Abstract

IN its relations with developing countries, as with other members, the Fund is guided primarily by a desire to implement the purposes outlined in the first of its Articles of Agreement, and in particular

Introduction

IN its relations with developing countries, as with other members, the Fund is guided primarily by a desire to implement the purposes outlined in the first of its Articles of Agreement, and in particular

  • to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.

By far the greatest number of Fund transactions have been with countries which may be considered to be developing rather than developed, even though a small number of large drawings, such as those by the United Kingdom in 1956, 1961, 1964, and 1965, France in 1957 and 1958, Canada in 1962, Japan in 1953 and 1957, and the United States in 1964, have accounted for over half of the value of total Fund transactions. Since the large majority of the Fund’s members are developing countries, most of its consultations are with them, and conducting relations with these countries is a major part of its day-to-day activities.

It is difficult to make generalizations regarding the problems of the developing countries. Many are primarily dependent on the export of a few commodities to provide the imports which account for a large part of their consumption and investment; others have already achieved a high degree of self-sufficiency. Some are faced with serious population pressures; others are able to absorb a fairly large number of immigrants. In many cases, their export products are subject to large price fluctuations, which make the determination of the prospective profitability of investment uncertain and the maintenance of balance of payments equilibrium difficult. Furthermore, most exporters of primary products are also importers of other primary products. When, as in 1964, the prices of some such products fall relatively to others, those countries that export the former and import the latter will suffer. In the field of financial policy, many of the developing countries have been able to achieve growth in an atmosphere of financial stability; for a few countries, inflation seems to be almost an endemic problem.

While the Fund is necessarily interested most directly in the financial problems of the developing countries, it recognizes that these account for only part of the real internal and external difficulties facing these nations. However, experience indicates that these difficulties are most likely to be successfully overcome when policy is directed toward the maintenance of internal and external financial equilibrium. Even if this stability is achieved, it will not necessarily guarantee that rapid progress is attained; monetary stability must be regarded as a prerequisite for sustained economic expansion, rather than as an objective in itself. Even the best of policies can only speed the achievement of potential progress.

In previous Annual Reports, a number of the financial problems facing developing countries have been discussed. In 1962, the relation between inflation and economic development was reviewed at some length; and in 1963, some of the trade and payments difficulties of the developing countries were discussed and methods to cope with them were considered. These are aspects of the more general financial problem facing developing countries.

This chapter deals with two other aspects of this general problem which are frequently encountered in developing countries, and with which the Fund is increasingly concerned. The first section of the chapter discusses briefly problems arising from structural weaknesses in countries’ fiscal systems; the second reviews at greater length difficulties arising from excessive burdens of short-term foreign debt.

Fiscal Systems

The Problems

For some years past, the discussions which the Fund has had with countries planning stabilization programs have shown that budget deficits are a major problem in many such countries. Indeed, it may not be too much to say that these deficits are the most frequent cause of the balance of payments difficulties of countries seeking assistance from the Fund in support of stabilization programs.

Many developing countries are faced with rapidly growing populations and a need to improve living standards. Their aspirations have led them to undertake ambitious expenditure programs in order to accelerate the rate of economic growth and to provide more government services. These programs involve not only the expansion of public investment in transportation, power, sanitation, and water, but also higher expenditures on education, public welfare, and other services, to meet the rising expectations of the population. Once a government becomes committed to a high and rising level of expenditure, the curtailment of spending programs is politically difficult. At the same time, the revenue systems of most of the developing countries are not structurally capable of supplying a rapid increase in financial resources. In most such countries, these systems, and the tax rates, are inadequate to obtain the necessary growth in revenue and are generally not conducive to development. Moreover, they are often so complicated that a general increase in rates would most likely lead to further economic distortions and administrative difficulties, with little growth in revenue. Simplification and reorientation, together with judicious increases in appropriate rates, are what is required.

A further complicating factor is that the existing revenue systems are generally inelastic relative to economic growth. Basically, this inelasticity reflects the fact that taxation does not tap adequately the more dynamic sectors of the economy. A major cause of the inelasticity of the revenue systems has been the inevitably heavy dependence upon import and export duties. On the import side, these have been rendered comparatively sluggish by balance of payments limitations upon the growth of imports, by the fixed character of specific duties, and by the shift in the composition of imports toward capital goods and raw materials that generally carry lower duties or are even exempt from them. The prevalence of specific indirect taxes and of land taxes based on long outdated assessments also inhibits revenue growth.

