues have covered premium structures as well as discussions, on a project-specific basis, on the implementation of the Consensus regarding mixed credits.

Cofinancing with Multilateral Institutions

Agencies have increasingly sought cofinancing arrangements with multilateral financial institutions and consider cofinancing an important technique to reduce and share risk. Under these arrangements, agencies provide support for part of the finance for projects selected and developed by the multilateral institution, and thus provide additional resources for development. Agencies see direct involvement of the multilateral institution as an important means to ensure that projects have been appraised carefully and fit within the overall development strategy of the country. They also see participation by multilateral institutions as an effective means to reduce, if not eliminate entirely, the risk of payment delays on such credits. Furthermore, co-financing allows participation in a wider range of projects than would otherwise be possible.

The World Bank remains by far the most important multilateral partner of agencies for cofinancing. During the past two fiscal years, the Bank approved some 250 projects for cofinancing, with an average total value per year of $12 billion, a sharp increase over the $9 billion during the 1991 fiscal year. This reflected the surge in World Bank operations in sectors such as power and water, which lend themselves to cofinancing by agencies. However, cofinancing with the World Bank was seen by many agencies as very complex and difficult to arrange, reflecting in part the nature of infrastructure projects as well as the Bank’s rules on bidding for contracts. In contrast, agencies were particularly keen on cofinancing, with the International Finance Corporation (IFC). Private sector projects in sectors that earn foreign exchange (and that often incorporate explicit security arrangements). The European Bank for Reconstruction and Development (EBRD) has recently introduced a new cofinancing program (Export Credit Loan Arrangement Technique—ECLAT). This program, which seeks to streamline the often complex procedures of conventional cofinancing techniques, was seen by many agencies as a promising and flexible vehicle to provide export support to economies in transition.

Criteria less easily quantified, but of increasing importance in risk assessment, are the policies and attitudes of the borrowing country government toward the private sector, a liberal trade and payments system, and the development of a sound and well-functioning banking system. Finally, agencies attach considerable importance to political developments in the borrowing country and make judgments about the sustainability of policies being followed. Agencies noted that they applied these judgments typically in a one-sided manner: the perception of political instability lowers country-risk ratings, but improvements in the political climate do not translate into higher ratings unless accompanied by improvements in economic and financial factors.

Short-Term Credits

Agencies draw a clear distinction between short-term credits on the one hand, and medium- and long-term credits on the other. First, unlike in the case of medium and long-term credits, there is significant involvement by private insurers in the provision of short-term export credits. Second, short-term export credits are generally considered less risky for a number of reasons.

  • Most short-term business is conducted on a routine basis with established commercial banks and buyers. Therefore it does not involve the complexities that arise in covering medium- or long-term transactions related to capital goods or projects.

  • The risk periods are short. Risks are therefore more predictable, and generally much lower, as even countries that have lost access to other forms of financing have continued to service short-term debts to preserve the flow of essential imports.

  • The size of transactions is typically small, which makes it easier to control exposure.

  • The Paris Club has not rescheduled short-term debts, except in a very few difficult cases.

As a result, agencies tend to remain on cover for short-term credits in all but the most risky markets, even in cases where they are off cover for medium- and long-term business.

Agencies also have a greater variety of techniques at their disposal to limit or share risks for short-term credits, as banks are generally willing to take part of the risk, and, in particular, to cover commercial risk. Additional securities that agencies might require include

  • irrevocable letters of credit from domestic banks in the buyers’ country, particularly those with secure access to foreign exchange;

  • guarantees from the Government or Central Bank; and

  • letters of credit confirmed (and therefore guaranteed) by a bank in another country.

While most agencies consider credits up to one year as short-term credits (and some go up to two years), Berne Union guidelines require that certain types of exports, such as consumer goods and certain raw materials, be financed with short-term credits not exceeding 180 days. It should be noted that these guidelines are not binding, however, and that they do not cover agencies and institutions that are not members of the Union, such as, for example, the Commodity Credit Corporation of the United States and the Canadian Wheat Board.

Relations with Private Sector Insurers

Agencies differ widely in their relations with private sector credit insurers. A number of agencies are private organizations that act on behalf of governments, but also on their own account. In the area of short-term insurance some agencies compete with private insurers; others eschew such competition.

