- Email: [email protected]
A note on the multilateral creditors and the debt crisis
World Development. Vol. 21, No. 7. pp. 1239-1244, Printed in Great Britain.
03oi-7SOX/Y3 $6.00 + 0.00 Pcrgamon Press Ltd
1993.
A Note on the Multilateral Creditors Crisis ROY CULPEPER The North-South Institute,
and the Debt
Ottawa
- The share of debt owed by developing countries to multilateral creditors doubled during the 1980s. Servicing this debt, particularly to the International Monetary Fund (IMF), has been very costly to some developing countries. In the light of this experience, it is appropriate both to consider the possibility of multilateral debt reduction. particularly for the poorest countries (as has been done with bilateral debt through the Paris Club), and to desist from using IMF short-term credit to assist countries with long-term structural problems. Summary.
1. INTRODUCTION Developing countries are indebted to three groups of creditors: private lenders (mainly commercial banks); bilateral lenders under the control of developed country governments (principally export credit agencies); and the multilateral organizations (the multilateral development banks and the International Monetary Fund). Over the course of the last decade, the international community has launched initiatives to restructure and reduce the debt owed to the first two, namely the commercial banks and bilateral creditors. Consequently both the amount and the relative share of Third World debt owed to multilateral organizations has risen rapidly. This article examines the expanding role of the multilaterals in the debt strategy. In particular, it considers the implications of their increasing share of the debt both for the debtor countries and for the institutions themselves. Finally, some possible approaches to reducing the burden of multilateral debt are examined.
2. ROLE OF THE MULTILATERAL AGENCIES IN THE DEBT CRISIS During 198&91, the total stock of Third World debt (including both long- and short-term debt) more than doubled. Private debt, however, grew only by 77%, while bilateral debt increased by 184% and multilateral by 319% (Table 1). The data suggest, moreover, that the trend toward a greater share of multilateral debt is accelerating. Since 1987, private long-term debt 1239
has fallen by about $47 billion and bilateral debt appeared to peak in 1990.’ These developments are related to the various international initiatives to manage the crisis since 1982, including the 1985 Baker and 1989 Brady Plans to restructure and reduce commercial bank debt, and the 1988 Toronto Summit which has led to a series of steps by the Paris Club creditors to reduce bilateral debt for the poorest countries. Multilateral agencies have become “lenders of last resort,” taking the place of retreating commercial and official bilateral lenders, and in some cases underwriting their withdrawal. During 1982-85, the perception of the debt crisis as a short-term liquidity problem meant that International Monetary Fund (IMF acquired the leading role in the debt strategy. 2 The IMF operated on two fronts. On one front were its developing-country borrowing members, to which it rapidly advanced short-term credit. Borrowers in turn had to adopt restrictive policies aimed at increasing next export earnings and stabilizing their economies. On the other front were the commercial banks. The Fund cajoled the banks into rescheduling principal payments in order to reduce the servicing burden of debtor countries. By 1985 it was clear that most debtor countries in Latin America and Africa faced long-term “solvency” rather than liquidity problems. The productive capacity of debtor countries was reeling from the double blow of IMF adjustment *The author would like to thank G. K. Helleiner for his comments. Any errors or omissions are solely the author’s
Final
revision
accepted:
January
IS, 1993.
1240
WORLD
Table
I. Third
World
long- und shorr-/em drht perccwrugr dislrihutior~)
Total debt outstanding Multilateral (including IMF) Bilateral Private (including short term) Source:
World
Bank
DEVELOPMENT
(1991).
Vol.
smcks
(IIS
19x0
1986
$572.X( 100) $61.6(10.7) $110.3(19.3) $400.‘)(70.0)
$1,062(100) $17Y.S(16.Y) $231.7(21.X) $651.1(61.3)
hilliom
und
IYYI $I ,280( 100) $257.6(2&l) $312.8(24.4) $710.3(55..5)
I, p. 120.
policies as well as the pressures of heavy debt payments. Accordingly, the Baker Plan was launched by the United States and the G-7 countries in October to help resuscitate growth in debtor countries. This time, it was the World Bank, with its long-term development focus, rather than the IMF. in the forefront. The Bank was asked to assist middle-income (primarily Latin American) debtor countries design strategies of “adjustment with growth.” It was also asked to lend these countries an additional $20 billion in fast-disbursing operations over three years. Commercial banks too were asked to increase their lending to the debtor countries by $20 billion over the same period. Rescheduling of principal, which was the hallmark of the debt strategy during 1982-85, was clearly not enough to reduce the debt-servicing burden to manageable levels. The Baker Plan in effect rescheduled, or capitalized, part of the interest payments due. The “additional lending” of the Baker Plan thus amounted to a bookkeeping entry rather than additional finance. Nonetheless the World Bank almost doubled its exposure to severely indebted middle-income countries’ from $14.5 billion in 1985 to $27.3 billion in 1987.’ Interest capitalization had by this time also become a feature of rescheduling official bilateral debt in the Paris Club. Interest as well as principal payments falling due over periods of 12 to 18 months were routinely consolidated and deferred into the future by up to 20 years.” The combined effect of the Baker Plan and Paris Club rescheduling was to initiate the “officialization” of the debt. Meanwhile, the total exposure of commercial banks to the severely indebted middle-income countries peaked in 1987 at $244 billion. By 1990 it had fallen by 45% to $136 billion. An important if less prominent part of the Baker Plan was its proposal to establish a “Structural Adjustment Facility” in the IMF, with relatively concessional terms (a 0.5% interest rate and lo-year repayment period) to
