Abstract
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Inter-enterprise debt (IED) is an serious problem for policy makers in many post-communist economies (PCEs) attempting “big bang” liberalization and stabilization programs. In the former Soviet Union, and Romania it has reached unprecedented proportions. Between January 1 and April 30, 1992, IED in Russia grew to the equivalent of total GNP generated during the same period, and in Romania at the end of 1991, IED amounted to about 50 percent of GNP. In contrast, the ratio of IED to GNP in Czechoslovakia and Poland was much smaller, and seemed to have increased at a far slower rate--or not at all--upon initiation of “big bang” transition programs.
In the former Soviet Union and Romania, the main reason for the explosion of IED seems to have been the lack of credibility of their stabilization programs. State-owned enterprises that do not believe in the durability of the reduction in the rate of growth of nominal credit that occurs during a stabilization program behave rationally if they extend trade credit to their customers. Furthermore, in order to protect themselves from the inflation that can be expected to accompany the loose monetary policy that will occur when the program collapses, they set prices sufficiently high to protect the real value of the payment, adding even more to inflation in the short term.
The best policy is to do nothing to “solve” the IED problem: moral hazard is almost sure to result from all multilateral clearing of IED, particularly because, if stabilization is indeed not credible and if there is a limit to the possible expansion of IED, a constant money supply requires repeated rounds of multilateral clearing just to prevent output from collapsing once IED has reached its maximum. The solution to this dilemma is to securitize the IED, so that its nominal value can be reduced to a level consistent with a constant money supply. This means allowing the market to effectively re-price past sales of goods at new, lower, prices. It also makes the reduction of prices on new sales of goods easier. Since total nominal transactions need to fall so that they are in line with the lower-than-expected level of nominal liquidity (resulting from the government’s unexpected persistence with stabilization), greater downward price flexibility reduces the share of the adjustment that takes the form of a fall in output. As a result, securitization also helps to make the stabilization program more credible.