External Indebtedness of Developing Countries

Ulrich Baumgartner, G. Johnson, K. Dillon, R. Williams, Peter Keller, Maria Tyler, Bahram Nowzad, G. Kincaid, and Tomás Reichmann

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1981
• eBook ISBN: 9781451935875

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Contents

Prefatory Note

I. Introduction

II. Dimensions of Developing Country Debt

Conceptual and statistical aspects

Overall developments, 1972–79

Non-oil developing countries

Changes in debt structure

Terms of debt

Prospects

Overview

III. Inflation and External Debt

Debt ratios

Burden of external debt, 1972–79

Inflation and the rate of amortization

IV. Survey of Recent Debt Problems

Main developments

Balance of payments background

V. Multilateral Debt Renegotiations

Basis of multilateral approach

Paris Club and similar frameworks

Summary of scope and terms of debt relief

Evolution of new guidelines

Role of the Fund

Background

Provisions of new guidelines

The Fund’s role in future debt rescheduling operations

VI. Debt Restructuring by Commercial Banks

Evolution of bank financing

Bank lending and economic management

Debt restructuring process

Financial impact of restructuring

Relationship to agreements with official creditors

Role of the Fund

Overview of some issues

APPENDICES

I. Developing Countries Covered in This Study

II. Inflation and Debt Service

III. Debt Ratios and Analysis of Debt Situations

General considerations

Descriptive function

Predictive function

Data considerations

Commonly used debt ratios

Debt service ratio

Ratio of amortization payments to disbursements

Ratio of interest payments to GDP or export earnings

Ratio of net resource transfer to GDP

Ratio of outstanding external debt to GDP or export earnings

Ratio of net external debt to GDP or export earnings

Debt capacity

LIST OF TABLES

Section

II. 1. Total External Debt of Developing Countries, End of 1979

2. Medium-Term and Long-Term Debt of 94 Developing Countries, 1972–79

3. Ratio of Developing Country Debt to Exports and Reserves, 1960 and 1970–79

4. Debt of 87 Non-Oil Developing Countries, 1972–79

5. Outstanding Debt of 94 Developing Countries by Income and Creditor Source, End of 1979

6. Outstanding Debt and Debt Service of Developing Countries with Largest Outstanding Debt, 1975–79

7. Average Terms of Debt Commitments for 94 Developing Countries, 1972–79

8. External Debt of 87 Non-Oil Developing Countries, 1978–81

III. 9. Nominal and Real Public Debt of 87 Non-Oil Developing Countries, 1972–79

10. Selected Indicators for Public Debt of 87 Non-Oil Developing Countries, 1972–79

IV. 11. Multilateral Debt Renegotiations, 1975–80

12. Comparison of External Public Debt Indicators for a Group of Twelve Countries and for Other Non-Oil Developing Countries, 1972–79

13. Comparisons of Economic Indicators for a Group of Twelve Countries and for Other Non-Oil Developing Countries, 1972–79

VI. 14. Medium-Term and Long-Term Bank Loan Commitments, 1971–78

15. Net Bank Financing and Net Balance of Payments Flow Vis-à-Vis Banks, 1973–79

16. Ratio of Net Flow Vis-à-Vis Banks to GDP and to Current Account Receipts, 1973–79

17. Basic Components of Restructuring Agreements

18. Impact of Restructuring Agreements on Net Flow Vis-à-Vis Banks During First Six Years

Appendices

II. 19. Effect of Inflation on Real Value of a Loan

LIST OF CHARTS

Section

III. 1. Public External Debt and Debt Service for 87 Non-Oil Developing Countries, 1972–79

Appendices

II. 2. Impact of Inflation on Real Burden of Debt Over Twenty Years

3. Impact of Inflation on Real Burden of Debt Over Ten Years

4. Impact of Inflation on Real Burden of Debt Over Five Years

III. 5. Model of External Debt Accumulation

Conceptual and Statistical Aspects

An examination of the external indebtedness and debt problems of developing countries must begin with a quantitative analysis of the debt. In spite of significant advances in recent years in the quality and coverage of debt data, serious deficiencies remain in the basic statistics, either from debtor or from creditor sources. Partly as a result of these deficiencies, a variety of estimates for developing country debt are in use, reflecting definitional differences in the categories of debt covered, the availability of information on each type of debt, and the particular purpose of each series.