assist low-income clients. This was followed in 1987 by the “Enhanced Structural Adjustment Facility,” which for the first time channelled overseas development assistance (ODA) from aid donors through the IMF. The creation of SAF and ESAF were in part an attempt to offer low-income borrowers support on more appropriate terms, and in part a refinancing of Fund obligations which would otherwise not be met. By 1988, it was obvious that the Baker Plan had also failed to deliver developing countries from the debt crisis. Rescheduling principal and interest was not sufficient to reduce debt servicing to manageable levels. There remained only one way out: to reduce the principal and/or interest payments themselves. The G-7 industrial countries gave their collective blessing at the 19% Toronto Summit to debt reduction for the poorest countries in respect of obligations to official bilateral creditors. In March 1989 the new US Treasury Secretary, Nicholas Brady, launched an initiative to reduce commercial bank debt as well. The essence of the Brady Plan was to replace commercial bank debt with multilateral debt. The banks demanded and got “credit enhancement” in return for reducing their claims on debtor countries. What this meant in practice was that other creditors, principally the World Bank and IMF, had to put up guarantees which could be called by the commercial banks if the debtors failed to honor their reduced debts. Altogether $25 billion was in fact earmarked from the two Bretton Woods institutions for this purpose. In 1990 and 1991, the World Bank and IMF each made commitments of over $2.7 billion to support “Brady debt deals” for Mexico, Philippines, Venezuela and Uruguay.’ Commercial bank debt reduction was thus purchased at the cost of increases in multilateral debt. For example, in the Mexican package a $12.7 billion reduction in bank debt required $5.8 billion in additional financing (of which $5.7 billion came from the World Bank and IMF). In the Venezuelan package a $4.3 billion reduction
MULTILATERAL Table 2. Share of multilateral debt in total debt service of developing countries (percentage)
All developing countries Sub-Saharan Africa Asian low-income countries Western Hemisphere countries Source:
OECD
(19Yl),
1982
1987
19YO
6 13 12 4
21 30 27 27
20 28 22 27
p. 42.
in bank debt required $2 billion in additional financing (of which $1.4 billion came from the World Bank and IMF). In these packages commercial banks exchanged their loans for bonds at a discount or earning a lower yield; the bonds were collateralized by World Bank and IMF guarantees. It would be misleading to suggest, however, that the transformation of private into multilateral debt has occurred primarily because of the design of the Baker and Brady Plans. More accurately, private creditors ceased to lend to much of the Third World in the latter half of the 1980s (despite the exhortation of the Baker Plan). Banks liquidated their claims as they were amortized or sold their loans at discounts on secondary markets. This left official creditors, particularly the multilaterals, as the only creditors willing to continue lending to Latin America and Africa.
3. PROBLEMS DUE TO INCREASING MULTILATERAL DEBT In its 1991 annual survey of developing country debt, the Organization for Economic Cooperation and Development (OECD) noted the
Table
1241
CREDITORS
marked rise in reported amounts of multilateral debt and debt servicing for all categories of countries. The most rapid buildup took place during 1981-87, leveling off in the next two years and increasing again in 1990 due to the Brady Plan (Table 2). The absolute amount of multilateral debt service payments, which are a better indication of the cash-flow burden than debt stocks, doubled during 1985-88, and amounted to $32 billion in 1990, of which $10 billion was due to the IMF.’ Why is growing indebtedness to the multilaterals a problem? First, because the practice until now has been that multilateral debt cannot be rescheduled (more on this below). This makes multilateral obligations more rigid than other forms of debt. Second, the multilaterals are lenders of last resort; therefore, arrears in servicing multilateral debt lead ultimately to ostracism from the world financial svstem. Third, because of the rigidity of multilateral debt servicing, net transfers” between the multilaterals and many of their borrowers have become negative. In effect, debtor countries are transferring resources to multilateral agencies. Net transfers from the private banks to debtors have become negative because those creditors have practically ceased to lend, and in spite of rescheduling and debt reduction. In contrast, net transfers from the multilaterals have become negative in spite of increased lending and because of the unwillingnesss to reschedule. The multilateral creditors were created to help increase access of the developing countries to external capital. Both the Baker and Brady Plans explicitly recognized the need for the multilaterals (including the regional development banks) to counteract the withdrawal of private creditors and other economic shocks through increasing their own lending to the debtor countries. In fact,
3. Developing countries’ net transfers fromlto multiluteral agencies (US$ millions)
IMF* MDBst IMF + MDBs IBRD$
1982
1987
1990
1985-92
5.179 8,758 13,937 2,729
-8,437 3,602 -4,835 - 1,490
-2,414 3,813 1,399 -2.066
-33,588 29.734 -3,654 -
Source: World Bank (1991. 199i). *IMF net transfers equal purchases minus repurchases charges. tConcessiona1 plus nonconcessional lending. $Nonconcessional World Bank lending. 1992 figure available.
and
not
1242
WORLD
DEVELOPMENT
the multilaterals did increase their gross disbursements, but they also had to be repaid for past loans. And because of short-term nature of the IMF’s credit facilities, and heavy repayments on the nonconcessional portion (about 70%) of multilateral bank lending, the multilaterals themselves have contributed to the negative net transfer problem after 1985 (Table 3). What is particularly striking is the magnitude of negative net transfers to the IMF, amounting to almost $33.6 billion for 1985-92. These were $3.7 billion greater than the positive net transfers from the multilateral banks, making the multilaterals as a group a destination rather than a source of finance during the climactic years of the debt crisis. Regionally, IMF net tranfers to subSaharan Africa turned negative in 1984, reached a peak of -$954 million in 1986, and totalled -$4.0 billion over 1984.90.” In the Latin American/Caribbean region, Fund transfers turned negative only in 1986 but amounted to -$11.2 billion over 1986-92. “I No borrower, it is true, can continue to receive positive net transfers in perpetuity. Moreover, borrowings properly invested should generate a stream of earnings which help to service the debt. Still, countries experiencing debt-servicing difficulties due to terms of trade and other external shocks have found their problems compounded when multilateral creditors are on balance demanding payment rather than providing finance.
