| United Nations | A/50/379 |
General Assembly
Distr. GENERAL
31 August 1995
ORIGINAL:
ENGLISH
Fiftieth session
Item 96 (c) of the provisional agenda*
MACROECONOMIC POLICY QUESTIONS: EXTERNAL DEBT CRISIS
AND DEVELOPMENT
The developing country debt situation as of mid-1995
Report of the Secretary-General
EXECUTIVE SUMMARY
Owing to the important political, economic and social dimensions of
foreign debt crises of developing countries, the General Assembly has for
many years closely monitored the debt situation of these countries and its
treatment by the international community. In its resolution 49/94 dated 19
December 1994, the Assembly requested the Secretary-General to report to
the Assembly's fiftieth session on the major developments that took place
in the international treatment of the debt of developing countries during
the past year. The present report responds to that request and also
identifies weaker areas within the international debt strategy that the
Assembly may wish to address in its deliberations.
The report is organized as follows. Following a brief introduction,
section II updates the current strategy in terms of new measures launched
and the restructuring agreements concluded from July 1994 to June 1995.
Improvements in the international debt situation should be visible in the
conventional debt indicators and the most recent data are analysed in
section III. It is argued, however, that such indicators offer an
incomplete picture of the debt situation, as they do not take into account
problems such as arrears, let alone slow economic growth and deteriorated
social conditions in debtor countries. Section IV thus takes the analysis
further by looking at countries that are still classified as severely
indebted despite the
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initiatives adopted so far. By identifying the types of debt held and
restructuring arrangements applied, this assessment attempts to highlight
the weaker elements of the current debt strategy.
The conclusion of the present report is that although significant relief
has been accorded to some countries and for certain classes of debt, the
international strategy has not comprehensively addressed the full stock of
debt, leaving a vulnerability for countries whose debt-servicing
obligations still exceed their "capacity to pay". Certainly, removing the
"debt overhand" by itself would not solve the development problems of the
debt-crisis countries. But while a debt overhand remains, even the most
rigorous and effective programmes of domestic economic stabilization and
structural adjustment leave the countries in question with serious
obstacles to moving to a sustained and sustainable development path. For
them, escape from debt overhand is a race against time.
CONTENTS
Paragraphs Page
EXECUTIVE SUMMARY ......................................................1
I. INTRODUCTION ........................................ 1 - 44
II. THE INTERNATIONAL DEBT STRATEGY: AN UPDATE ......... 5 - 195
A. Private creditors ............................... 8 - 117
B. Bilateral official creditors .................... 12 - 168
C. Multilateral creditors .......................... 17 - 1910
III. DEBT INDICATORS AT THE GLOBAL AND REGIONAL LEVEL:
MIXED MESSAGES .......................................20 - 3610
A. Aggregate measures of debt burden ................ 23 - 3013
B. Looking beyond debt indicators ................... 31 - 3617
IV. OUTSTANDING ISSUES ...................................37 - 5518
A. Middle-income countries .......................... 39 - 4418
B. Low-income countries ............................. 45 - 5520
V. CONCLUSIONS FOR POLICY ...............................56 - 6522
Figures
1. Foreign debt of the capital-importing developing countries,
1984-1994 ........................................................11
2. Composition of the long-term external debt of capital-importing
developing countries, by type of creditor, 1984, 1989 and 1994 ...12
Tables
1. Debt and debt-service reduction in the international debt strategy 6
2. Major features of current Paris Club rescheduling terms ..........9
3. Debt indicators for capital-importing developing countries,
1984-1994 ........................................................14
4. Developing countries classified as severely indebted by the World
Bank .............................................................16
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I. INTRODUCTION
1. The report of the Secretary-General on the external debt situation of
developing countries, presented to the General Assembly at its forty-ninth
session (A/49/338), noted that an increasing differentiation had taken
place among countries affected by the 1980s debt crisis. Some countries,
particularly middle-income countries of Latin America that had owed
considerable amounts to international commercial banks, were experiencing
an improvement in their economic conditions and regaining access - albeit
at a high financial cost - to international capital markets. This seemed
to suggest that their debt crisis was finally behind them. It was
certainly over for their commercial bank creditors. On the other hand, the
majority of low-income countries - and some lower middle-income countries -
continued to suffer debt-servicing difficulties. They also experienced low
rates of economic growth and their borrowing was restricted to the official
sources of largely concessional financial resources. For these countries,
the external debt crisis was very much alive.
2. One year later the situation in the low-income countries with debt
crises is little changed, although certain initiatives may begin to change
that. There is a new appreciation, however, of the fragility of the
situation in some of the middle-income countries that the markets once
seemed to judge as past their debt crises.
3. The General Assembly has closely followed the external debt problem of
developing countries since the debt crisis erupted in the early 1980s, and
"External debt crisis and development" has been on the Assembly's agenda
annually since its forty-first session. The Assembly discussions embodied
a series of resolutions that reflected the concern of the international
community about the severity of the debt problems of developing countries,
as well as the evolving consensus over the measures required to reduce the
debt burden of these countries. These resolutions have also emphasized the
need to further strengthen the international strategy so that a durable
solution to the debt problems could be reached.
4. In its resolution 49/94, adopted by consensus on 19 December 1994, the
General Assembly, inter alia, welcomed the measures taken by the
international community in reducing the debt burden of heavily indebted
developing countries and the economic adjustment efforts undertaken by
these countries. The Assembly called upon official and private creditors,
however, to consider appropriate new measures to extend further relief to
debt-distressed countries. It also requested the Secretary-General to
report at its fiftieth session on the implementation of that resolution.
The present report responds to that request. 1/ As in previous reports,
the present one draws heavily on information and analysis of the World
Bank, the International Monetary Fund (IMF) and the United Nations
Conference on Trade and Development (UNCTAD).