This paper concentrates on the medium-term and long-term external debt of 94 developing countries, that is, the disbursed and outstanding external debt with maturities of one year or more contracted by the public and private sectors. This definition includes debt contracted by the private sector without a guarantee from a public entity in the debtor country, for which some information is available in a form that can be incorporated in the more generally used series on public and publicly guaranteed debt. However, because of the preliminary and derivative nature of this information, much of the analysis of debt must be based on public debt data alone.²

Total medium-term and long-term debt statistics do not fully account for all external liabilities of a country because not all of these liabilities can be defined as debt. A possible operational criterion would be to include as debt all term liabilities, that is, all obligations that have a predetermined schedule of repayment.³ Using this criterion, it would be necessary to supplement existing published data in several ways. The most important addition would be the external liabilities of less than one year in original maturity, usually defined as short-term debt. The outstanding amount of these liabilities at the end of 1979 has been conservatively estimated at $80–90 billion. They include, for the most part, bank loans of short maturity, overdrafts or revolving lines of credit, bills of exchange, and letters of credit. In general, these are related to trade transactions and, in a sense, are self-liquidating; their absolute level tends to maintain a stable relation to the value of a country’s trade, and the amounts involved are normally rolled over from year to year. However, at any given moment, the outstanding amount may place a net immediate claim on a country’s foreign exchange reserves, thus affecting the overall payments position, including the country’s debt servicing ability. In some cases, even though this financing tends to be more costly than medium-term financing, countries have resorted to sudden increases in short-term borrowing. As these short-term credits are rolled over, they become the equivalent of a high-cost, medium-term source of finance and may become significant in terms of a country’s debt profile.

In spite of the importance of short-term liabilities, no comprehensive statistical record has been compiled on a basis consistent with the medium-term and long-term debt statistics produced by the OECD and the World Bank. For individual countries, often a substantial part of their short-term financial transactions, especially those involving the private sector, are not properly recorded in the balance of payments but are reflected in the “errors and omissions” item.

A second addition that could be made to extend the analysis is the use of Fund credit. This type of external liability traditionally has not been included in external debt statistics; only Trust Fund loans, which have highly concessional terms of repayment, are included in the series reported by the World Bank. The exclusion of other Fund credit has not, however, materially affected the aggregate debt picture, since the outstanding amount ⁴ does not exceed 2 per cent of the total outstanding medium-term and long-term debt. For individual countries, however, inclusion of Fund credit would give a somewhat different picture of the debt situation.

Up to the late 1960s, capital flows to most developing countries consisted largely of direct investment, short-term trade-related credits, and long-term, mostly concessional, flows associated with project financing by official lenders. Operations with the Fund were considered primarily as compensatory monetary movements that provided bridging finance between cyclical swings of a country’s balance of payments. This distinction between the existing types of capital flows explained the focus on long-term flows in the analysis of external debt. The rapid development of commercial bank lending during the 1970s has to a large extent blurred this distinction. Countries gained access to private sources that provide medium-term financing tied neither to trade nor to projects. With the creation of new facilities and the mechanism of successive Fund-supported programs, access to Fund resources has been enlarged and the maturity of Fund credit lengthened.

In any case, the monetary character of the use of Fund credit does not alter the fact that it constitutes a fixed-term obligation of the user of these resources that lays claim on its future foreign exchange earnings. Furthermore, published external debt data include, for example, medium-term borrowings by central banks from international capital markets, a part of the liabilities of monetary authorities. In view of the above, and particularly in the light of recent decisions regarding the role of the Fund in recycling and in meeting the balance of payments needs of members in the years ahead, it may be appropriate to take account of Fund credit in the analysis of external indebtedness.

Another addition to the analysis relates to payments arrears, which arise when, either on an informal basis or through official limitations on the availability of foreign exchange, an undue delay occurs in making international payments. Undue delay may be defined as a delay that exceeds the period reasonably needed to complete the administrative procedures required to establish the bona fides of an application for foreign exchange, having regard to the circumstances of the country concerned. A broader definition of arrears could include any undue delay by governments in meeting their external obligations. As such, arrears may arise in connection with any payment—for merchandise, invisibles, or debt service—but in all cases they may be construed as a liability of the country akin to a loan that, although it does not have a fixed schedule of repayment, constitutes a priority claim on the country’s foreign exchange reserves.

At the end of 1979, 22 countries had accumulated arrears estimated at $5.1 billion. Although this does not significantly affect the aggregate picture of developing country debt, arrears are often a manifestation of debt servicing problems and, for the individual country concerned, must be included in debt analysis because they can be equivalent to a substantial part of export proceeds. Furthermore, the emergence or elimination of arrears will tend, respectively, to understate or overstate the debt servicing obligations of a country.

Finally, depending on the particular circumstances of a country, consideration could be given to extending the analysis of external debt to include certain other term liabilities, such as obligations arising from the operation of bilateral trade agreements, private nonresident deposits, or certain types of leasing arrangement. This is an area where no comprehensive statistical information is available; its absence, however, is not likely to alter significantly the aggregate analysis of this paper.

When all of the above-mentioned categories of external debt are taken into account, it is possible to obtain a broad estimate of the total external debt of all developing countries. At the end of 1979 this debt was estimated at about $490 billion (Table 1). At that date, the medium-term and long-term debt of the 94 developing countries selected for analysis in this paper was estimated at almost $360 billion, or about three fourths of the total.

Table 1. Total External Debt of Developing Countries, End of 1979

(In millions of U.S. dollars)

Sources: World Bank, World Debt Tables; OECD, Development Assistance Committee; and Fund staff estimates.