Increasing attention has recently focused on the role of officially supported agencies in short-term insurance and relations between official and private insurers, in particular in the EU in the context of harmonization. At issue is what official agencies can reasonably do in the areas of insurance and reinsurance without inhibiting or distorting competition.

Governments have taken different approaches. For example, the United Kingdom has privatized ECGD’s short-term business (which was taken over by NCM of the Netherlands, itself a private insurer). However, the United Kingdom continues to provide some reinsurance for short-term business.

Many other agencies in the EU have made a distinction between, on the one hand, “marketable risk”: short-term commercial credit risk (up to two years) to countries within the OECD (excluding Turkey), for which private credit insurance is generally available and which they see as an area where official support might lead to distortions and should therefore be avoided and, on the other hand, political risk within the OECD and all short-term risks in other countries.

Limitations of Export Credit Financing

The nature of export credits, and of trade financing more generally, imposes a number of limitations on the role such financing can be expected to play. In particular, export credits are not well suited as a substitute for general balance of payments support. For the financing of investment projects, the main domain of long-term export credit finance, there is generally a lag of several years between commitment and disbursement that makes such credits an ineffective vehicle for balance of payments financing. Moreover, the volume of medium-term export credits is directly linked to the volume of imports, and more specifically capital goods imports. This means that additional net financing can only be provided in support of an increase in the demand for such imports.14 Short-term financing is quick-disbursing and more readily available for countries in need of balance of payments support, but extensive recourse to short-term export credits can rapidly lead to severe debt-servicing difficulties, as illustrated by the recent experience of Algeria and Iran (see Chapter IV). The distinctive features of short-term credits are discussed further in Box 5.

The fact that export credits are usually expected to be repaid quickly also suggests that such credits should not be relied on as a major source of net financing for prolonged periods. Countries that need large transfers of resources, such as the low-income countries and many transition economies, require, instead, financing on long maturities or, preferably, non-debt-creating flows in the form of foreign direct investment or grants from official sources. Countries that continue to rely largely on export credit financing without developing alternative sources of financing are likely to run into debt-servicing difficulties over time. An unsustainable buildup of debt obligations on export credits usually cannot be addressed through access to additional export credits. It requires, instead, recourse to exceptional financing through Paris Club reschedulings, which transform contingent insurance claims of the export credit agencies into direct (and untied) credits with much longer maturities, but at a considerable cost in terms of creditworthiness and hence in terms of future access to financing.

This is brought out in Chart 7, which shows the share of export credits in total debt of the 20 largest recipients of export credits. Of these 20 countries, only 6 have avoided recourse to either substantial payments arrears or recent debt reschedulings (China, India, Indonesia, South Africa, Turkey, and Venezuela). For these 6 cases, the share of export credits in total debt is significantly lower than for most of the other 14 countries.

Chart 7.
Chart 7.

Twenty Main Recipients of Export Credits: Share of Export Credits in Total External Debt, 1992

(In percent)

Sources: OECD; and IMF staff estimates.

The nature of export credit financing thus limits the usefulness of export credits in the financing of developing countries and of the economies in transition, particularly in cases that require significant net financial flows for prolonged periods. More specifically, export credits are not a suitable instrument of large-scale support for the poorest countries, though a cautious use of export credits to help finance carefully selected projects would be appropriate in some cases.

Low-Risk Markets and Competition Among Agencies

In countries considered creditworthy borrowers, competition for business among exporters and among agencies is intense. Such competition can result in financing on terms that might not otherwise have been available, even to developing countries that have demonstrated their creditworthiness. But agencies’ reactions to competitive pressures can also lead to outcomes that are not in the collective interest of creditors or borrowing countries.

First, agencies are often slow in reacting appropriately to deteriorations in the policy environment. Under competitive pressures, agencies tend to continue to provide or even expand cover to countries that do not have apparent debt-servicing difficulties, but are pursuing policies that could lead to future problems. Similarly, agencies are under often intense pressure to help exporters gain an early foothold in countries seen as future growth markets, and have provided cover to countries where policy performance and agencies’ own country-risk assessments indicated a more restrictive stance.

Second, the desire to support exporters in competitive markets has led agencies and their governments to make use of subsidies to export credits. These “mixed credits” distort trade, divert scarce aid resources, and prevent a more commercially based approach to export credit financing for large projects.