II. THE INTERNATIONAL DEBT STRATEGY: AN UPDATE
5. Since the emergence of the debt crisis, the international community has
devised a series of measures to deal with the persistent difficulties
developing countries faced in servicing their external debt obligations. 2/
These measures evolved into what is called the "international debt
strategy", which has two fundamental parts. First, the debtor country
addresses its domestic adjustment requirements, generally in a programme
supported by the multilateral financial institutions. Second, the debt-
servicing obligations are modified under negotiated arrangements, whose
major elements are reviewed below.
6. The approach to debt restructuring of the international strategy
started to acquire its present structure in the mid-1980s, when it was
recognized that the existing treatments of debt servicing only postponed
the payments, leaving the debt overhang unchanged, which discouraged
investment and undermined the economic growth prospects of debtor
countries. Increasing arrears in interest and principal payments,
moreover, signalled the debtors' inability to pay and that the stock of
debt needed to be made more manageable. At the same time, the emergence of
a market where commercial bank loans of the countries affected by the debt
crisis were traded at a growing discount indicated the creditors'
increasing perception that debt would not be serviced in full. By the
early 1990s, however, debt and debt-service reduction became a common
component of debt-restructuring agreements that debtor countries negotiated
with their bilateral official and private creditors.
7. The amount of relief extended has not been uniform, and its modality
has reflected the particular situation of the creditors and debtors
involved in each case. For both private and official bilateral creditors,
the particular debt restructuring results from choices made from different
but more or less standard "menus of options". Table 1 identifies the major
components of the international debt strategy in its current form. As
shown, only some types of debt are subject to restructuring, but
considerable relief may be granted on the restructured debt. 3/
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Table 1. Debt and debt-service reduction inthe international debt strategy
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A. Private creditors
8. Restructuring agreements involving the reduction of the stock or the
servicing of commercial bank debt allow the debtor countries to buy back
part of their outstanding debt at a discount or convert it into securities
that entail either lower interest obligations or a reduced face value. The
securitization approach is a common feature of "Brady Plan" arrangements
that were first applied in 1990. Many of these new debt instruments have
the repayment of principal collateralized with zero-coupon bonds issued by
the United States Treasury (or other Treasury obligations). A partial
guarantee is also sometimes offered on interest payments for a certain
period of time. Under the Brady Plan, multilateral and bilateral credits
have also been extended to the debtor country to meet up-front costs, such
as purchasing the United States securities that serve as collateral.
9. This approach has mainly been applied to the renegotiations of bank
debt owed by middle-income countries. The standard procedure is for the
debtor country Government to negotiate with a "steering committee" drawn
from its bank creditors a menu of alternatives from which each of the
creditor banks would then choose. The bankers' concern is that all banks
make comparable concessions in according relief to the debtor country.
During the period under review, two additional developing countries closed
debt and debt-service reduction agreements with their commercial bank
creditors: the Dominican Republic and Ecuador. Treatment of past-due
interest was part of the agreement in both cases. The Dominican Republic
was fully able to meet up-front costs from its own resources, while
additional borrowing from official creditors was required in the case of
Ecuador. The closing of these agreements brought to 13 the number of
countries that have negotiated Brady agreements with their creditors. Debt
reduction obtained through these operations amounted on average to about
one third of outstanding commercial bank claims on the countries concerned.
4/ Other countries currently negotiating Brady packages include Panama and
Peru.
10. Buy-back operations have also been conducted by low-income countries
with the assistance of official creditors and donors. Qualifying low-
income countries have benefited from the Debt Reduction Facility of the
International Development Association (IDA), the concessional lending arm
of the World Bank. The IDA facility is financed by bilateral donors and
transfers from net income of the World Bank on its regular lending
operations. It provides grants of up to $10 million per country for the
reduction of their commercial bank debt through buy-backs. However, only
seven countries have concluded buy-back agreements supported by the
facility since it was created in 1989. Recent agreements include those of
Sao Tome and Principe and Zambia.
11. Debt reduction is not a universal feature of all restructuring.
Traditional rescheduling of debt servicing with commercial and bilateral
official creditors still takes place. In May 1995, for example, it was
announced that Algeria had reached an agreement with a steering committee
of creditor banks on rescheduling $3.2 billion of its commercial bank debt.
Algeria had been in arrears on its bank debt since March 1994, and the
accord will help the country to regularize its situation with its bank
creditors.
B. Bilateral official creditors
12. Creditor Governments generally restructure debt servicing owed to them
through a multilateral forum known as the Paris Club. As in the case of
commercial bank steering committees, the Paris Club agrees to a menu of
comparable treatments to be applied to a particular debtor and each
creditor is then to choose from among the alternatives in a bilateral
implementing agreement. Since the 1980s, official bilateral creditors have
been gradually extending the degree of concessionality in their
restructuring of developing countries' external debt. The extent of relief
provided depends, inter alia, on the per capita income level of the country
concerned, as well as on the amount of debt subject to restructuring.
Rescheduling only affects payments falling due in a certain period (the so-
called "consolidation period") on debt that was contracted before a certain
date (the "cut-off date"), although with the introduction of the Naples
terms, discussed below, the possibility of treating the full stock of
relevant debt at one time was introduced.
13. The Paris Club has a set of standard terms and special treatments. In
particular, the "Houston terms", which entail long-term rescheduling of
payments, are applied to lower middle-income countries, while "Naples
terms" are now available to eligible low-income countries. The latter were
adopted by the Paris Club in December 1994 and are actually an extension of
the earlier "enhanced Toronto terms". That is, in cases in which the Paris
Club would have offered the option of debt-service reduction of 50 per cent
on affected debt, the Naples terms raised the percentage to 67 per cent.