4. WAYS OF RELIEVING INDEBTEDNESS TO THE MULTILATERAL AGENCIES While it is not possible here to examine solutions to the growing problem of multilateral indebtedness in any detail, the above analysis suggests some broad policy implications. It is clear that the IMF is central to the problem of developing-country indebtedness to the multilateral agencies. Since the IMF is a fundamentally different kind of “creditor” agency than the multilateral banks, the solutions must also be different. The IMF’s function and financial structure as a short-term revolving fund means that any rescheduling of its credits might quickly compromise its integrity. That is why the Fund moved with such alacrity to mobilize donor funding to establish the $8.4 billion ESAF in 1987-88. The injection of these concessional resources enabled the IMF’s borrowers to refinance their Fund credits on softer terms. Regrettably, the conditionality imposed by the IMF on would-be borrowers has inhibited a greater uptake of ESAF resources. In any case, it is also clear that SAF and ESAF
have not been sufficient to stem the negative transfer of resources to the Fund from its borrowers. Nor has it prevented growing arrears by certain member countries. The IMF has tried to resolve this problem in a limited number of countries by introducing a “rights accumulation” procedure, because the previous convention was to render members in arrears ineligible for further Fund credits. Under this procedure a member in arrears to the IMF can earn rights to draw on Fund resources in return for good economic performance under IMF supervision. To tackle the larger question of restructuring the IMF’s claims on debtor countries, some experts have called for the sale of some of the Fund’s gold reserves, which are worth some $40 billion on the open market. Proceeds from the sale of a portion of these holdings could be used to refinance the obligations of low-income members to the Fund on highly concessional terms. Alternatively, repayments could be made in local currency, or rescheduling could be undertaken in extreme circumstances. Such proposals would, however, further broaden the toe-hold of the IMF in the area of concessional lending. Hence it might be preferable for the Fund to cede such lending to agencies whose primary purpose is development assistance, such as the World Bank or bilateral aid agencies. An institution geared principally to assist countries with short-term balance of payments difficulties seems out of place in countries with deep structural problems,” unless its assistance for short-term exigencies is closely meshed with the availability of long-term flows. Meanwhile, the IMF is in the midst of its ninth quota increase (representing a 50% expansion of its lending capacity), the urgency of which has been pressed by the admission of the republics of the former Soviet Union into the Fund. It is questionable whether the economic problems of this group of new member countries, or of the Eastern European countries which also joined the IMF recently, are any shorter term in nature than those of African countries. Hence, it would not be surprising if a few years from now these new members also face debt servicing difficulties featuring a perverse net transfer relationship with the IMF.” Therefore, on the eve of a major new expansion in lending by the IMF, it seems timziy to question the future role of this orgnization, especially with regard to developing countries and other borrowers facing long-term aid structural problems. Perhaps it is time if not to merge the IMF with the World Bank altogeth-r. then to dovetail its lending facilities for deve!oping countries with those of the Bank. In this manner.
MULTILATERAL
repayments to the Fund would be anticipated in advance and funded through longer term Bank loans rather than add to a mounting and unserviceable liability to the IMF. As to the multilateral development banks (MDBs) themselves, a distinction must be made between their concessional and nonconcessional windows. The former (for example, the World Bank’s International Development Association - IDA) provide loans with maturities of up to 50 years at zero or very low interest rates. These soft loans are funded through contributions from the aid donor countries. The “hard” windows in contrast provide loans of around 20 years carrying market-related interest rates: these loans are funded from MDB borrowings on the capital markets. The latter, of course, are the problematic loans, both for the borrowers (being the cause of negative net transfers) and for the MDBs. They are a problem for the Banks which have insisted that less than prompt and full debt servicing from their borrowing clients would jeopardize the terms on which the MDBs can borrow on the capital markets. Like the IMF, the World Bank has sought to refinance the hardest of its loans with softer funding. In 1989 the Bank introduced a program to subsidize payments on nonconcessional loans to its low-income debt-distressed borrowers, through allocating $300 million in concessional “supplemental credits” from IDA, its softwindow affiliate. Some bilateral donors have participated in this program by making contributions. ” Such measures are likely to spread over the of the coming years. I4 But cross-subsidization MDBs’ hard loans through their concessional windows, or through the additional generosity of bilateral donors, carries an opportunity cost, ultimately diverting aid resources from lowincome recipients. The question is whether there are alternatives which do not have this crucial drawback. An obvious answer is to consider the possibility of rescheduling or debt relief by the MDBs. It is possible to reschedule loans without having any impact on the income of MDBs by concentrating on principal payments. For example, grace and amortization periods could be stretched out, even for outstanding loans. One expert calculated that such techniques, applied to the World Bank’s loans to Latin American countries, could have had the same effect in 1991 as a $3.1 billion increase in disbursements.” It may be possible to go even further. In 1990, the MDBs collectively earned net income, or profits, or over $2 billion, of which one-half accrued to the World Bank; their income in the
CREDITORS
I243
past few years has been of similar magnitude (Table 4). While the profits of the World Bank group have not grown commensurately with lending, its rate of return on assets has been l-2%, indicating a return of about 12-24% on paid-in capital. Returns in the other MDBs have tended to be higher - for example, the return on assets in the Asian Bank in 1990 was over 4%. These figures compare favorably with profit levels enjoyed by successful commercial banks. Thus, there may be some leeway for the MDBs to contemplate interest-rate reduction without dangerously impairing net income levels of the Banks. For example, interest-rate relief could be confined to the smaller severely indebted, lowincome countries whose debt to the multilateral agencies (including the IMF) comprises over 40% of their debt. In 1988, such criteria would have made the following countries eligible for relief: Burundi, Uganda, Malawi, Guinea-Bissau, Honduras, Guyana and Kenya. Outstanding nonconcessional loans to these countries amounted to $2.6 billion, or about 2.2% of all such loans outstanding to the MDBs.” Even if interest on these loans were entirely forgiven, this might cost the MDBs collectively only in the order of $50 million in lower income, an amount which could easily be absorbed. It is doubtful that such measures would cause the bond rating agencies much concern - which is the reason given by the MDBs for their unwillingness to contemplate any departures from full and regular servicing of their loans. Indeed, underwriters might well see such measures as strengthening the MDBs’ loan portfolio and preferable to the conventional measure of refinancing unsustainable debts.”