Agencies’ Reactions to Changes in the Policy Environment

For countries seen as good risks, agencies tend to be relatively unconcerned about large increases in new commitments or even breaches in their internal guidelines on the maximum share of risk to a single country. In some cases, the result of agencies acting collectively in this fashion has been a very rapid buildup of debt by the borrowing countries, which, on a number of occasions, has been followed by payments difficulties. This is not a new problem, and the first IMF study on export credits in 1985 pointed to this tendency as a major contributing factor to debt difficulties. Attempts by agencies to address this problem in recent years have not been entirely successful, as illustrated by the recent emergence of serious payments difficulties in three markets that had been seen as good credit risks: Algeria. Iran, and the former Soviet Union. These cases illustrate a number of features of agencies’ policies in newly competitive or emerging markets, and, in particular, the difficulty agencies can experience when they do not act on the conclusions of their own risk assessments. All are discussed in more detail in Chapter IV.

Agencies acknowledged that continued export credit support had often helped countries to postpone adjustment measures, and thus made eventual adjustment more difficult. They commented that achieving greater discipline on their side was complicated by a number of systemic and agency-specific factors. First, it was difficult for any agency to tighten cover in an intensely competitive environment ahead of others. Second, the effect of a tightening by an individual agency would be marginal to the overall outcome. Third, warning signals were often not fully conclusive, and an abrupt move by agencies as a group could well precipitate a liquidity crisis, especially since increased demand for export credits was often a reflection of changed sentiment of private creditors. As official agencies, they were responsible for helping their exporters in maintaining trade flows to fundamentally creditworthy debtors in temporary difficulties. This would also assist the importing country. Finally, agencies contended that it was the responsibility of the borrowing country to ensure that debt obligations remained within sustainable bounds and to implement appropriate adjustment measures in response to external shocks.

Those points have some validity. It is certainly true that agencies face difficult decisions on whether to continue providing cover for countries where policy slippages are becoming evident. However, it is also undeniable that the choices that agencies have made have sometimes been inconsistent with their own risk assessments; have resulted in delays in adjustment, with considerable costs for the borrowing countries: and have led to substantial claims and cash flow deficits for the agencies themselves.

Mixed Credits

Export subsidies in the form of “mixed” or “tied-aid” credits remain a powerful and often-used instrument of competition in loans to certain countries considered good risks. These credits generally involve projects funded in part by export credits and in part by tied-aid resources, which are used either as a grant or applied toward reducing interest rates on the export credit. As with export credits on commercial terms, the export credit elements of mixed credits can take the form of direct lending or insurance or guarantee of loans made by a private creditor (for further details see Appendix III).

According to agencies, the motives behind mixed credits vary. Sometimes they are used as a means of stretching aid resources and encouraging worthwhile development projects. On other occasions, however, an initial request for cover on commercial terms is supplemented by aid resources to enable the agency and the exporter to compete with terms offered by another agency. As agencies routinely consider matching the terms of export credits for the same export contract, mixed credits are a significant instrument of competition. This has raised concerns about the diversion of increasingly scarce aid resources from the poorest countries without access to financing on commercial terms to countries that already have access to export credit financing, and often also to financing from private markets.

To limit the subsidization of exports through export finance, the agencies in OECD countries have agreed to be bound by the provisions of the OECD Consensus on officially supported export credits. The Consensus establishes guidelines concerning financial terms and sets minimum concessionality requirements for mixed credits. The required levels of concessionality are 50 percent for the poorer (Category III) countries and 35 percent for countries with a per capita GNP below a threshold currently established at $2,786; mixed credits are not allowed for relatively rich (Category I) countries.15

A significant step toward further reducing the use of tied aid in export credit finance was the 1992 modification of the OECD Consensus (the Helsinki Package).16 The major element of this modification was to prohibit the use of mixed credits for projects that are commercially viable (except for the Least Developed Countries, as defined by the United Nations). The rules for implementation are currently the subject of intense discussion in the Consultations Group of the Participants to the Arrangement.17 Most agencies believe that the Helsinki Package has succeeded in eliminating the worst abuses of mixed credits. However, almost all noted instances where the spirit, if not the letter, of the accord had been breached. There was also a widespread view that for some major debtor countries, the pressures of competition would continue to make mixed credits an important factor in obtaining export contracts. Indeed, according to several agencies, a number of their largest borrowers had indicated that exporters that did not offer mixed credits could not expect to receive export contracts; mixed creditsthus remained a virtual necessity for doing business in several countries, mostly in Asia.