The scope for borrowing by the public sector in the developing countries is quite limited. Usually, the capacity of the capital market in developing countries is exceedingly small and is limited more by the low level of income per capita than by the lack of institutions for channeling savings into productive employment. Some borrowing is possible from small savings—for example, post office savings and low-denomination government bonds—and from pension funds. Usually, however, internal borrowing by the public sector is mainly from the banking system. Since the scanty supply of financial savings through the banking system has to assist in financing the over-all requirements of the economy, only modest amounts can be obtained from this source if the private sector is to have adequate funds to meet its needs for growth. The total amount of external financing is limited by the over-all supply of such funds, by the shortage of projects suitable for such financing, and by balance of payments considerations. In particular, external credits with short repayment terms can lead and in many instances have led to serious balance of payments difficulties.

When internal borrowing (largely in the form of bank credit) leads to a primary monetary expansion beyond the needs of the economy, rising wages and other internal costs will impair the country’s competitive position, stimulate imports, and result in a drain on foreign reserves. Such an inflationary situation tends to feed on itself. Wage and salary adjustments and subsidies to alleviate rising living costs increase budgetary expenditures. The revenue structure, in addition to being inelastic to growth, is usually not well designed to provide the necessary response to price increases. Specific import duties, where they exist, do not reflect changing values or composition of goods, and income and profits taxes are of minor importance. Indirect taxes on the internal economy are often specific, and property tax assessments lag behind changing values. Delays in payment of tax liabilities and inadequate administration and enforcement of the tax laws often worsen the situation.

The fiscal difficulties of many developing countries are aggravated by heavy dependence on the export of raw materials and sensitivity to fluctuations in prices due to the shifts in world supply and demand of a few basic commodities. Any decline in the prices of these items is soon reflected in falling government receipts from customs duties and internal taxes. Also, a country’s financial problems may at times be intensified by disasters, such as floods, earthquakes, or prolonged droughts. The resulting loss of production not only precipitates a drop in taxable income but also entails greater expenditure for relief. However, weak fiscal systems can make the country’s problems more difficult than they need be, and a strengthening of such systems can facilitate the solution.

The Fund has long aided its members in tackling the problems of inflation, and the establishment of the Fiscal Affairs Department will enable it to render greater technical assistance to countries seeking to improve tax structures, tax administration, and budget administration.

Steps to Strengthen Public Finances

Although taxable capacity is limited by low incomes and the difficulty of taxing the subsistence sector of the agricultural population, few countries do not have scope for increasing government revenues. Some countries have achieved impressive results. In India, for example, the ratio of taxes to national income was more than doubled in a 13-year period. The ratio had ranged between 4½ per cent and 6½ per cent, until the institution of the first development plan in 1951; by 1955-56 the tax ratio had risen to almost 8 per cent, and by 1963-64, it was pushed to over 13 per cent of national income. (The inclusion of municipal taxes would raise the level even more.) In Peru, the ratio of taxes to national income between 1952 and 1959 averaged approximately 9 per cent; in the succeeding four years, tax collections rose to 14 per cent of national income. In many other countries, the ratio has also been rising.

Countries attempting to deal with inflation and to bring their balance of payments under control have often had to adopt emergency fiscal measures which are helpful in the short run but which would be undesirable if long continued. These include such actions as the deferment of capital outlays and the imposition of surcharges on imports or foreign payments.

For the long run, improved budgeting, tax reform, and better administration are required.

Budgetary Planning and Control

The national budget, through which expenditures are authorized and taxes and other revenues are set, is the logical starting point for improving a country’s finances. The budgetary process involves the establishment of priorities for expenditures for various public purposes, and these should be restrained within the over-all ability of the government to support them. The matching resources are made available from internal revenues, including taxes and other receipts and loans, or from loans from abroad. In order to ensure the efficient utilization of public funds, some countries have organized a budget office that has effective control over both planning and execution of budget expenditures, and have provided the office with adequate authority to keep expenditures within the limit of prospective resources.

It is also important to ensure the coordination of the operating policies and investment decisions of autonomous entities with the country’s economic plans through appropriate forms of central review or control. This need was recently recognized in Mexico, and all decentralized agencies were required to submit their budgets to the executive for review and formal legislative approval. Improvements in accounting and reporting procedures are a necessarily related step for both expenditures and revenues, in order to provide the up-to-the-minute data which are essential for proper administrative control over expenditures.