Table 4. Net income banks
of the multilateral (US$ millions)
development
1987
1988
1989
I990
AfDB* AsDBt IDB$ World Bank
66 306 376 1,113
65 374 288 1 .OO4
129 43s 269 1,094
138 509 388 I .046
Total
1,861
1.731
1,927
2,081
Source: MDB annual reports, *African Development Bank. tAsian Development Bank. Slnter-American Development
1897-1990.
Bank.
1214
WORLD
DEVELOPMENT
5. A BRIEF CONCLUSION
To end on an optimistic note, it is encouraging that much of the developing world is beginning to emerge from the debt crisis of the 1980s. Unfortunately, the resumption of growth is characteristic more of the middle-income than the poorest countries. While debt relief is no panacea for any country’s economic problems. it can help to
reduce the tremendous external financial pressures faced by debtor countries. Multilateral agencies the IMF and the multilateral banks - have a particular responsibility to alleviate the debt burden, especially of the poorest countries, given their large share of that debt. It is both timely and feasible to contemplate additional measures which can benefit both the debtor countries and the multilateral agencies themselves.
NOTES 1. World Bank (1991). Vol. 1. It should he noted that World Bank data excluded the external debt of the former Soviet Union until 19Y2, when it was included for the first time. 2.
Government
of Canada
3.
World
Bank
(lYXY, IYYO and
4. World (lYX7).
Bank
(IYXY, 1YYO and
S. Sevigny ing process.
(1990).
(1YYO). for a description
p. 6 IYYI), p. 116 IYYl).
Culpcper
of the reschedul-
6. World Bank (19XY. 1900 and 1YYl). p. 6X. Costa Rica was also a beneficiary of the Brady Plan, hut did not draw on IMF or World Bank resources.
12. There is also the opportunity cost of heavy program lending to the former East Bloc countries which could divert scarce concessional resources away from the low-income countries. 13. World Bank (lYYO), p. 28. The World Bank also established an “IDA Debt Reduction Facility” in 1989, through which grants of up to $10 million can hc made to severely indebted low-income countries with appropriate adjustment programs. These grants can be used to rcducc debt to commercial banks via buyhacks or conversions, although very few countries to date have benefited from this facility. 14. Fcinherg. Fcrnandcz-Arias and Sader (1992). p. 30. predict an increase in the MDBs’ share of the stock of debt from 20% in 19Yl to 28% in 2000. IS.
7.
OECD
8. Equal to disbursements on new loans minus debt servicing (principal) plus interest on outstanding loans. Y.
Helleiner
IO.
World
Il.
Helleiner
Fcinhcrg
(1YYO). pp. 227-232
(lYY1). p. 42.
(IYYI). Bank
(IYHY, 1990 and
16. From calculations undertaken by the author with the assistance of Andrew Clark. The 40% cutoff was arbitrarily chosen to avoid including India. Presumably some criterion similar to that for ESAF and the World Bank’s SPA (i.e.. aevercly indebted, low-income countries) could he chosen.
IYYl). 17.
(IYYl).
Culpeper
(1YYl). p. 3X.
p. 32.
REFERENCES Culpeper. Roy. G‘rowllr und Adjustment in Smaller HighQ-lndehrrd <‘ountries: An Overview (Ottawa. Ontario: North-South Institute, 1991). Baker: The maturing debt Culpeper, Roy. “Beyond crisis.” Briefing Paper, No. 1X (Ottawa: North-South Institute. 19X7). Feinberg, Richard E., Eduardo Fernandcz-Arias and ‘.Deht reductions and North-South Frank Sader, resource transfers to the Year 2000.” ODC Policy Essay No. 3 (Washington, DC: Overseas Devclopment Council. 1902). Felix, David (Ed.), U&I und Truns&xrution? Prosprcts /or Latin America’s Economic Revival (Armonk. NY: M. E. Sharpc. lY90).
Government of Canada,
Government Response to the Report of The Standing Committee on External Affairs and International Trade, “Securing our Global Future: Canada’s Stake in the Unfinished Business of Third World Deht” (Ottawa: Government of Canada. IYOO). Hellciner, G. K., “The IMF, the World Bank, and Africa’s adjustment and external debt problems: An University of unofficial view.” Mimeo (Toronto: Toronto, 1091). OECD, Financing and External Debt of Developing Countries: lYY(j Survey (Paris: OECD. 1991). Sevigny, David. The Paris Club: cm Inside Vkw (Ottawa: North-South Institute. IYYO).