Relief on the entire stock of debt (50 or 67 per cent) may be obtained in
exceptional circumstances and is considered an "exit option", meaning that
the debtor country will not ask for further rescheduling of its remaining
debt.
14. Middle-income countries usually reschedule under standard terms.
Lately, some flexibility has been introduced in the standard terms in the
form of extended maturities and graduated payments that allow for smaller
principal repayments to be made at the beginning of the repayment schedule.
Table 2 highlights the major features of current Paris Club rescheduling
terms.
15. In the year ending in June 1995, the Paris Club granted Croatia a
graduated repayment schedule. Houston terms were applied to the
Philippines, enhanced Toronto terms to Sierra Leone 5/ and Naples terms to
Bolivia, Cambodia, Guinea, Guinea-Bissau, Haiti, Nicaragua, Senegal, Togo
and Uganda. Among the countries receiving Naples terms, all - with the
exception of Guinea - received a 67 per cent reduction on the consolidated
eligible maturities. As of mid-1995, Uganda was the only country to
receive a 67 per cent reduction on the eligible stock of debt.
16. Debt forgiveness and debt conversions have also been undertaken by
individual creditor countries outside the multilateral framework. Creditor
Governments that have not participated in the Paris Club rescheduling (some
Arab creditors, China, some Latin American creditors and others), have
conducted bilateral restructuring through which a great deal of relief has
been extended in some cases, particularly when low-income debtor countries
were involved.
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Table 2. Major features of current Paris Club rescheduling terms
Countries, 1994.
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C. Multilateral creditors
17. Debt owed to the multilateral financial institutions cannot formally
be restructured and is not subject to cancellation or reduction. In
practice, however, there has been a series of initiatives to tackle the
difficulties developing countries have encountered in servicing their
multilateral debt. One indirect approach used for low-income countries is
to offer new lending on concessional terms, which provides foreign exchange
that can be used to service older debt.
18. Some interest-payment relief is extended by the World Bank, however,
through its Fifth Dimension facility. Heavily indebted countries that
already have IDA borrowing programmes can receive additional IDA credits
(which are on concessional terms) to help finance payment of their
outstanding non-concessional loans from the World Bank.
19. IMF has no programme comparable to the Fifth Dimension facility, but
it operates the Rights Accumulation Programme for countries that have
fallen into arrears and wish assistance in working back into regular
status. The programme allows countries to accumulate "rights" towards
future drawings of Fund resources while they establish a satisfactory
record of policy adjustment and meet payment schedules. The latter is
generally accomplished with the help of resources provided by bilateral
donors. The Programme, as established, was limited to the 11 countries
that were in protracted arrears to the Fund at the end of 1989. 6/
III. DEBT INDICATORS AT THE GLOBAL AND REGIONAL LEVEL:
MIXED MESSAGES
20. The gross external debt of capital-importing developing countries
reached an estimated $1.6 trillion by the end of 1994, a $100 billion
increase over 1993. 7/ As a result of improved economic conditions in
debtor countries as well as developments in the international capital
markets, the growth in longterm lending to developing countries was
dominated by private creditors in 1994. Although the indebtedness of
developing countries to private creditors has been increasing since 1991,
this was the first time in a decade that the increase in private debt
exceeded that observed in official debt. Private lending, however, was
directed mainly to countries that have not had to restructure their debt
and to the major borrowers in Latin America. As a result, Asia has built
up the largest debt of the main geographical regions of the developing
world, holding about 37 per cent of the external debt of capital-importing
developing countries in 1994, up from 25 per cent in 1984 (see figure 1).
21. Another trend that has been accentuated lately refers to the change in
the composition of long-term debt of developing countries. As figure 2
shows, Latin American external debt is still dominated by private debt, but
the composition of its private debt changed significantly after 1989. Most
of its debt owed to private creditors is now in the form of bonds. By the
end of 1994, 38 per cent of Latin American long-term debt was in bonds
compared with 5 per cent in 1989. This change reflects both the
restructuring operations conducted under the Brady initiative and
successful new borrowing in the international capital markets. Lending
through bonds has been favoured by private investors owing to the
relatively high returns and short maturities of the bonds. Moreover, the
fact that the debtor countries on the whole continued to service their bond
obligations, even during the worst days of their external debt crisis, may
have given foreign creditors a sense that the debt servicing of bonds would
have seniority over other debt instruments. 8/ Certainly, negotiated
rescheduling of bonds held by thousands of investors would be more
complicated than rescheduling payments to hundreds of banks.
22. Asian and African external debts are largely owed to official
creditors, but while in the former the share of private debt has been
increasing recently, in the latter it has persistently declined. The
shrinking participation of foreign private creditors in African external
debt is most striking in sub-Saharan Africa (excluding Nigeria and South
Africa). As shown in figure 2, it represented only 15 per cent of the
subregion's long-term external debt in 1994. The remaining external debt
of sub-Saharan Africa is owed to official creditors and consists mostly of
concessional loans (58 per cent of total long-term debt). In a curious
way, Latin America and sub-Saharan Africa share a common characteristic as
far as the structure of their debt is concerned: both regions have been
accumulating increasing amounts of debt that is in principle difficult to
restructure.
Figure 1. Foreign debt of the capital-importing
developing countries, 1984-1994
Source: United Nations, World Economic and Social Survey, 1995.
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Figure 2. Composition of the long-term external debt of capital-importing
developing countries,
by type of creditor, 1984, 1989 and 1994
(Percentages)
Source: World Economic and Social Survey, 1995.
a/ Excluding Nigeria and South Africa. Sub-Saharan Africa a/
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A. Aggregate measures of debt burden
23. One way of assessing the effectiveness of the current international
debt strategy is to look at indicators of the debt burden (see table 3).