Tax Reform

In recent years, many of the less developed countries have recognized the need to modernize tax systems so as to facilitate economic development and other social objectives. In parts of Latin America, for example, important tax reform programs have been undertaken which have greatly strengthened the revenues. Most of the recent reforms have been designed to introduce or to strengthen income taxes, to improve the incidence of import duties and internal sales taxes by higher rates on luxury and semiluxury goods, or to modify or eliminate tax barriers to new investment by various relief measures. Supplemental taxes on net wealth have been introduced in a few countries, and taxes on exports modified in others.

One of the most intractable problems frequently encountered is that of obtaining appropriate tax revenues from the agricultural sector. In many instances, this revenue is obtained through taxes on exports of important agricultural commodities and through duties on imports or excises and sales taxes on farmers’ purchases. However, new techniques need to be developed to tap the predominantly subsistence sector and to widen the tax base by encouraging the conversion of production for subsistence into production for money income. Graduated personal taxes have proved useful in several African countries where land taxes are impracticable, although evasion is sometimes difficult to prevent. In other countries, improvements have been made in the assessment of land values and the collection of land taxes.

Tax reforms are commonly intended not only to increase revenues but to lessen interference with economic growth and to help to achieve a more even distribution of income and wealth. In some respects these objectives may conflict, so that compromises among them often become necessary.

Tax Administration

More and more countries are recognizing that the most effective means of strengthening revenue collection is often the improved enforcement and administration of existing taxes. Usually a long range program is required, including reorganization of revenue departments, the hiring and training of suitable employees, and the payment of adequate salaries, as well as the introduction of modern techniques and controls to check evasion and irregularities. Greater voluntary compliance with the tax laws may be secured as taxpayers’ confidence in the efficiency and fairness of the revenue administration grows.

To improve revenue administration, it may also be necessary to redesign and simplify the tax laws themselves. This may entail the consolidation of many separate taxes into a single integrated tax, as in Ecuador which recently combined 25 separate taxes on the export of bananas into a single unified rate of 20.4 per cent. Progress can also be made by the elimination of miscellaneous small taxes that are not justified by the cost of collection.

Pricing Policies of Public Enterprises

A major cause of government deficits has often been contributions to finance the operating deficits of public enterprises, which are frequently due to inadequate prices for the services provided. Railroads, other transportation, and electric utilities are common sources of drain on public funds; such a drain frequently results also from the production and distribution of consumer goods. These losses are often the result of conscious under-pricing policies designed to provide subsidies to counter inflation. Many enterprises that cover operating expenses do not make adequate provision for the amortization of their initial capital investment or for expansion. Financial demands are often made on the government even by autonomous entities that are only loosely affiliated to it. The revenue structures of most developing countries are not strong enough to support both the increased expenditure required by an adequate development plan and the large financial contributions that the state enterprises often receive.

Some countries have reduced or eliminated the budgetary drain of public enterprises by placing them on a more efficiently operating basis. In Mexico, most of the state enterprises operate profitably. India has for many years been striving to operate its public enterprises so as to obtain surpluses for investment, and has been particularly successful with respect to the railways and some of the new industrial establishments. Serious attempts are also being made to improve the financial results of public enterprises in a number of other countries, including Argentina, Brazil, and Ceylon.

Debt Burdens and Debt Renegotiation

The Problem

In many instances, the strains arising from weak fiscal structures in developing countries have been eased temporarily by recourse to unduly large foreign credits, often for relatively short terms. In addition, in attempting to mitigate the immediate effects of inflation, governments have, in certain instances, acquiesced in the incurring of large short-term and medium-term debts by businesses and individuals, or, by granting import permits more freely than foreign exchange has been made available, have allowed the accumulation of large commercial debts to foreign suppliers. Another important factor in the emergence of heavy debt burdens has been that a shortage of long-term capital has induced governments to finance long-term development by short-term or medium-term borrowings.

In assessing the problems of development, there are many aspects of the question of debt burden. In one sense, debt servicing requirements need not be regarded as a burden, and even a rising level of debt service need not be a cause for concern. If the original external financing enables a country to build up its capital stock so that the gross flow of its total output is increased in a manner which permits it to improve its balance of payments by more than the associated debt service payments, it should be able to meet its obligations and still enjoy a rising standard of living. On the other hand, if the maturities of debts are out of line with the productivity of the investments this may be the source of difficulties. Even with reasonable agreement between debt maturities and investment productivity, problems of international transfers may arise, and, in any event, policies with regard to foreign borrowing must be shaped with a country’s eventual capacity to repay constantly in mind.

