Abstract

This paper reviews recent developments in multilateral official debt restructuring during 1988 and 1989.1 This period was marked by two significant trends: debtor countries increasingly relied on debt reschedulings through the Paris Club and official creditors further adapted their policies in response to protracted problems in the most heavily indebted low-income countries.2

This paper reviews recent developments in multilateral official debt restructuring during 1988 and 1989.1 This period was marked by two significant trends: debtor countries increasingly relied on debt reschedulings through the Paris Club and official creditors further adapted their policies in response to protracted problems in the most heavily indebted low-income countries.2

Activity in the Paris Club reached a new peak in 1989, when 24 rescheduling agreements were concluded. Seven debtor countries approached the Paris Club for the first time, while the pace of repeat reschedulings continued unabated. This increased the total number of multilateral official debt reschedulings since 1976 to 150, involving a total of 50 debtor countries and consolidating about $110 billion in cumulative debt service (Table 1). The unprecedented frequency of Paris Club reschedulings in 1989 mirrored in large part the rise in the number of countries with Fund-supported adjustment programs, including, notably, several countries that had for some time been unable to obtain Paris Club reschedulings because of the absence of a Fund arrangement. Of the 50 debtor countries that have rescheduled since 1976, however, only 5 countries had re-established normal debtor-creditor relations by the beginning of 1990. The other 45 either had rescheduling agreements or were expected to approach the Paris Club for further cash-flow relief. As shown in Table 1, 11 debtor countries obtained rescheduling agreements during the first seven months of 1990, and several others are expected to meet with creditors in the near future. For some countries the lack of a further Paris Club rescheduling chiefly reflects difficulties and delays in framing appropriate adjustment programs that could form the basis for an agreement with official creditors.

Table 1.

Multilateral Official Debt Reschedulings, 1976-July 19901

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Source: Agreed Minutes of debt reschedulings and Fund staff estimates.

The reschedulings exclude both debt restructurings conducted under the auspices of aid consortia and official debt reschedulings for countries not members of the Fund, but include agreements with Poland signed prior to its date of membership in the Fund (June 12, 1986) and the agreement with Angola signed prior its date of membership in the Fund (September 19, 1989).

Roman numerals indicate the number of debt reschedulings for that country since 1976.

“Menu” refers to reschedulings on Toronto terms (see Appendix II). Agreed Minutes specify first and last payment dates for different categories of debts consolidated rather than maturity and grace periods. The maturities generally refer to the period from the middle of the consolidation period to the last payment date for previously non-rescheduled current maturities on medium- and long-term debt as indicated in communiqués of the rescheduling agreements.

Includes three separate one-year consolidation periods of the multiyear restructuring agreement.

The conditional second tranche of the consolidation took effect after a further meeting with creditors in 1987.

Includes two separate consolidation periods.

Includes conditional extension as indicated in Chart 5.

Includes two separate consolidation periods; however, the second tranche of the consolidation did not become effective.

Includes two separate tranches.

Date of informal meeting of creditors on the terms to be applied in the bilateral reschedulings. Since only two creditors were involved for Equatorial Guinea and three creditors for Chad, creditors did not call for a full Paris Club meeting.

Includes three separate tranches.

While graduation from the rescheduling process remains elusive for all but 5 of the 50 countries, the strategy of debt subordination pursued by official creditors has been successful in achieving important and more immediate objectives. First, creditors have continued to respond flexibly to the need for cash-flow relief on existing debts of countries that adopted Fund-supported programs; they have provided, when necessary, very comprehensive reschedulings of pre-cutoff date debts, including, when needed, previously rescheduled debt. And, second, they have helped safeguard the flow of new external financing to rescheduling countries by maintaining cutoff dates in successive Paris Club reschedulings and by excluding short-term debt from coverage under the consolidation.

The recent trend toward more comprehensive coverage of pre-cutoff date debt reflects mainly the persistence of severe balance of payments difficulties in the large majority of rescheduling countries, which has meant that the debt-service profile resulting from the terms of previous reschedulings could not be met. In response, creditors have progressively increased to 100 percent the proportion of principal and interest on current maturities covered by the consolidation in all but a very few cases, covered arrears in a more comprehensive manner, and also included at least part of previously rescheduled debt in most repeat reschedulings. Creditors also agreed to multiyear consolidation periods for several countries with arrangements under the extended Fund facility or under the structural adjustment facility (SAF) and the enhanced structural adjustment facility (ESAF).

A major development over the past three years has been the willingness of Paris Club creditors to progressively adapt their policies in response to the particularly protracted and deep-rooted problems of the heavily indebted low-income countries. These countries have accounted for nearly two thirds of all rescheduling agreements and had frequently experienced great difficulties in adhering to the payments schedule of previous consolidations. As described in more detail in Section III, Paris Club creditors took a first step toward easing repayment terms in mid-1987 by lengthening maturities and grace periods. A second and more far-reaching step was the introduction, in late 1988, of a menu of options, including partial cancellation, further extensions of maturities, and concessions on interest rates.3 Through July 1990 the menu approach was implemented in 23 reschedulings for 18 low-income countries, which consolidated debt-service payments of some $5 billion.

The issue of comparable treatment among various creditor groups has recently acquired increased importance, especially as regards the assessment of burden sharing between official and commercial bank creditors. Paris Club creditors and banks have long sought to ensure comparable action by the other except when debt service due to one creditor group was relatively small. In recent years, however, while official creditors continued to show considerable flexibility in providing relief for countries with Fund-supported adjustment programs, commercial banks in some cases did not come forward with the amount of financing that had been anticipated. In other cases, the increasing reluctance of banks to participate in financing packages contributed to delays in the adoption of adjustment programs and thus delays in official financing. With the return to the Paris Club in 1989 of debtor countries that have significant and often much larger debts to commercial banks, Paris Club creditors reaffirmed the importance they attach to comparable treatment, especially in those cases that involve official support of bank debt and debt-service reduction operations.