03oi-7SOX/Y3 $6.00 + 0.00 Pcrgamon Press Ltd
1993.
A Note on the Multilateral Creditors Crisis ROY CULPEPER The North-South Institute,
and the Debt
Ottawa
- The share of debt owed by developing countries to multilateral creditors doubled during the 1980s. Servicing this debt, particularly to the International Monetary Fund (IMF), has been very costly to some developing countries. In the light of this experience, it is appropriate both to consider the possibility of multilateral debt reduction. particularly for the poorest countries (as has been done with bilateral debt through the Paris Club), and to desist from using IMF short-term credit to assist countries with long-term structural problems. Summary.
1. INTRODUCTION Developing countries are indebted to three groups of creditors: private lenders (mainly commercial banks); bilateral lenders under the control of developed country governments (principally export credit agencies); and the multilateral organizations (the multilateral development banks and the International Monetary Fund). Over the course of the last decade, the international community has launched initiatives to restructure and reduce the debt owed to the first two, namely the commercial banks and bilateral creditors. Consequently both the amount and the relative share of Third World debt owed to multilateral organizations has risen rapidly. This article examines the expanding role of the multilaterals in the debt strategy. In particular, it considers the implications of their increasing share of the debt both for the debtor countries and for the institutions themselves. Finally, some possible approaches to reducing the burden of multilateral debt are examined.
2. ROLE OF THE MULTILATERAL AGENCIES IN THE DEBT CRISIS During 198&91, the total stock of Third World debt (including both long- and short-term debt) more than doubled. Private debt, however, grew only by 77%, while bilateral debt increased by 184% and multilateral by 319% (Table 1). The data suggest, moreover, that the trend toward a greater share of multilateral debt is accelerating. Since 1987, private long-term debt 1239
has fallen by about $47 billion and bilateral debt appeared to peak in 1990.’ These developments are related to the various international initiatives to manage the crisis since 1982, including the 1985 Baker and 1989 Brady Plans to restructure and reduce commercial bank debt, and the 1988 Toronto Summit which has led to a series of steps by the Paris Club creditors to reduce bilateral debt for the poorest countries. Multilateral agencies have become “lenders of last resort,” taking the place of retreating commercial and official bilateral lenders, and in some cases underwriting their withdrawal. During 1982-85, the perception of the debt crisis as a short-term liquidity problem meant that International Monetary Fund (IMF acquired the leading role in the debt strategy. 2 The IMF operated on two fronts. On one front were its developing-country borrowing members, to which it rapidly advanced short-term credit. Borrowers in turn had to adopt restrictive policies aimed at increasing next export earnings and stabilizing their economies. On the other front were the commercial banks. The Fund cajoled the banks into rescheduling principal payments in order to reduce the servicing burden of debtor countries. By 1985 it was clear that most debtor countries in Latin America and Africa faced long-term “solvency” rather than liquidity problems. The productive capacity of debtor countries was reeling from the double blow of IMF adjustment *The author would like to thank G. K. Helleiner for his comments. Any errors or omissions are solely the author’s
Final
revision
accepted:
January
IS, 1993.
1240
WORLD
Table
I. Third
World
long- und shorr-/em drht perccwrugr dislrihutior~)
Total debt outstanding Multilateral (including IMF) Bilateral Private (including short term) Source:
World
Bank
DEVELOPMENT
(1991).
Vol.
smcks
(IIS
19x0
1986
$572.X( 100) $61.6(10.7) $110.3(19.3) $400.‘)(70.0)
$1,062(100) $17Y.S(16.Y) $231.7(21.X) $651.1(61.3)
hilliom
und
IYYI $I ,280( 100) $257.6(2&l) $312.8(24.4) $710.3(55..5)
I, p. 120.
policies as well as the pressures of heavy debt payments. Accordingly, the Baker Plan was launched by the United States and the G-7 countries in October to help resuscitate growth in debtor countries. This time, it was the World Bank, with its long-term development focus, rather than the IMF. in the forefront. The Bank was asked to assist middle-income (primarily Latin American) debtor countries design strategies of “adjustment with growth.” It was also asked to lend these countries an additional $20 billion in fast-disbursing operations over three years. Commercial banks too were asked to increase their lending to the debtor countries by $20 billion over the same period. Rescheduling of principal, which was the hallmark of the debt strategy during 1982-85, was clearly not enough to reduce the debt-servicing burden to manageable levels. The Baker Plan in effect rescheduled, or capitalized, part of the interest payments due. The “additional lending” of the Baker Plan thus amounted to a bookkeeping entry rather than additional finance. Nonetheless the World Bank almost doubled its exposure to severely indebted middle-income countries’ from $14.5 billion in 1985 to $27.3 billion in 1987.’ Interest capitalization had by this time also become a feature of rescheduling official bilateral debt in the Paris Club. Interest as well as principal payments falling due over periods of 12 to 18 months were routinely consolidated and deferred into the future by up to 20 years.” The combined effect of the Baker Plan and Paris Club rescheduling was to initiate the “officialization” of the debt. Meanwhile, the total exposure of commercial banks to the severely indebted middle-income countries peaked in 1987 at $244 billion. By 1990 it had fallen by 45% to $136 billion. An important if less prominent part of the Baker Plan was its proposal to establish a “Structural Adjustment Facility” in the IMF, with relatively concessional terms (a 0.5% interest rate and lo-year repayment period) to