In some respects, the problems related to a country’s borrowing capacity are of more direct concern to creditor countries and to development institutions such as the IBRD than to the Fund. However, in a number of countries there are immediately pressing problems of financing relatively heavy debt burdens in the near future, and of controlling the incurrence of new indebtedness, which are of concern to both the Bank and the Fund.

Debt Repayment Schedules

A number of developing countries are presently faced with debt repayment schedules over the next few years which are very heavy compared with their potential earnings. While government debts with original maturities of 12 months or more are only a part of the total, some of the available data on this component provide an indication of the general magnitude of the short-term debt problem in a number of countries. Thus, the annual debt service requirements (payments of interest plus amortization of principal) on these public debts of 37 developing countries covered in Table 1 increased by over 250 per cent from 1956 to 1964. Not only have the government debts of some of these countries increased markedly in recent years, as indicated in Table 2, but the structure of these debts has altered so that relatively short-term debt forms a larger part of the total, as evidenced by the rise since 1956 in the immediate repayment requirements relative to the total outstanding debt, indicated in Table 3. In part, this increasing importance of short-term debt reflects the fact that sufficient long-term funds were not available to meet the desires of governments to finance capital development, or that there were no programs that could be financed in such a way, while foreign suppliers were willing to supply the equipment for this investment on relatively short-term credits, largely because their own governments guarantee a part of export drives. These credits generally have maturity schedules that are not in line with the productivity schedules on the investment undertaken.

Table 1.

Thirty-Seven Countries1: Annual Service Charges on Medium–Term and Long–Term External Public Debt, End of Year, 1956-64

(In millions of U.S. dollars)

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Sources: Data for 1956-62 are from Dragoslav Avramovic and associates, Economic Growth and External Debt (Baltimore, 1964), p. 107; those for 1963 and 1964 were prepared by the staff of the International Bank for Reconstruction and Development.

Latin America: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, Venezuela. South Asia and Middle East: India, Iran, Israel, Pakistan. East Asia: Burma, Ceylon, Malaya, Philippines, Thailand. Africa: Sudan, Ethiopia, Rhodesia and Nyasaland, Kenya, Tanganyika, Uganda. Southern Europe: Spain, Turkey, Yugoslavia. The debts covered are those with original maturity of one year or more.

Table 2.

Thirty–Seven Countries: Medium–Term and Long–Term External Public Debt, End of Year, 1956-64

(In millions of U.S. dollars)

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Sources: Data for 1956-62 are from Avramovic (cited in Table 1), p. 101; those for 1963-64 were prepared by the staff of the International Bank for Reconstruction and Development.
Table 3.

Thirty-Seven Countries: Annual Service Charges on Medium–Term and Long–Term External Public Debt as Percentages of Outstanding Debts, End of Year, 1956-64

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Source: Based on data in Tables 1 and 2. The data shown in Table 2 include lines of credit not yet drawn upon; on many of these, service charges are limited to a commitment fee. The percentages shown in Table 3 are therefore lower than those applying to that part of the debt which has in fact been used.

Data on other international indebtedness are more difficult to assemble, although short-term private and government borrowings are a large part of the total indebtedness. However, there can be no doubt that many developing countries have been receiving a rather continuous net inflow of short-term finance on government and private account, reflecting a “rolling-over” of some previous short-term capital receipts, and borrowings greater than repayments, with a consequent increasing obligation to meet outstanding commitments. Table 4 indicates that the short-term government and private liabilities of many developing countries to private U.S. lenders have been rising quite rapidly in recent years; and the United States has been only one of the sources of short-term finance, although the main one for Latin America.

Irrespective of the origins of the problem, there can be no doubt that certain countries are now faced with very large external debt repayment schedules in comparison with their potential foreign exchange earnings. The rising trends of immediate debt service requirements related to export income are demonstrated in Chart 1 and the levels reached in a few selected countries in Latin America are shown in Chart 2. At present, a number of Fund members are faced with very heavy commitments.

Table 4.