The most commonly used indicators are: (a) ratio of external debt to gross
national product (GNP); (b) the ratio of external debt to exports of goods
and services; and (c) the debt-service-to-exports ratio. These indicators
measure the level of indebtedness in terms of the capacity of the debtor
country or region to generate income (GNP) and its ability to generate
foreign exchange (exports).
24. Some analysts also use the present value of debt as a numerator. The
present value of debt reflects the value today of the stream of payments of
interest and principal to be made on the debt, discounted at a market
interest rate. It indicates, in effect, what an investor would be willing
to pay today to receive the future stream of debt-servicing payments. It
thus takes into account the degree of concessionality of the existing stock
of debt. For this reason it is considered by some to be a more accurate
indicator of the indebtedness of a country than the face value of the debt.
25. As with most economic indicators, debt indicators must be interpreted
with caution. This is particularly clear in the case of debt-to-GNP ratios
in 1994. Thus, while the overall and regional ratios were largely
unchanged, those of Africa and sub-Saharan Africa deteriorated appreciably.
In this instance it had much to do with changes in exchange rates. The
value of GNP of a debtor country has to be converted into the same currency
as the debt, which is conventionally expressed in dollars since most of the
debt is contracted in dollars. Exchangerate devaluations reduce the dollar
value of a country's GNP and the spate of devaluations in sub-Saharan
Africa - in particular, that of the CFA franc - is one reason that the
external debt of this region increased from 115 per cent of GNP in 1993 to
131 per cent in 1994, an increase that is not compatible with either the
net credit flows to the region (less than $8 billion or about 5 per cent of
1993 debt) or the economic growth experienced last year (2 per cent in real
terms). The point to draw from these numbers is not that the actual
situation deteriorated so much in 1994 as that the earlier data, based on
over-valued exchange rates, underestimated the severity of the problem.
26. Viewed from the foreign exchange constraint, the increase in debt in
1994 was within sustainable limits overall, owing to the robust growth of
international trade last year and the recovery in the price of most non-oil
commodities. 9/ But regions have been exhibiting different trends. While
in Latin America the debt-to-export ratio has been falling for the past
three years, in Asia it has been consistently rising during the same
period. However, the level of the Asian ratio is only one third of that in
Latin America.
27. The ratio of debt service to exports, another indicator, showed an
easing of the debt burden in all regions in 1994. Only the Latin America
ratio was above 20 per cent in 1994, a threshold that is generally held to
mark the limit of sustainability of the countries' external positions. 10/
This indicator, however, should also be used with caution, because it
refers to payments actually made, thus omitting arrears. They can be quite
substantial, as in the case of sub-Saharan Africa where the accumulated
arrears amounted to $44 billion by the end of 1994, or more than 27 per
cent of the region's external debt.
Table 3. Debt indicators for capital-importing developing countries,
1984-1994
(Percentage)
28. Arrears are not a problem exclusive to sub-Saharan Africa. In fact,
the majority of countries monitored by the World Bank have accumulated
overdue payments. Out of 120 countries for which data were available for
1992 and 1993, 63 increased their interest arrears (25 of them outside sub-
Saharan Africa), while another 25 decreased the amount of arrears but still
had payments overdue. Only 31 countries did not have any arrears or cleared
them during that year.
29. The persistence of arrears is a warning sign that, in spite of
progress, a durable solution to the debt problem of the developing
countries may not yet have been found. The large number of countries that
continue to experience debt-servicing difficulties 13 years after the
emergence of the crisis on to the international stage warrants concern.
30. Indeed, a considerable number of countries are currently classified by
the World Bank as "severely indebted". Using the ratios of the present
value of debt service to exports of goods and services and to GNP to assess
the degree of indebtedness, the Bank considers as severely indebted those
countries with either ratio higher than 220 per cent or 80 per cent,
respectively. A "moderately indebted" country is defined as one having
both ratios below the critical values, but with either ratio at 60 per cent
or more of the threshold value. In its latest World Debt Tables, the Bank
classified 51 countries as severely indebted (see table 4). 11/ Although
most countries remain classified as severely indebted for a considerable
length of time, some eventually leave the group, while others join. Recent
"graduates" included Algeria, Cambodia, Egypt and Mexico, while new members
were Guinea, Uruguay and Yemen. In the light of the debt and payment
difficulties in 1995 of Algeria and Mexico, their removal from the list
seems to have been premature. It is also a concern that Uruguay is again
classified as a severely indebted country, as it had successfully completed
a Brady restructuring in 1991. Moreover, all countries that left the
category, with the exception of Cambodia, were reclassified as moderately
indebted and not as less-indebted countries, which means that by these
criteria they still do not hold solid external positions. The same applies
to those moderately indebted countries whose debt indicators approached the
established critical values. An abrupt increase in international interest
rates or a major decline in the price of their exports might be enough to
throw them back into the severely indebted category.
Table 4. Developing countries classified as severely indebted by the World
Bank a/
Low-income countries b/
Middle-income countries b/
Burundi
AngolaCentral African Republic
ArgentinaCote d'Ivoire
BoliviaEquatorial Guinea
BrazilEthiopia
CameroonGhana
CongoGuinea
EcuadorGuinea-Bissau
JamaicaGuyana
JordanHonduras
MoroccoKenya
PanamaLao People's Democratic Republic
PeruLiberia
Syrian Arab RepublicMadagascar
UruguayMali
Cuba c/Mauritania
Iraq c/Mozambique
Myanmar
Nicaragua
Niger
Nigeria
Rwanda
Sao Tome and Principe
Sierra Leone
Somalia
Sudan
Uganda
Viet Nam
Yemen, Republic of
Zaire
Zambia
Afghanistan c/
Source: World Bank, World Debt Tables 1994-95, vol. 1, p. 187.
a/ Countries in which the ratio of the present value of debt servicing
to exports is above 220 per cent or the ratio of the present value of debt
servicing to GNP is above 80 per cent.
b/ Countries are classified as low-income if their 1993 GNP per capita
is $695 or less and middle-income if their 1993 GNP per capita is more than
$695 but less than $8,626.
c/ Countries not reporting to the World Bank's Debtor Reporting system.