assist low-income clients. This was followed in 1987 by the “Enhanced Structural Adjustment Facility,” which for the first time channelled overseas development assistance (ODA) from aid donors through the IMF. The creation of SAF and ESAF were in part an attempt to offer low-income borrowers support on more appropriate terms, and in part a refinancing of Fund obligations which would otherwise not be met. By 1988, it was obvious that the Baker Plan had also failed to deliver developing countries from the debt crisis. Rescheduling principal and interest was not sufficient to reduce debt servicing to manageable levels. There remained only one way out: to reduce the principal and/or interest payments themselves. The G-7 industrial countries gave their collective blessing at the 19% Toronto Summit to debt reduction for the poorest countries in respect of obligations to official bilateral creditors. In March 1989 the new US Treasury Secretary, Nicholas Brady, launched an initiative to reduce commercial bank debt as well. The essence of the Brady Plan was to replace commercial bank debt with multilateral debt. The banks demanded and got “credit enhancement” in return for reducing their claims on debtor countries. What this meant in practice was that other creditors, principally the World Bank and IMF, had to put up guarantees which could be called by the commercial banks if the debtors failed to honor their reduced debts. Altogether $25 billion was in fact earmarked from the two Bretton Woods institutions for this purpose. In 1990 and 1991, the World Bank and IMF each made commitments of over $2.7 billion to support “Brady debt deals” for Mexico, Philippines, Venezuela and Uruguay.’ Commercial bank debt reduction was thus purchased at the cost of increases in multilateral debt. For example, in the Mexican package a $12.7 billion reduction in bank debt required $5.8 billion in additional financing (of which $5.7 billion came from the World Bank and IMF). In the Venezuelan package a $4.3 billion reduction
MULTILATERAL Table 2. Share of multilateral debt in total debt service of developing countries (percentage)
All developing countries Sub-Saharan Africa Asian low-income countries Western Hemisphere countries Source:
OECD
(19Yl),
1982
1987
19YO
6 13 12 4
21 30 27 27
20 28 22 27
p. 42.
in bank debt required $2 billion in additional financing (of which $1.4 billion came from the World Bank and IMF). In these packages commercial banks exchanged their loans for bonds at a discount or earning a lower yield; the bonds were collateralized by World Bank and IMF guarantees. It would be misleading to suggest, however, that the transformation of private into multilateral debt has occurred primarily because of the design of the Baker and Brady Plans. More accurately, private creditors ceased to lend to much of the Third World in the latter half of the 1980s (despite the exhortation of the Baker Plan). Banks liquidated their claims as they were amortized or sold their loans at discounts on secondary markets. This left official creditors, particularly the multilaterals, as the only creditors willing to continue lending to Latin America and Africa.
3. PROBLEMS DUE TO INCREASING MULTILATERAL DEBT In its 1991 annual survey of developing country debt, the Organization for Economic Cooperation and Development (OECD) noted the
Table
1241
CREDITORS
marked rise in reported amounts of multilateral debt and debt servicing for all categories of countries. The most rapid buildup took place during 1981-87, leveling off in the next two years and increasing again in 1990 due to the Brady Plan (Table 2). The absolute amount of multilateral debt service payments, which are a better indication of the cash-flow burden than debt stocks, doubled during 1985-88, and amounted to $32 billion in 1990, of which $10 billion was due to the IMF.’ Why is growing indebtedness to the multilaterals a problem? First, because the practice until now has been that multilateral debt cannot be rescheduled (more on this below). This makes multilateral obligations more rigid than other forms of debt. Second, the multilaterals are lenders of last resort; therefore, arrears in servicing multilateral debt lead ultimately to ostracism from the world financial svstem. Third, because of the rigidity of multilateral debt servicing, net transfers” between the multilaterals and many of their borrowers have become negative. In effect, debtor countries are transferring resources to multilateral agencies. Net transfers from the private banks to debtors have become negative because those creditors have practically ceased to lend, and in spite of rescheduling and debt reduction. In contrast, net transfers from the multilaterals have become negative in spite of increased lending and because of the unwillingnesss to reschedule. The multilateral creditors were created to help increase access of the developing countries to external capital. Both the Baker and Brady Plans explicitly recognized the need for the multilaterals (including the regional development banks) to counteract the withdrawal of private creditors and other economic shocks through increasing their own lending to the debtor countries. In fact,
3. Developing countries’ net transfers fromlto multiluteral agencies (US$ millions)
IMF* MDBst IMF + MDBs IBRD$
1982
1987
1990
1985-92
5.179 8,758 13,937 2,729
-8,437 3,602 -4,835 - 1,490
-2,414 3,813 1,399 -2.066
-33,588 29.734 -3,654 -
Source: World Bank (1991. 199i). *IMF net transfers equal purchases minus repurchases charges. tConcessiona1 plus nonconcessional lending. $Nonconcessional World Bank lending. 1992 figure available.
and
not
1242
WORLD
DEVELOPMENT
the multilaterals did increase their gross disbursements, but they also had to be repaid for past loans. And because of short-term nature of the IMF’s credit facilities, and heavy repayments on the nonconcessional portion (about 70%) of multilateral bank lending, the multilaterals themselves have contributed to the negative net transfer problem after 1985 (Table 3). What is particularly striking is the magnitude of negative net transfers to the IMF, amounting to almost $33.6 billion for 1985-92. These were $3.7 billion greater than the positive net transfers from the multilateral banks, making the multilaterals as a group a destination rather than a source of finance during the climactic years of the debt crisis. Regionally, IMF net tranfers to subSaharan Africa turned negative in 1984, reached a peak of -$954 million in 1986, and totalled -$4.0 billion over 1984.90.” In the Latin American/Caribbean region, Fund transfers turned negative only in 1986 but amounted to -$11.2 billion over 1986-92. “I No borrower, it is true, can continue to receive positive net transfers in perpetuity. Moreover, borrowings properly invested should generate a stream of earnings which help to service the debt. Still, countries experiencing debt-servicing difficulties due to terms of trade and other external shocks have found their problems compounded when multilateral creditors are on balance demanding payment rather than providing finance.