Short–Term Claims on Selected Countries Reported by U.S. Banks

and Nonfinancial Concerns, End of year, 1960-64

(In millions of U.S. dollars)

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Source: Based on data in Federal Reserve Bulletin.
Chart 1.
Chart 1.

Thirty–Seven Countries: External Public Debt Service as Percentage of Exports, 1956–64

Renegotiation Possibilities

If a country’s debt structure is such that it is faced with a heavy burden of repayment in the near future and much smaller payments in later years, it is possible that a postponement of some payments may convert an essentially intractable position into one where orderly repayments can be made. However, such rescheduling precludes further access to large amounts of short-term credit, if the rearrangement of debts is to be successful.

It must be recognized that in extreme cases countries are, in fact, faced with a choice between persistent default, reborrowing, unilateral moratoria (which only postpone the day of reckoning), and debt renegotiation to spread the burden over a number of years. In certain cases, the Fund has encouraged debtors and creditors to renegotiate debt contracts when such arrangements appeared appropriate to the particular circumstances that had developed. In these situations, the Fund has proceeded on the understanding that the debtors would adopt policies to make certain that the renegotiations would not merely constitute another postponement, new debts being accumulated during the period over which immediately pressing repayments are spread out.

Chart 2.
Chart 2.

Seven Latin American Countries: External Public Debt Service as Percentage of Exports, 1955, 1960, and 1964

The need for, and appropriateness of, debt renegotiation arises most frequently for countries trying to stabilize their economies after fairly prolonged periods of inflation. An essential part of many stabilization programs is the regularization of the countries’ foreign debt positions. This regularization may require an abatement of the pressure of immediately payable accounts, so that all debts may be met in an orderly manner, while at the same time debt repayment does not absorb such a large part of a country’s supply of foreign exchange that it is unable to pay for its essential external needs.

While debt renegotiation may be an essential component of an individual stabilization program, not only must such renegotiation involve an eventual complete repayment of the outstanding debts but it should be a rare event. If there is to be a flow of credit from the developed countries adequate to meet the needs of the developing countries, it is essential that the terms, of debt contracts be taken seriously and that orderly relations between debtors and creditors be maintained. In a sense, there is a world-wide pool of international finance for development. The willingness of creditors to make funds available to this pool depends, in part, on their expectations that they will be repaid on the terms on which they lend. Failures by developing countries to meet obligations tend to undermine the element of confidence in international indebtedness on which borrowing by all developing countries ultimately depends. A formal renegotiation may serve to improve and gradually restore the credit of a country that is in serious difficulties in meeting its obligations, and enable the debtor to, avoid a default, with its damaging effects on the international credit structure. Yet it may not suffice to restore the debtor’s creditworthiness to the level at which it would have been if renegotiation had not been necessary. Hence the development of serious short-term indebtedness situations serves to weaken the forces working toward the raising of living standards in the developing nations. Consideration is being given in the Fund and elsewhere to ways in which it might be possible to forestall the emergence of excessive external debt burdens.

Present Practices in Debt Renegotiation

Some reasonably well-defined practices have developed in the debt negotiations that have taken place in recent years. These practices are by no means so firmly based that they may not be changed, but they take into account realities that will continue to be important.

Difficulties in arranging a new debt schedule sometimes arise from the nature of the debts under review. In some instances, they have been incurred without an adequate review of the original financing by the appropriate authorities in either the lending or the borrowing country. Some of these debts are the counterpart of not necessarily productive investments undertaken by individuals in the developing countries on the basis of credit freely extended by exporters in the industrial countries. As a result, the debts being refinanced may have arisen from investments which were not necessarily the most desirable or which may have been made at unduly high prices.

The technical prospects of refinancing may also involve difficulties. Even in creditor countries where the refinancing can be handled by an existing public institution without new appropriations, a considerable reluctance is sometimes shown by such an institution to have its funds used in this relatively unappealing manner.

Although the creditor countries have evidenced considerable sympathy for the problems of the debtors, they have, in general, emphasized their view that a debt renegotiation must be considered to be a very unusual event and that it is explicitly an appeal for creditor forbearance. The same concern of creditors has led to the application, where a second approach has been made by a debtor country, of more restrictive standards and more emphasis on avoiding a recurrence of the problem.