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B. Looking beyond debt indicators
31. If it thus appears that the debt situation of a large number of
developing countries is still fragile, it is also the case that their
overall economic situations are not as strong as might have been hoped.
Growth rates of gross domestic product (GDP) in countries that "experienced
recent debt-servicing difficulties" 12/ have been persistently lower than
those of countries without debt-servicing problems. IMF estimated that the
GDP growth rate for the former group averaged 2.4 per cent per year during
the period 1987-1994; it reached an annual average of 7.1 per cent for
countries without debt-servicing problems during the same period.
Moreover, IMF forecasted the differences in growth rates to continue in
1995 and 1996, with growth of GDP in the former group averaging 3.3 per
cent a year and in the latter group remaining above 7 per cent a year. 13/
32. This is not to say that the differences in growth rates should be
attributed only to the debt problem. There are countries facing severe
developmental constraints besides the external one, and diverse political
problems whose solution could clear the way towards a more desirable
development path. But even some debt-crisis countries that have been
considered model adjusters - Mexico before 1994 being a major case in point
- did not see robust economic growth.
33. The adoption of strong adjustment policies has long been an integral
part of the international debt strategy. But results produced so far have
underlined how long and difficult is the process. With hindsight, one can
appreciate how often it has entailed false starts, inappropriate sequencing
and a political-economic process of learning by doing. 14/ Slow growth,
reduced employment opportunities and cuts in government expenditure have
led to an increase in the number of people living in poverty in many
countries, while the gap between the rich and the poor has increased in
some others. Many countries have been registering a slow-down in their
social progress, while social indicators have been deteriorating in others.
15/ Although lately there has been increasing emphasis by multilateral
financial institutions and Governments on protecting the poor and other
vulnerable groups during adjustment, there remains a need to translate
these efforts into more effective policies in many cases.
34. The issue acquires even greater importance today as countries that
were believed to have reached a sustainable path suddenly face new external
constraints and are required to overcome new adjustment hurdles. This
brings additional burdens to a large segment of their populations, often
those that also failed to enjoy the limited period of "prosperity".
35. The Mexican and Argentine crises in 1995 are cases in point. The
Mexican crisis alarmed the international community early this year, and
many initially thought that the debt crisis had returned to this country in
a new, virulent form. While the markets diagnosed the crisis as one of
liquidity - born out of an unhappy combination of trade liberalization and
an overvalued exchange rate - the Mexican economy has had to return to a
difficult adjustment path with a sharp contraction of economic activity in
1995, lower incomes and higher unemployment. Argentina is another country
where new austerity measures had to be introduced earlier this year, while
already facing a severe unemployment problem.
36. The events in Mexico temporarily cooled off investors' attitudes
towards lending to developing countries. Although some debtor countries
have succeeded in placing bonds in the international capital markets in the
first half of 1995, the interest rates needed to attract buyers continued
to be quite high. This is an indication that these countries'
creditworthiness was still not perceived to be solid. As of March 1995,
among the 27 "moderately indebted" countries, only Chile, Colombia, India,
Indonesia and Tunisia were rated "investment grade" by the major private
credit agencies. 16/
IV. OUTSTANDING ISSUES
37. Why is it that after more than a decade of an evolving strategy and
concerted efforts by both creditors and debtors, it is not possible to say
that the debt crisis is finally over? The answer seems to be that the
international strategy for bringing countries out of their debt crises was
incomplete. The strategy can be characterized as first recognizing that
for whatever reason a country found itself in a foreign debt crisis, it had
to adjust its economy so as to raise its production of tradable goods and
services, increase efficiency overall and stabilize its macroeconomy. The
strategy recognized as well that there was no way that the required
adjustments could be brought about while maintaining minimal standards of
living if all the debt also had to be serviced on a timely basis. Thus,
while debtor country Governments recognized that there would be costs of
adjustment that had to be absorbed, the international community conceded
that not all of the debt could in good conscience be serviced. Over time,
the degree of difficulty and protracted nature of the adjustment process
was increasingly appreciated by the debtors, and the depth of the necessary
degree of debt relief was increasingly acknowledged by the creditors. But
in almost all cases a gap remained between the overall degree of debt
relief that was warranted and what was available at any one moment.
38. One part of the explanation for this seems tied to the fact that the
international strategy, by separately dealing with discrete components of
the debt stock, has failed to address adequately the "debt overhang" as
such. In other words, in many instances the relief granted has not been
sufficient to bring debt obligations in line with the debtor's capacity to
pay.
A. Middle-income countries
39. Brady-style debt and debt-service reduction agreements, for instance,
were devised for middle-income countries with significant private debt,
specifically commercial bank debt. These agreements were meant as final
restructurings of the debt, as the "exit option" with no mechanism for
further renegotiation of that particular debt. In some cases, however, the
cash flow benefit was small, since debtors had not been making full
payments before the agreements went into effect. Often the net reduction
in total debt was smaller than the reduction in bank debt since borrowings
from multilateral sources rose to finance the United States treasury bonds
purchased as collateral. Thus, although the Mexican agreement - the first
Brady Plan arrangement - reduced Mexico's commercial bank debt by 17 per
cent, it reduced Mexico's overall debt (net of reserve holdings) by less
than 2 per cent. In the case of Venezuela, there was a small reduction in
commercial bank debt but a small increase in the net debtor position of the
country. In the case of Uruguay, a one-third reduction in bank debt
translated into less than a 3 per cent improvement in the net debtor
position. 17/
40. The case of Costa Rica illustrates another difficulty. Its bank debt
was reduced by 57 per cent and the net overall debt by 23 per cent as a
result of its Brady Plan agreement. However, the cash flow benefits were
not large, owing to the arrears that Costa Rica had been accumulating.