4. WAYS OF RELIEVING INDEBTEDNESS TO THE MULTILATERAL AGENCIES While it is not possible here to examine solutions to the growing problem of multilateral indebtedness in any detail, the above analysis suggests some broad policy implications. It is clear that the IMF is central to the problem of developing-country indebtedness to the multilateral agencies. Since the IMF is a fundamentally different kind of “creditor” agency than the multilateral banks, the solutions must also be different. The IMF’s function and financial structure as a short-term revolving fund means that any rescheduling of its credits might quickly compromise its integrity. That is why the Fund moved with such alacrity to mobilize donor funding to establish the $8.4 billion ESAF in 1987-88. The injection of these concessional resources enabled the IMF’s borrowers to refinance their Fund credits on softer terms. Regrettably, the conditionality imposed by the IMF on would-be borrowers has inhibited a greater uptake of ESAF resources. In any case, it is also clear that SAF and ESAF
have not been sufficient to stem the negative transfer of resources to the Fund from its borrowers. Nor has it prevented growing arrears by certain member countries. The IMF has tried to resolve this problem in a limited number of countries by introducing a “rights accumulation” procedure, because the previous convention was to render members in arrears ineligible for further Fund credits. Under this procedure a member in arrears to the IMF can earn rights to draw on Fund resources in return for good economic performance under IMF supervision. To tackle the larger question of restructuring the IMF’s claims on debtor countries, some experts have called for the sale of some of the Fund’s gold reserves, which are worth some $40 billion on the open market. Proceeds from the sale of a portion of these holdings could be used to refinance the obligations of low-income members to the Fund on highly concessional terms. Alternatively, repayments could be made in local currency, or rescheduling could be undertaken in extreme circumstances. Such proposals would, however, further broaden the toe-hold of the IMF in the area of concessional lending. Hence it might be preferable for the Fund to cede such lending to agencies whose primary purpose is development assistance, such as the World Bank or bilateral aid agencies. An institution geared principally to assist countries with short-term balance of payments difficulties seems out of place in countries with deep structural problems,” unless its assistance for short-term exigencies is closely meshed with the availability of long-term flows. Meanwhile, the IMF is in the midst of its ninth quota increase (representing a 50% expansion of its lending capacity), the urgency of which has been pressed by the admission of the republics of the former Soviet Union into the Fund. It is questionable whether the economic problems of this group of new member countries, or of the Eastern European countries which also joined the IMF recently, are any shorter term in nature than those of African countries. Hence, it would not be surprising if a few years from now these new members also face debt servicing difficulties featuring a perverse net transfer relationship with the IMF.” Therefore, on the eve of a major new expansion in lending by the IMF, it seems timziy to question the future role of this orgnization, especially with regard to developing countries and other borrowers facing long-term aid structural problems. Perhaps it is time if not to merge the IMF with the World Bank altogeth-r. then to dovetail its lending facilities for deve!oping countries with those of the Bank. In this manner.
MULTILATERAL
repayments to the Fund would be anticipated in advance and funded through longer term Bank loans rather than add to a mounting and unserviceable liability to the IMF. As to the multilateral development banks (MDBs) themselves, a distinction must be made between their concessional and nonconcessional windows. The former (for example, the World Bank’s International Development Association - IDA) provide loans with maturities of up to 50 years at zero or very low interest rates. These soft loans are funded through contributions from the aid donor countries. The “hard” windows in contrast provide loans of around 20 years carrying market-related interest rates: these loans are funded from MDB borrowings on the capital markets. The latter, of course, are the problematic loans, both for the borrowers (being the cause of negative net transfers) and for the MDBs. They are a problem for the Banks which have insisted that less than prompt and full debt servicing from their borrowing clients would jeopardize the terms on which the MDBs can borrow on the capital markets. Like the IMF, the World Bank has sought to refinance the hardest of its loans with softer funding. In 1989 the Bank introduced a program to subsidize payments on nonconcessional loans to its low-income debt-distressed borrowers, through allocating $300 million in concessional “supplemental credits” from IDA, its softwindow affiliate. Some bilateral donors have participated in this program by making contributions. ” Such measures are likely to spread over the of the coming years. I4 But cross-subsidization MDBs’ hard loans through their concessional windows, or through the additional generosity of bilateral donors, carries an opportunity cost, ultimately diverting aid resources from lowincome recipients. The question is whether there are alternatives which do not have this crucial drawback. An obvious answer is to consider the possibility of rescheduling or debt relief by the MDBs. It is possible to reschedule loans without having any impact on the income of MDBs by concentrating on principal payments. For example, grace and amortization periods could be stretched out, even for outstanding loans. One expert calculated that such techniques, applied to the World Bank’s loans to Latin American countries, could have had the same effect in 1991 as a $3.1 billion increase in disbursements.” It may be possible to go even further. In 1990, the MDBs collectively earned net income, or profits, or over $2 billion, of which one-half accrued to the World Bank; their income in the
CREDITORS
I243
past few years has been of similar magnitude (Table 4). While the profits of the World Bank group have not grown commensurately with lending, its rate of return on assets has been l-2%, indicating a return of about 12-24% on paid-in capital. Returns in the other MDBs have tended to be higher - for example, the return on assets in the Asian Bank in 1990 was over 4%. These figures compare favorably with profit levels enjoyed by successful commercial banks. Thus, there may be some leeway for the MDBs to contemplate interest-rate reduction without dangerously impairing net income levels of the Banks. For example, interest-rate relief could be confined to the smaller severely indebted, lowincome countries whose debt to the multilateral agencies (including the IMF) comprises over 40% of their debt. In 1988, such criteria would have made the following countries eligible for relief: Burundi, Uganda, Malawi, Guinea-Bissau, Honduras, Guyana and Kenya. Outstanding nonconcessional loans to these countries amounted to $2.6 billion, or about 2.2% of all such loans outstanding to the MDBs.” Even if interest on these loans were entirely forgiven, this might cost the MDBs collectively only in the order of $50 million in lower income, an amount which could easily be absorbed. It is doubtful that such measures would cause the bond rating agencies much concern - which is the reason given by the MDBs for their unwillingness to contemplate any departures from full and regular servicing of their loans. Indeed, underwriters might well see such measures as strengthening the MDBs’ loan portfolio and preferable to the conventional measure of refinancing unsustainable debts.”