In this context, many agencies and their government authorities deplored the insistence of a few of the larger recipient countries on contract interest rates below a specified threshold, and noted that this use of “cosmetic interest rates” had been made virtually unavoidable in some countries by making all imports financed with loans carrying higher interest rates subject to substantially higher import tariffs. Such rates were seen as leading to distortions by making export credit transactions less transparent both within the recipient country and vis-à-vis other creditors.18

As strains on aid budgets have been increasing, agencies and their government authorities have taken various approaches to limit or at least make more transparent the use of aid for export subsidies. A number of donor governments eschew the use of mixed credits altogether. Others have made more explicit the use of aid for export credits, or have strictly limited and separated budgetary accounts for export promotion in this form. Some creditors channel tied-aid credits through separate institutions rather than providing subsidies on export credits. The extent to which more limited use of aid as an instrument of export competition could free resources for direct development assistance to the poorest countries is therefore not easy to assess, but there appears to be considerable scope for reallocation.

Further restrictions on mixed credits would also help eliminate trade distortions and free exporters to compete on the basis of the price and quality of their product rather than on the basis of the associated financing. Many agencies see the creation of such a “level playing field” as a precondition for considering changes to the Consensus rules on overall maturities. A more commercially based approach to export credit finance combined with a lengthening of maturities would be highly desirable in the financing of large-scale projects, to ensure that repayment periods are more in line with the cash flow profile of the project. The increased demand for large projects, particularly in infrastructure, by many developing countries lends urgency to modifications of the Consensus in this direction, as was noted in the communique of the Development Committee in the fall of 1993.

Cover Policy in Countries Perceived as High Risk

It is in countries perceived as high-risk markets that the increased emphasis on risk assessment discussed above has had the most impact. In general, the use of risk assessment techniques has served agencies well in those countries. It has enabled agencies to distinguish, for example, between the situations of countries that have required recourse to Paris Club reschedulings in the past but are now emerging from their debt-servicing difficulties, and those of countries where the commitment to strong adjustment policies and sound debt management is not as strong and problems of credit-worthiness remain.

There are cases, however, where it may be that agencies’ policies are too conservative. In particular, the emphasis that agencies place on payments performance has led them to regard countries that have recently rescheduled their debts as of potentially higher risk than others. Agencies have extended substantial credits to rescheduling countries that have established a solid track record of performance under their Paris Club rescheduling agreements, but they remain very cautious in extending cover to rescheduling countries with mixed records of performance. This strong emphasis on payments records means that most agencies are slow to reopen cover for countries that have had poor records in the past, but that have recently strengthened their policies in the context of IMF-supported adjustment programs. Some government authorities commented that they considered this tendency of agencies to remain off-cover perverse, as a country’s prospects were improved with an IMF-supported program in place and a regularization of relations with creditors. There appears to be a particular reluctance to provide cover in two groups of countries.

Low-Income Rescheduling Countries

Low-income countries are among the most important markets for export credit agencies.19 However, agencies regard low-income countries with great caution, both in terms of their payments performance and the prospects of their servicing nonconcessional debt. Debt reschedulings (which also cover concessional loans from bilateral sources) are seen as an unambiguous sign of an inability to service export credits. Agencies, nearly without exception, reported that for the low-income rescheduling countries (largely in sub-Saharan Africa) they were only prepared to give cover for short-term lending and for offshore operations. Most agencies believed that long-term financing for these countries should come exclusively in the form of aid and concessional loans.

At the same time, however, a few agencies and some government authorities recognized that this very cautious approach could lead them to miss opportunities to promote exports where export credits on commercial terms were an appropriate form of financing for low-income rescheduling countries. In particular, these agencies agreed that export credits on commercial terms should generally be used to support private or privatized enterprises. Use of aid or tied-aid credits in such cases would perpetuate the idea that projects need not have commercial rates of return in low-income countries, whereas in fact more—rather than less—reliance on market criteria was needed. Some agencies also noted that export credit agencies remain for many of the low-income countries the only source of short-term trade financing at reasonable cost, and that establishing a solid record of payments performance on these credits was a first step toward regaining creditworthiness.

It is clear that large-scale support in the form of nonconcessional export credits is neither appropriate nor feasible for most low-income rescheduling countries. There are cases, however, where export credits on commercial terms are justified, and could be beneficial, and these cases are often not sufficiently recognized by agencies.