Also, the standard Paris Club rescheduling was arranged on Costa Rica's
debt to bilateral official creditors, and that debt had been roughly as
large as its bank debt. Indeed, soon after, new debt-servicing
difficulties arose.
41. Middle-income countries commonly owe considerable amounts to bilateral
official creditors. A significant number of severely indebted middle-
income countries, for example, owed more than 40 per cent of their debt to
bilateral official creditors at the end of 1993, including Bolivia,
Cameroon, Congo, Jamaica, Jordan, Morocco, Peru and the Syrian Arab
Republic. The relief usually granted to these countries through the Paris
Club was merely to defer principal repayments, charging commercial interest
rates on the deferred amounts, terms that were far less accommodating than
those agreed by their commercial bank creditors.
42. For political reasons, treatment of such debt could be far more
concessional, as it was for Poland, a middle-income country that is not
usually grouped with the developing countries. The Paris Club granted
Poland a 50 per cent reduction in the entire stock of bilateral debt (or an
equivalent reduction in the scheduled debt service calculated on the basis
of net present value), phased over several years. 18/ Full implementation
of this agreement was approved in April 1994. With comparable relief also
obtained from its bank creditors, Poland may soon graduate from the
severely indebted group. The Polish agreement may, in fact, serve as an
indication of how little official debt relief other middle-income countries
received. Furthermore, Poland's graduation will highlight the importance
of treating the whole stock of debt at once.
43. Indeed, the treatment of the debt of some middle-income countries has
improved. Bolivia and Cameroon have recently rescheduled under
concessional terms actually meant for low-income countries: enhanced
Toronto and Naples terms, respectively. Several countries (Congo, Ecuador,
Jamaica, Jordan, Morocco and Peru) restructured Paris Club debt under the
Houston terms which grant a somewhat longer maturity and grace period than
the standard terms, although no debt-service reduction is explicitly
obtained under these terms.
44. In sum, except in exceptional circumstances, the Paris Club offers no
debt reduction to severely indebted middle-income countries. And financing
the collateral in Brady Plan arrangements diluted the net benefit of the
reduction in commercial bank debt. The overall degree of relief could thus
be rather small. At first, this did not seem to matter, at least to the
financial markets that celebrated the regularization of relations of
middle-income debt-crisis countries with their creditors by providing
large-scale capital inflows to several of the countries. As was seen by
early 1995, however, in some cases those flows were not sustainable.
B. Low-income countries
45. The debt of severely indebted low-income countries is owed mostly to
official creditors. In some countries (Cote d'Ivoire, Guyana, Lao People's
Democratic Republic, Madagascar, Mauritania, Mozambique, Myanmar,
Nicaragua, Nigeria, Sudan, United Republic of Tanzania, Viet Nam, Yemen and
Zaire), bilateral debt dominates the structure of total long-term debt. As
was seen above, creditor Governments have increased the concessionality of
terms applied to Paris Club restructuring of the debt of low-income
countries. Accordingly, several countries have been granted enhanced
Toronto terms since 1991, and more recently, Naples terms.
46. The enhanced terms, however, have not been enough to lift these
countries out of their debt problem. According to the World Bank, the
application of enhanced Toronto terms and rescheduling of official
development assistance credits on agreed Paris Club terms alone would bring
the debt-to-export ratio below the critical value of 200 per cent in only 3
out of 32 severely indebted low-income countries. 19/ Naples terms go
somewhat further, but their impact will only be felt if and when the
cancellation of the agreed share of the debt stock takes place.
47. The limited impact of Paris Club initiatives so far can be partially
explained by the fact that, as mentioned above, Paris Club does not
restructure the entire stock of debt owed but only part of it.
Furthermore, many countries are not indebted exclusively to Paris Club
creditors. The net result is that only a share of bilateral debt ends up
receiving the concessional treatment. A related problem is that creditors'
choices are not uniform, and some creditor Governments - owing to complex
legal and political constraints - have not been able to select the
concessional options, so the scope of debt reduction varies between
countries. Accordingly, the overall relief granted may be less than the
stipulated 50 or 67 per cent, depending on the composition of creditors
involved in the rescheduling.
48. As cases in point, lack of consensus among creditors prevented Bolivia
and Nicaragua from having the stock of eligible debt treated in their
latest restructuring with the Paris Club, although both countries met the
eligibility criteria to be considered by creditors on the matter of the
stock of debt. In addition, some low-income countries have not received
concessional treatment on their rescheduling with the Paris Club (Kenya and
Nigeria). 20/
49. Another practice that contributes to relief being smaller than
anticipated is the "de minimis" clause. It allows those creditors whose
claims are below an agreed amount to be excluded from the rescheduling
agreement. The recent Ugandan restructuring illustrates these problems
well. First, the stock treatment did not include all outstanding debt, but
only that contracted before the cut-off date of 1 July 1981. Second, the
debt covered was reduced further by a high "de minimis" clause, and thus
only three creditor countries participated in the agreement. As a result,
49 per cent of Uganda's pre-cut-off debt was cancelled, which corresponds
to 26 per cent of the country's debt to Paris Club creditors. 21/
50. In any event, the Naples terms do not solve the problem of debts owed
to Governments that do not participate in the Paris Club. Paris Club
agreements include a clause of comparability of treatment, under which the
debtor would seek to receive comparable concessions from its various other
bilateral official creditors. The clause, however, may hinder negotiations
at the Club, as debtor countries with relatively little bargaining power
face obstacles in obtaining the comparable relief. 22/ For many severely
indebted low-income countries (including Ethiopia, Guinea, Guyana, Lao
People's Democratic Republic, Madagascar, Mali, Mozambique, Nicaragua,
Niger, Somalia, the Sudan, the United Republic of Tanzania and Viet Nam) a
significant share - sometimes almost all - of their bilateral debt is owed
to non-Paris Club countries. Moreover, the multilateral institutions,
which are the largest non-Paris Club creditors, are fully excluded from
Paris Club treatments.