Table 4. Net income banks
of the multilateral (US$ millions)
development
1987
1988
1989
I990
AfDB* AsDBt IDB$ World Bank
66 306 376 1,113
65 374 288 1 .OO4
129 43s 269 1,094
138 509 388 I .046
Total
1,861
1.731
1,927
2,081
Source: MDB annual reports, *African Development Bank. tAsian Development Bank. Slnter-American Development
1897-1990.
Bank.
1214
WORLD
DEVELOPMENT
5. A BRIEF CONCLUSION
To end on an optimistic note, it is encouraging that much of the developing world is beginning to emerge from the debt crisis of the 1980s. Unfortunately, the resumption of growth is characteristic more of the middle-income than the poorest countries. While debt relief is no panacea for any country’s economic problems. it can help to
reduce the tremendous external financial pressures faced by debtor countries. Multilateral agencies the IMF and the multilateral banks - have a particular responsibility to alleviate the debt burden, especially of the poorest countries, given their large share of that debt. It is both timely and feasible to contemplate additional measures which can benefit both the debtor countries and the multilateral agencies themselves.
NOTES 1. World Bank (1991). Vol. 1. It should he noted that World Bank data excluded the external debt of the former Soviet Union until 19Y2, when it was included for the first time. 2.
Government
of Canada
3.
World
Bank
(lYXY, IYYO and
4. World (lYX7).
Bank
(IYXY, 1YYO and
S. Sevigny ing process.
(1990).
(1YYO). for a description
p. 6 IYYI), p. 116 IYYl).
Culpcper
of the reschedul-
6. World Bank (19XY. 1900 and 1YYl). p. 6X. Costa Rica was also a beneficiary of the Brady Plan, hut did not draw on IMF or World Bank resources.
12. There is also the opportunity cost of heavy program lending to the former East Bloc countries which could divert scarce concessional resources away from the low-income countries. 13. World Bank (lYYO), p. 28. The World Bank also established an “IDA Debt Reduction Facility” in 1989, through which grants of up to $10 million can hc made to severely indebted low-income countries with appropriate adjustment programs. These grants can be used to rcducc debt to commercial banks via buyhacks or conversions, although very few countries to date have benefited from this facility. 14. Fcinherg. Fcrnandcz-Arias and Sader (1992). p. 30. predict an increase in the MDBs’ share of the stock of debt from 20% in 19Yl to 28% in 2000. IS.
7.
OECD
8. Equal to disbursements on new loans minus debt servicing (principal) plus interest on outstanding loans. Y.
Helleiner
IO.
World
Il.
Helleiner
Fcinhcrg
(1YYO). pp. 227-232
(lYY1). p. 42.
(IYYI). Bank
(IYHY, 1990 and
16. From calculations undertaken by the author with the assistance of Andrew Clark. The 40% cutoff was arbitrarily chosen to avoid including India. Presumably some criterion similar to that for ESAF and the World Bank’s SPA (i.e.. aevercly indebted, low-income countries) could he chosen.
IYYl). 17.
(IYYl).
Culpeper
(1YYl). p. 3X.
p. 32.
REFERENCES Culpeper. Roy. G‘rowllr und Adjustment in Smaller HighQ-lndehrrd <‘ountries: An Overview (Ottawa. Ontario: North-South Institute, 1991). Baker: The maturing debt Culpeper, Roy. “Beyond crisis.” Briefing Paper, No. 1X (Ottawa: North-South Institute. 19X7). Feinberg, Richard E., Eduardo Fernandcz-Arias and ‘.Deht reductions and North-South Frank Sader, resource transfers to the Year 2000.” ODC Policy Essay No. 3 (Washington, DC: Overseas Devclopment Council. 1902). Felix, David (Ed.), U&I und Truns&xrution? Prosprcts /or Latin America’s Economic Revival (Armonk. NY: M. E. Sharpc. lY90).
Government of Canada,
Government Response to the Report of The Standing Committee on External Affairs and International Trade, “Securing our Global Future: Canada’s Stake in the Unfinished Business of Third World Deht” (Ottawa: Government of Canada. IYOO). Hellciner, G. K., “The IMF, the World Bank, and Africa’s adjustment and external debt problems: An University of unofficial view.” Mimeo (Toronto: Toronto, 1091). OECD, Financing and External Debt of Developing Countries: lYY(j Survey (Paris: OECD. 1991). Sevigny, David. The Paris Club: cm Inside Vkw (Ottawa: North-South Institute. IYYO).