Responses to Debt and Debt-Service Reduction

Agencies’ attitudes toward countries that had reached agreements involving debt and debt-service reduction in the Paris Club were mixed. Some agencies thought that debt reduction generally improved a country’s prospects of servicing its remaining debt, and that cover policy should reflect this. At the same time, most of these agencies also commented that the debt reduction granted so far for most of the low-income rescheduling countries had not been sufficient to permit a return to creditworthiness. Other agencies thought that once countries had obtained debt and debt-service reduction from bilateral creditors they would tend to look for it again, and that a very cautious attitude to new cover for these countries was called for. Two major agencies emphasized that it would be extremely difficult for them to provide or insure new finance for a country that had reached an agreement with official bilateral creditors incorporating elements of debt and debt-service reduction.

Export Credits to the Private Sector


Although public sector borrowers continue to be the main recipients of export credits in developing countries, agencies have been placing increasing emphasis in recent years on providing cover for exports to the private sector. This trend has intensified as an increasing number of countries have adopted development strategies that call for a much larger role for the private sector in investment and production, including an expanded role in areas that were previously considered the sole responsibility of the public sector, such as telecommunications and power generation. The reluctance of many debtor country governments to provide guarantees has further accelerated this move toward greater direct involvement with private sector buyers.

To some extent this represents a reversal of traditional practice. In the mid-1980s, agencies tended to react to debt-servicing difficulties on the part of a country by using public sector guarantees more frequently, reflecting their experience of a better record of servicing of the debt owed or guaranteed by the public sector than that owed by the private sector. This in pan reflected the priority accorded to the public sector in foreign exchange allocations in some countries, and in part the fact that the poor economic situation in some borrowing countries had worsened the commercial risks for the private sector borrowers.20 Many agencies still charge higher premia for private sector borrowers than they do for public sector borrowers.

However, in countries where experience with public sector debt servicing has been poor, a number of agencies are now pursuing an approach that clearly favors credits to the private sector, and agencies have adopted a more open stance on cover toward loans to private sector enterprises, or guaranteed by private commercial banks, than to loans to or guaranteed by public sector institutions. In Brazil, in particular, several agencies reported that they were on cover for private sector borrowers but not to the public sector, or gave more favorable terms to private sector borrowers, because they have established a better payments record.21 One agency also reported that it preferred guarantees from commercial banks to sovereign guarantees in lending to public sector borrowers.22

Many of the agencies surveyed stressed that policy actions in two areas could greatly facilitate the provision of cover to private buyers in their countries. The first was a well-functioning local banking system. Although a few agencies that already did substantial business with private buyers had credit records and could conduct credit assessments on a large number of private firms in developing countries, other agencies considered that they did not have the capacity to conduct independent assessments of the creditworthiness of any but the largest private buyers. In such circumstances, the provision of cover to private buyers could be greatly facilitated by a relationship with a local bank in which the agency had confidence, since this could substantially reduce the costs of credit assessment and documentation. Several agencies already make substantial efforts to find reliable commercial banks in developing countries.

The second area cited by most export credit agencies as important in enabling them to provide cover to private sector buyers in developing countries was the existence of a legal system that was stable, consistent, and fair to foreign investors and creditors. Most agencies stressed that they would still require either commercial bank or public sector guarantees for all transactions, but the legal system nevertheless remains an important concern.

Table 2.

Summary of Short-Term Cover Policies of Export Credit Agencies Toward Selected Developing Countries, End-1993

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Sources: Agencies visited; Berne Union; and IMF staff estimates.

One agency can have several types of restrictions.

Including cases where restriction is only on private sector. Agencies whose stance is not yet determined but are open on a case-by-case basis are included here.

Including agencies reporting an undetermined stance.

Including guarantees of payment or transfer and commercial bank guarantees.

Including limits on individual transactions, on total commitments, and on annual new business.

In Côte d’Ivoire, one agency offered unrestricted cover for the private sector, but was off cover for the public sector; in Kenya, two agencies adopted this stance.