51. Many severely indebted low-income countries are highly indebted to the
multilateral creditors. By the end of 1993, multilateral debt, including
amounts owed to IMF, represented at least 50 per cent of total public and
publicly guaranteed debt of Burundi, Central African Republic, Ghana,
Guinea-Bissau, Honduras, Kenya, Liberia, Niger, Rwanda, Sao Tome and
Principe and Uganda. In 1994, the multilateral debt service of severely
indebted low-income countries amounted to $3.2 billion and represented
about 47 per cent of all obligations met by these countries. In countries
such as Bolivia, Burundi, Honduras, Mauritania, Niger, Uganda and Zambia,
multilateral debt service alone corresponded to at least 20 per cent of
their exports of goods and services in 1993.
52. When countries such as these receive relief from their bilateral
creditors, the anomalous situation could arise wherein that relief might
mainly help to meet financial obligations to their multilateral creditors.
In effect, something like this already happens. Debtors typically let
arrears accumulate mainly on bilateral and long-term private debt, since
costs of not servicing short-term debt (basically trade lines) and
multilateral debt would have even more devastating consequences for the
countries concerned. According to a recent study, sub-Saharan African
countries met 84 per cent of their scheduled payments to their multilateral
creditors in 1992, while private creditors received 64 per cent of expected
payments and bilateral creditors only 14 per cent of what was due. 23/
53. Although multilateral debt is not subject to restructuring, new loans
are usually extended to those countries that have been adhering to
adjustment programmes supported by the multilateral financial institutions,
and these new loans can help refinance payments falling due on the old
loans. However, to the degree that there is difficulty servicing
multilateral debt, this only postpones the problem and worsens it as it
increases indebtedness.
54. In this regard it is quite significant that there has been increasing
acceptance recently of the difficulties associated with the servicing of
multilateral debt on the part of a number of low-income countries. The
communique of the summit meeting in Halifax, Canada, of the group of seven
major industrialized countries in June 1995 states that the group "...
recognize[s] that some of the poorest countries have substantial
multilateral debt burdens". Thus, the group agreed to encourage the Bretton
Woods institutions to develop a comprehensive approach to assist countries
with multilateral debt problems, through the flexible implementation of
existing instruments and new mechanisms where necessary (see A/50/254,
annex I).
55. One new mechanism had already been proposed by Mr. Kenneth Clark, the
United Kingdom Chancellor of the Exchequer. It entails the establishment
of a new concessional facility at IMF to be funded by loans from creditor
countries. Although the creditors would receive market interest rates on
these loans, countries that drew on the facility would pay highly
concessional interest rates. The difference might be covered by the
earnings of a trust fund, which could be established with the profits from
a phased sale of small amounts of IMF's gold holdings. 24/ As only IMF
holds significant amounts of gold, other mechanisms would be needed to
underwrite comparable refinancing facilities at the multilateral
development banks.
V. CONCLUSIONS FOR POLICY
56. The analysis above indicates that a more comprehensive application of
debt-relief measures may be necessary. If so, which debt; if not, why not?
57. Although many countries have indeed benefited from the implementation
of the debt-reduction initiatives hitherto developed, the debt of several
countries is still unmanageable while the debt of others might become
unmanageable. It would only be prudent to consider contingencies. Certain
avenues of relief, however, have already been closed off for many countries
and others are not considered practical.
58. In particular, the Brady Plan debt-restructuring arrangements - like
the debt-stock treatments under the Naples terms for low-income countries -
were meant to be "exit" options for the debtors and the creditors. They
were intended to leave the countries with sustainable debt-servicing
obligations while freeing the creditors from having to renegotiate
repeatedly the debt servicing on the same debt. Even if the sustainability
calculations were wrong, the creditors that took the exit option are beyond
further debt restructuring on the affected debt. Any further relief must
thus fall to the remaining creditors, who are mainly bond holders whose
cooperation in new debt restructuring would be very difficult to mobilize
and official creditors of one sort or another.
59. The Paris Club might thus find itself being asked to enlarge the
number of countries to which it accords concessional debt relief. As
presently conceived, the eligibility criteria for debt reduction through
the Paris Club exclude countries that are severely indebted but have an
income per capita above the $500 benchmark or a ratio of present value of
debt to exports below 350 per cent, even if it is still above the critical
value of 220 per cent identified by the World Bank.
60. Greater concessionality by the Paris Club need not be the exclusive
approach (or even be sufficient in itself) to make debt servicing
manageable. Similar steps may be needed on other portions of the debt, in
particular multilateral debt. The debt owed by some low-income countries
to the multilateral financial institutions has already become of special
concern to the international community. As reviewed above, some of these
institutions have started applying special mechanisms to alleviate the
debt-servicing burden of selected countries. Again, the scope of the
countries considered to require special, concessional treatment may not be
broad enough to meet all contingencies.
61. It is also possible, however, that expanding the range of countries
and types of debt, and deepening the relief granted well beyond what is
already on the international agenda may only be necessary for exceptional
types of cases, such as lowest-income or some post-conflict countries. The
debt-servicing capacity of a country depends on developments in the
international economy as much as on success in structural adjustment at
home. One cannot emphasize enough the importance of debtor countries'
adherence to policies that will correct macroeconomic disequilibria,
maintain a stable economic environment and make relative prices reflect
real resource costs. But these policies are not sufficient in themselves
to promote fast and sustainable growth in the countries concerned, and that
is the key to any strategy - as for middle-income countries - that
envisions growing out from under a debt overhang.