Refinancing has almost exclusively been on a national basis, the relief given by a creditor country being limited to payments on debts due to its own nationals. As there has been a considerable variation between countries in difficult debt situations, it has been widely felt that those which have taken the risks in order to gain export markets are also those which should bear the costs. Increasingly close attention has been paid to this matter because liberal relief or new credits by one country can be diverted to maintaining service on debts to others granting less liberal relief.

To ensure that the burden of refinancing is shared equitably among the creditors, they have attached great importance to unity of action, and it is usual for a rule to be adopted requiring all creditors to be treated alike. The multilateral agreements include a most-favored-nation clause, the purpose of which is to ensure that all debts within the scope of the agreement receive the same treatment. The bilateral agreements which are necessary to implement the general understandings reached at the major debt conferences are tailored to suit conditions and institutions in the individual creditor countries, and although they may have a varied form and timetable, the same basic principles, as agreed between the creditors, are observed.

Although uniformity of treatment has been sought, there has been reasonable understanding that debt arrangements cannot be negotiated with too large a group. No objection has been raised to the exclusion from the scope of a multilateral agreement of countries that are owed relatively small credits, since they hardly affect the basic problem. In fact, attention has been focused primarily on obtaining uniformity of treatment between major creditor countries rather than on individual country settlements. Particular concern for uniformity has arisen when the debt with countries in the Sino-Soviet bloc has been substantial.

The coverage of the debt to be renegotiated has usually been relatively restricted. Frequently it has been limited to debt arising from commercial arrears and suppliers’ credits. In general, previously renegotiated debts and debts to international agencies have not been subject to further negotiation. Debts of central banks to private foreign commercial banks have also usually been outside any arrangement, although there has sometimes been parallel but less favorable refinancing in this area. Broadly speaking, the arrangements have been government to government—a situation facilitated by the widespread guaranteeing of export credits in most capital-exporting countries. Thus, the complexity of negotiations with large groups of private creditors has been avoided, and the damage to the credit standing of the debtor country has also been limited.

The problem of ensuring that the cost of refinancing is borne by those who openly assumed the risk has affected the coverage of some of the agreements. For example, in cases arising in the United States, where exporters have financed capital goods without any government guarantee, the U.S. authorities have generally wished to avoid giving a retroactive guarantee such as would be created if a government agency were to refinance these private debts. In the 1964 Brazilian renegotiation, the U.S. authorities did not undertake the refinancing of amounts due to private U.S. suppliers, and they urged the Brazilian Government to undertake such renegotiations direct.

The terms of refinancing have differed rather widely, but in general creditors appear to have been responsive to pleas to keep debt service down to a level considered reasonable in relation to the level of balance of payments receipts. They have been willing to accept a pause in payments in the early years when other debt service is unusually high, to be compensated for by increasing payments in later years. As most of the debts being renegotiated have been relatively short term, the renegotiated terms have not usually been beyond 10-15 years, and it has been appropriate that the level of payments arranged should have provided little leeway for accumulating new debts within reasonable limits of the debtor’s capacity to repay. (This limitation generally has a deflationary effect because of the reduction in the inflow of capital.) Although there have been important exceptions, rescheduling has usually related only to principal payments; payments of interest have been expected to continue without refinancing.

Conditions for Success

The willingness of creditors to accept an appropriate rescheduling of debt service is related to the degree of assurance that the problem will not recur. In principle, the creditors acting collectively should be able to prevent this—they usually represent the major part of possible credit facilities—but in practice, cooperative arrangements without effective coordination have not been effective. Consequently, increased attention has been paid to the safeguards that can be provided through the cooperation of the Fund and the IBRD.

The need for cooperative action has been particularly important in connection with export credits from the countries supplying investment goods to the developing countries. Export credits serve a useful, and indeed a necessary, function as long as they are limited to the capacity of the importing country to make repayment in the short term or medium term. However, difficulties have arisen because of excessive resort to borrowing in the form of short-term export credits for the financing of the purchase of equipment for long-term investment uses. In part, the responsibility for many of these cases of over-indebtedness must be shared by the creditor countries, where the over-all national interest is rarely represented effectively. Too often, an exporter, on a plea that businesses in other countries might get contracts, is able to exert a very considerable pressure on his government to obtain an official guarantee. This is a difficult and delicate problem requiring cooperative action for its solution, to which the Fund and the IBRD are directing their attention.