Agencies generally considered credits for the private sector as an area where growth in their activities could be expected. Two aspects of cover for the private sector that were seen as particularly promising were buyers’ credits to developing country commercial banks and project finance. In the case of buyers’ credits, a bank in a developing country acts as an intermediary, responsible for assessing the creditworthiness of buyers and the viability of projects, and assuming the commercial risks involved in the lending operations. Agencies cover the risk associated with the possible failure of the borrowing bank, and the transfer and other political risks. Agencies saw such credit lines as particularly effective instruments to improve the quality of investments, because the demand for finance would originate with buyers rather than with exporters keen to expand their business, while, at the same time, exports from small businesses that would otherwise not have ventured into this market might be encouraged.

Table 3.

Summary of Medium- and Long-Term Cover Policies of Export Credit Agencies Toward Selected Developing Countries, End-1993

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Sources: Agencies visited; Berne Union; and IMF staff estimates.

One agency can have several types of restrictions.

Including cases where restriction is only on business with private sector or where agency is open for medium- but not for long-term cover; agencies whose stance is not yet determined but are open on a case-by-case basis are included here.

Including agencies off cover for new business and those reporting an undetermined stance.

Including guarantees of payment or transfer and commercial bank guarantees.

Including limits on individual transactions, on total commitments, and on annual new business.

Two agencies offered restricted cover for the private sector but were off cover for the public sector.

Project finance, defined in this context as the provision of credit with only limited recourse by the lender to the owner of the project or the host government, has taken on an increased importance as developing countries have privatized large utilities with heavy demands for finance and as demand for infrastructure investment has picked up in a number of large developing countries. The advantage for the developing country is that the risks associated with such finance can be limited; the advantage for the lender is that security can be obtained for the loan, either in the form of an ownership stake in the project or through the placing of some of the borrower’s assets in escrow accounts, usually held offshore. However, the absence of a formal government guarantee on the loan does not mean that it frees the government from all responsibility or the loan from political risk. Governments are generally required to give letters of comfort promising not to interfere with the operations of the enterprise or the service of its debts. Moreover, experience has shown that project financing can involve complex transactions that strain the capacity of agencies. For this reason, as much as any other, the volume of project financing undertaken by agencies has so far remained limited.

Export Credit Financing for Transition Economies

Overall Views

Export credit agencies see the fundamental restructuring of the economies of most of the countries of the former Soviet Union and of eastern and central Europe as presenting them with tremendous opportunities but also tremendous challenges. The economies in transition have been undergoing a period of rapidly changing economic and legal environments, sharp declines in output, and major strains on the budget and balance of payments. At the same time, many of these countries have educated work forces, some have excellent resource endowments and all have huge, pent-up demand for consumer and capital goods. Central and Eastern European transition economies are also geographically natural markets for exporters in Western Europe. Finally, there has been considerable political support for assistance, largely through export credits, to countries undergoing a difficult transition to democracy and a free market economy, and international financial institutions have taken steps to facilitate such assistance (see Box 6). While these factors together have resulted in considerable interest in transition economies on the part of agencies, the rapidity and extent of the changes in these countries have also given them and their government authorities an acute sense of the risks involved in such finance.

Special Security Arrangements and the World Bank’s Negative Pledge Clause

The basic purpose of the World Bank’s negative pledge clause is to protect the Bank against the use of governmental resources, or the use of governmental authority to mobilize other resources, to enable other foreign creditors to obtain foreign exchange in preference to the Bank through the creation of liens or priorities on public assets.1 The Bank’s negative pledge clause provides that if any such liens or priority interests are created, they shall equally and ratably secure the Bank, unless the Bank agrees otherwise.

Escrow accounts established by borrowing enterprises to ensure availability of foreign exchange to service specific debt or other contractual obligations are seen by foreign investors as one important element of protection against noncommercial risks. Escrow accounts afford lenders only limited protection against commercial risks.

In March and November 1993, the World Bank adopted changes in its general negative pledge clause policy to provide for country-specific waivers under certain conditions. Country eligibility is assessed on the following basis:

  • At least 75 percent of income-producing assets are in the public sector.

  • Macroeconomic policies are satisfactory. In cases where no IMF-supported program is in place, the Bank staff would make an independent assessment of the macrocconomic framework.

  • A program of structural change is being implemented, involving two key elements: (1) diversification from the public to the private sector, including an appropriate privatization program; and (2) a shift from an administered system to a market economy.