62. The problem confronted by the severely indebted countries may be seen
as a race against time. If investment is sufficiently high and efficient,
the capacity to produce tradable goods and services may grow rapidly enough
to catch enough of the opportunities thrown up by the international
economy. Those opportunities depend, however, on the sustained growth of
world income and open markets in the world's large economies, even in the
face of new competition from developing countries.
63. More generally, innovative enterprise activity in the heavily indebted
countries needs to be boosted, which requires in addition to the
appropriate price signals a measure of business confidence. A debt
overhang inhibits that confidence, in particular in the absence of
contingency plans for maintaining the liquidity of countries whose debts
still exceed their long-run debt-servicing capacity, especially should
there be, say, a severe international economic downturn. In this regard,
the proposed expansion of the resources at the disposal of the General
Arrangements to Borrow at IMF would be a supportive step, as would
maintenance of adequate regular multilateral lending capacities through
appropriately timed IMF Quota increases, development bank capital increases
and concessional fund replenishments, as discussed in A/50/397.
64. In addition, while much attention is given to short-term monetary and
fiscal indicators, when long-term social and economic goals suffer,
confidence suffers as well. Adjustment policies are not substitutes for
development policies. The practice of giving priority to economic
adjustment and then applying palliatives on the social level - through, for
instance, the adoption of special funds to finance projects that aim at
mitigating the social costs of adjustment - has produced limited results.
Confidence and the investment that it determines thus hinge as well on
maintaining a degree of social equilibrium.
65. As always, it is the entire package of adjustment measures, plus
adequate debt relief, official financial support and a buoyancy in an open
world economy that builds confidence in the private sector and charges up
dynamic development processes.
Notes
1/ A companion report contains an assessment of recent trends in
financial flows to developing countries (see report of the Secretary-
General on agenda item 96 (a), "Macroeconomic policy questions: financing
of development", A/50/397).
2/ The external debt difficulties of heavily indebted transition
economies have been treated by the international community in a manner
parallel to that of the developing countries. The external debt situation
of the transition economies is thus not covered in this report.
3/ "Debt conversion" is noted in the table as one type of treatment of
official and bank debt, although the bulk of actual cases has involved bank
loans. In the latter type of conversion, banks would typically sell their
claims at a discount on the secondary market to potential direct investors
(debt-for-equity swaps) or to non-governmental organizations (as in debt-
fornature or debt-for-education swaps). The loan paper would then be
exchanged for equity shares or budgetary programme commitments. In the
conversions of debt owed to official creditors, specific arrangements would
be made between debtor and creditor (e.g., allowing debt servicing to be
paid in local currency and then returning the funds to the debtor
Government for use in environmental programmes).
4/ See World Bank, World Debt Tables 1994-95, vol. 1 (Washington, D.C.,
December 1994), p. 30.
5/ The agreement with Sierra Leone was concluded before the adoption of
the Naples terms.
6/ See IMF, Annual Report 1994 (Washington, D.C., 1994), p. 143.
7/ Data and country groupings are those of United Nations, World
Economic and Social Survey, 1995 (United Nations publications, Sales No.
E.95.II.C.1).
8/ Nevertheless, the 1980s debt crisis entailed the suspension of debt
servicing on bonds by some countries (e.g., Costa Rica, Guatemala, Nigeria
and Panama). For details, see J. J. Fernandez-Ansola and T. Laursen,
"Historical experience with bond financing to developing countries", IMF
Working Paper No. WP/95/27 (March 1995).
9/ For additional details, see United Nations, World Economic and Social
Survey, 1995, pp. 35-40.
10/ See IMF, Official Financing for Developing Countries (Washington,
D.C., April 1994), p. 14.
11/ Out of the 57 low-income countries for which information is
available, 33 are considered severely indebted, 13 moderately indebted and
only 11 are classified as less-indebted countries. Among the 96 middle-
income countries, 18 are severely indebted, 19 are moderately indebted and
59 are ranked as less indebted.
12/ This is a category that IMF employs in its World Economic Outlook.
It includes 72 developing countries that incurred arrears or entered into
debtrescheduling agreements during the period 1986-1990.
13/ See IMF, World Economic Outlook (Washington, D.C., May 1995), p.
121.
14/ See World Economic and Social Survey, 1995, chap. V.
15/ See United Nations, Report on the World Social Situation, 1993
(United Nations publication, Sales No. E.93.IV.2).
16/ See Financial Flows and the Developing Countries: A World Bank
Quarterly, May 1995, p. 10.
17/ See World Economic Survey, 1991 (United Nations publication, Sales
No. E.91.II.C.1), p. 163.
18/ Comparable treatment was agreed as well for Egypt in the same year,
1991, before a general concessional treatment for low-income countries was
first adopted (the enhanced Toronto terms).
19/ See World Bank, World Debt Tables 1994-95, vol. 1, p. 44.
20/ See UNCTAD, Trade and Development Report 1995 (United Nations
publication, Sales No. E.95.II.D.16), p. 37.
21/ Information provided by UNCTAD/Development and Finance Branch. See
also C. Katsouris, "Naples debt deal falls short of needs", Africa
Recovery, vol. 9, No. 1 (June 1995), p. 11.
22/ See OECD, Financing and External Debt of Developing Countries, 1992
Survey (Paris, 1993).
23/ See Non-Aligned Movement, Ad Hoc Advisory Group of Experts on Debt,
The Continuing Debt Crisis of the Developing Countries (August 1994).
24/ The profits would represent the amount by which the net sale price
exceeded SDR 35 per ounce, which is the official valuation of Fund gold (at
the end of June 1995, the market price of gold was almost SDR 247 per
ounce).
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