On the debtor’s side, the first decision in any debt renegotiation is to ask for relief. The timing of action to obtain such relief is important. Debt service builds up over time and may be accompanied by an accumulation of arrears of current payments. It is usually one product of excessive expenditures incurred as a result of domestic pressures which the financial authorities have not been able to resist. As long as these various pressures for expenditure are stronger than the countervailing desires for domestic stability, renegotiation is unlikely to be successful, for new debts will be incurred and the country will continue to be in difficulty. However, when the strain of the debt burden becomes sufficiently apparent, it serves to support efforts toward domestic stability, and, as a result, there may be sufficient backing from public opinion for responsible financial conduct. At such times, debt renegotiation may be desirable, and a successful renegotiation can strengthen the position of the authorities and provide them with an effective basis for requesting full control over all governmental foreign borrowing and for developing an integrated planning program.

The Role of the Fund

The Fund has never agreed to refinance debts directly, as such transactions would be outside its normal sphere of operations; its resources are available for the provision of relatively short-term assistance to meet balance of payments deficits.

In most situations where debt renegotiation is appropriate, there is need for much longer-term financing than could be provided under the terms of the Fund’s policy limiting the use of its resources to three to five years. Moreover, the debts are frequently large in relation to the member’s quota, and their refinancing by the Fund would seriously limit the Fund’s ability to meet genuinely short-term balance of payments difficulties. In many instances where debt renegotiation is only one aspect of a general stabilization program, financial assistance from the Fund to meet other aspects of the balance of payments readjustment problem is also a prerequisite for the program’s success.

In the course of a debt renegotiation, the balance of payments position of the debtor is certain to be discussed. Although the debtor usually can present an exposition of its position, there is a decided advantage to both the debtor and the creditor if there can be an impartial presentation of the facts. The Fund is in a good position to provide such an analysis of the short-term and medium-term balance of payments prospects, while the IBRD is in a comparable position to assess longer-term development trends. The Fund provided this type of information on an informal basis as part of the negotiations with respect to the outstanding debts of Turkey in 1958-59, Brazil in 1961 and 1964, Argentina in 1962 and 1965, Liberia in 1963, Indonesia in 1963, and Chile in 1965. In the last-mentioned instance, the IBRD participated in the discussion.

The Fund has the opportunity to assist in preventing a recurrence of the need for debt renegotiation when a stand-by arrangement is being negotiated parallel to the debt refinancing, although it must be remembered that a stand-by arrangement lasts for not more than a year, whereas the repayment of a rearranged debt will take several years. Subject to this, mutual benefits can be derived from commitments given to the Fund under a stand-by arrangement, since if adequate measures to restore the payments balance are implemented, there can be some assurance that such problems as the accumulation of arrears will not recur. Safeguards against other methods of accumulating an undue amount of indebtedness—e.g., the excessive use of short-term and medium-term suppliers’ credits—probably require the cooperation of a development agency such as the IBRD.

Another method, not connected with a program supported by a stand-by arrangement with the Fund, may be illustrated by the role that the Fund was asked to play in the negotiations with Brazil in 1964. At that time, the creditors and Brazil agreed to ask the Fund to be responsible for reporting to the creditors all information supplied by Brazil concerning the observance by Brazil of its new policy on the acceptance of suppliers’ credits.

Conclusion

Operations with the developing countries have provided experience which demonstrates that the Fund and the IBRD can expect to be involved in the debt problems of these countries. In certain cases, the renegotiation of outstanding debts is an essential step toward a return to orderly international financial conditions. While the Fund recognizes that this step should be taken only in exceptional circumstances, it always stands ready to make its good offices available when appropriate. It has provided, and will continue to provide, the background information required to assess the need for debt rescheduling and to understand the magnitude of the problem facing debtors. Further, some stand-by arrangements include conditions intended to discourage excessive debt burden, including the acceptance of an unduly large amount of suppliers’ credits. Finally, in its relations with member countries, the Fund is alert to the possibility (even if remote) of this problem emerging, and encourages the adoption of policies which will forestall the danger. Such encouragement lies within the Fund’s competence as a source of short-term balance of payments credits. By supporting appropriate policies, it hopes to contribute to the maintenance of a system of international payments which will, among other objectives, assist in fostering an adequate flow of longer-term international finance for soundly based development programs.

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    Thirty–Seven Countries: External Public Debt Service as Percentage of Exports, 1956–64

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    Seven Latin American Countries: External Public Debt Service as Percentage of Exports, 1955, 1960, and 1964