Eligible countries are granted a waiver for an initial period of two years.2 Subject to review by the Bank’s Executive Board by the end of the second year, the waiver can be extended for a further period of two years. All eligible transactions signed during the waiver period are covered for the full maturity of the liens established. The Bank requires that project financing be supported by a feasibility study, prepared by competent, independent experts, that demonstrates that the project would generate foreign exchange in excess of the amount necessary to service the debt incurred. Finally, the Bank reserves the right to withdraw the waiver for projects not yet approved if an event of default occurs under a Bank loan or guarantee with the country.

The waiver is granted with respect to any lien to secure repayments of external debt under a loan made to finance a specific investment project, provided that the initial maturity of the loan is not less than 5 years, and that the lien does not permit the accumulation of more than 12 months’ projected debt-service obligations in any related escrow accounts. The lenders may also require reserve accounts to be established to sequester appropriate amounts of project revenues as provision for future operating expenditures, and other project contingencies, limited to the equivalent of an additional six months’ projected debt-service obligations.

Other conditions are that

  • the lender does not have alternative recourse for repayments of the loan, such as guarantees of public authorities in the borrowing country, or insurance, or any form of third party indemnity with the exception of that provided by a private source, or by an official agency that requires the establishment of the lien as a condition of its support.

  • the lender is private in character. Liens created in favor of official bilateral aid and export credit agencies and of multilateral development institutions are therefore excluded from the scope of the waiver, except that (1) the waiver can extend to loans made by multilateral development finance institutions that are unable to obtain a government guarantee due to legal restrictions; (2) an official agency that has guaranteed a loan by private lenders can benefit under a lien in favor of the latter by subrogation of rights (for example, after payment to the lender under a guarantee issued by an export credit agency); and (3) an official agency’s direct lending comprises less than 50 percent of the loan.

  • the Bank is not a cofinancier of the investment project concerned. Where the Bank is cofinancing an investment project, it is generally its practice to share, equally and ratably, in escrow or other security arrangements.

1Assets of a joint venture between a government or public entity on the one hand and a foreign private enterprise on the other will not fall under the scope of the Bank’s negative pledge clause unless the joint venture is controlled by, or operates mainly for the account or benefit of, the government or public entity.2As of September 1994, waivers had been granted for Russia. Uzbekistan, and Kazakhstan.

Agencies emphasized the particular difficulties they face in assessing the creditworthiness of borrowers in transition economies. Both public institutions and private companies in borrowing countries are often new and unfamiliar. In cases where the country itself is new, and especially in the case of the countries of the former Soviet Union other than Russia, there may be little external debt and therefore no payments record. The scope of sovereign guarantees has been the subject of intense negotiations with some countries, and may or may not prove to be reliable; and in some cases it is not clear which government agencies have the right to commit government resources for the contingency of nonpayment by the borrower. The regulatory environment is evolving rapidly and accounting standards vary widely from country to country. The distinction between public and private enterprises and banks in these economies is also often uncertain. In this situation, traditional criteria for assessing political risk or the commercial viability of enterprises or projects—such as debt-service indicators, past payments records and borrower or project evaluation—are often not readily applicable.

Agencies have responded to these problems in a variety of ways. They have tried to supplement the limited information that is available by using other sources, including IMF staff reports. Agencies look particularly for evidence of the authorities’ commitment to a stable macroeconomic framework. Other policy issues of importance to agencies are the extent to which the authorities are encouraging the emergence of a private sector through privatization; the development of an efficient and reliable banking system; and a clear legal framework, especially with respect to creditors’ recourse in the event of default. Finally, agencies scrutinize with more than usual care whatever evidence of a payments record there is. Diligence in meeting debt-service payments, even those that are small, is regarded as an indication of a responsible attitude toward debt generally. On the other hand, if the authorities appear inattentive to the need to service debts on time when debt-service payments are limited, then export credit agencies are reluctant to make commitments that will lead to more substantial obligations in the future.

Agencies have generally taken a very gradual and cautious approach to cover. They have tended to begin with short-term cover at relatively low levels, and follow this with more substantial medium- and long-term cover upon establishment of a good payments record. Similarly, in extending credits to emerging private sectors in economies in transition, agencies have looked for a few reliable commercial banks as guarantors in the borrowing country, leaving open the option of extending credits on a broader basis once business relationships have been established. It was in this context that the establishment of a sound banking system was seen as absolutely essential for further easing of the existing restrictions on cover.

Securitization Techniques—Escrow Accounts

In some countries export credit agencies seek more direct securities than guarantees by governments or creditworthy commercial banks. Securitization and collateralization are not new: commercial lenders often seek security in the form of an irrevocable lien established over assets or export earnings of private buyers, and export credit agencies have also on occasion made use of, or participated in, such arrangements in transactions involving private sector importers. However, in markets considered high risk, where creditors’ risk assessments indicate that no cover should be extended, and where sovereign guarantees are seen as of little value, security arrangements have been sought on a broader basis. These arrangements typically involve escrow accounts in offshore banks through which export proceeds of the debtor are channeled and that give the creditor priority for debt service. To ensure timely debt servicing, even in the face of possible variations in cash flow, the debtor is typically required to keep a minimum balance in these accounts.

A substantial group of agencies saw no possibility of their providing more cover for most states of the former Soviet Union, including Russia, without establishing security arrangements, including offshore escrow accounts. In the case of Russia, agencies have been influenced in this stance by the substantial payments difficulties on outstanding debt. This group of agencies preferred escrow accounts—in conjunction with project financing, including in transactions involving the public sector—to sovereign guarantees, which they considered of lesser value. Most escrow accounts that have been set up so far relate to credits to private sector entities. However, following the World Bank’s waiver of the negative pledge clause for Russia, the U.S. Eximbank, EID/MITI (Japan), and SACE (Italy) have all reached agreements with Russia involving escrow accounts for financing of public investments in the oil and gas sectors.23

However, the possibility of escrow-secured lending has not yet led to major additional inflows to transition economies. One reason is that while escrow accounts can serve substantially to reduce transfer risk, creditors remain largely exposed to commercial risk. Further possible reasons include the bias introduced by escrow accounts toward projects that can earn convertible export proceeds, which reduces the set of potential borrowing sectors. Putting escrow accounts in place has also proved to be a complicated and time-consuming process, involving technical work with which agencies have had limited experience in the past. As a result, a number of agencies have not pursued escrow accounts, and some of the agencies that have used them have commented that they would prefer a sovereign guarantee to an escrow account, if they had more confidence that the guarantee would be honored. Finally, there are some countries for which export credit agencies would not provide any cover, with or without escrow accounts.

Agencies also reported that governments in transition economies tended to be cautious in approving requests to establish escrow accounts for public sector projects. They agreed that there are some features of escrow-secured lending operations that could make them unattractive to borrowing country governments. Escrow accounts reduce the authorities’ flexibility in mobilizing and managing foreign exchange; monitoring of external debt operations is also complicated by offshore escrow accounts. Escrow accounts reduce the supply of foreign exchange and lead to a segmentation of foreign exchange reserves. They may also divert foreign credits to companies that can offer the best security package, rather than to companies that can put credit to the most economically efficient use. Finally, there is a danger of proliferation: governments that agree frequently to the use of escrow accounts may see creditors insist on them in cases where they would not otherwise have done so, which would effectively reduce a country’s ability to obtain credit. In this context, agencies noted that they had difficulties in justifying nonsecured lending in cases where governments had agreed to provide other creditors with security packages.

Escrow accounts also have potential costs for other creditors. In particular, the use of escrow accounts for public sector projects runs counter to the policy of debt subordination, which has served as the basis of the debt strategy for official bilateral creditors. Escrow accounts attempt to subordinate all other loans, including post-cutoff date loans and loans from multi lateral creditors.24 A proliferation of escrow accounts would therefore raise serious concerns, both for non-secured bilateral creditors and for multilateral creditors, including the IMF, at a time when these institutions are being called on to provide a growing share of the financing for economies in transition.

Limitations of Export Credit Financing for Transition Economies

At their best, export credits can be an essential instrument in financing the restructuring of an economy, relieving pressure on reserves, and as a stepping stone towards access to longer-term, more flexible forms, and more diversified sources of foreign financing. But some of the limitations of export credits discussed above are particularly relevant to transition economies; and, indeed, the concerns of borrowing countries about escrow accounts appear in some cases to reflect ambivalence about export credits generally.

Even when escrow accounts are not involved, credits may be allocated to sectors where foreign exporters are pursuing contracts most aggressively rather than to those where in the view of the borrowing country government the need is greatest. At worst, extensive recourse to export credits without careful consideration of the economic benefits to be gained from them can result in unproductive projects and future debt-servicing problems. The risks of this may be particularly acute in transition economies because the rapid economic change in these countries makes sound financial evaluation more difficult.

Developments and Prospects