¹ Not including outstanding use of Fund credit or arrears.

² Public and publicly guaranteed debt.

Overall Developments, 1972–79

During 1972–79 there was a fourfold increase in the outstanding medium-term and long-term debt of developing countries.⁵ Over this period, the debt grew at an average annual rate of 21.7 per cent, reaching about $360 billion at the end of 1979 (Table 2). At the same time, service payments on this debt increased more than fivefold, from $12 billion in 1972 to $63 billion in 1979, or at a rate of 26.6 per cent a year. The faster pace of increase of service obligations reflects the progressive change in the structure of debt commitments toward debt contracted with shorter maturities and higher interest rates. These rates of increase in debt and debt service may be compared with the 14–15 per cent average annual increase during the 1960s.

Table 2. Medium-Term and Long-Term Debt of 94 Developing Countries, 1972–79

(In millions of U.S. dollars)

Sources: World Bank, World Debt Tables; OECD, Development Assistance Committee; and Fund staff estimates.

¹ Preliminary.

² Public and publicly guaranteed debt.

The high rates of growth of debt and debt service since 1972 have been associated with attempts by developing countries to maintain investment and economic growth in the face of an increasingly unstable external environment arising from wide fluctuations of commodity prices and larger current account deficits owing to higher import costs. However, the single most important factor in the increase of nominal debt and debt servicing obligations was the more rapid pace of inflation that characterized the period under review. As explained in Section III, debt outstanding, in real terms, grew during this period at an average annual rate estimated, depending on the choice of the base year and the deflator,⁶ at between 6 per cent and 9 per cent, which is substantially lower than the corresponding rate of about 12 per cent a year during the 1960s. Debt service, in real terms, increased at a rate of about 11 per cent a year in both periods.

Another dimension of the real values of debt and debt service is obtained when they are compared with the evolution of exports. Using exports of goods and services of the 94 developing countries as a scaling factor, debt rose faster in 1970–72 than export proceeds; the export boom of 1972–74 sharply reversed this trend, but it resumed its former path from 1975 onward. As a result, the outstanding debt of the 94 countries, which in 1960 was equivalent to 48 per cent of export proceeds, rose to 122 per cent in 1970–72, dropped to 68 per cent in 1974, and again rose, to 97 per cent in 1979 (Table 3). Debt service payments experienced a similar evolution: from a level of 7 per cent of exports in 1960 they increased to 15 per cent in 1970–72, fell to 10 per cent in 1974, and rose again, to 17 per cent in 1979. In spite of its large size in nominal terms, by the end of 1979 the debt of developing countries relative to their exports was in the aggregate not markedly different from that at the beginning of the decade.⁷

Table 3. Ratio of Developing Country Debt to Exports and Reserves, 1960 and 1970–79 ¹

(In per cent)

Sources: World Bank, World Debt Tables; OECD, Development Assistance Committee; International Monetary Fund, International Financial Statistics and World Economic Outlook.

¹ Total medium-term and long-term debt, including private nonguaranteed debt.

² Fund staff estimates.

The rise in gross external assets of developing countries, in particular their foreign exchange reserves, is another factor that may be considered in assessing the growth in the total debt of these countries. Again, the experience of the 1970s reversed that of the 1960s: during the earlier period debt grew faster than the accumulation of reserve assets, so that reserves (valuing gold holdings at market prices), which in 1960 were equivalent to 58 per cent of outstanding debt, represented only about 32 per cent in 1970–72; subsequently, reserves increased faster than debt and, by the end of 1979, represented 51 per cent of the debt. Part of the increased borrowing in 1973–79 was for reconstituting reserves.

In sum, for developing countries, including oil exporters, external indebtedness and the related service payments had by the end of the 1970s attained unprecedented levels in nominal terms; in real terms, however, and in relation to other economic magnitudes, such as exports and reserves, the general debt situation does not seem to be substantially different from that at the beginning of the decade.

Non-Oil Developing Countries

The evolution of the debt and debt servicing obligations of 87 non-oil developing countries⁸ included in this study follows a pattern generally similar to that of all developing countries analyzed in the previous section. By the end of 1979, the outstanding medium-term and long-term debt of these countries was $299 billion, and the corresponding service payments during that year were $51 billion (Table 4).

Table 4. Debt of 87 Non-Oil Developing Countries, 1972–79 ¹

(In millions of U.S. dollars)

Sources: World Bank, World Debt Tables; OECD, Development Assistance Committee; and Fund staff estimates.

¹ Flow and stock data cannot be reconciled fully because of valuation adjustments to convert to a common currency and other adjustments.

² Preliminary.

³ Public and publicly guaranteed debt.

When the total outstanding debt of non-oil developing countries is measured against exports or reserves, it follows a similar path to that of all developing countries. For debt service payments, however, a considerable deterioration occurred between 1970–72 and 1979. As a result of this deterioration, and also because this group of countries started the decade in a less favorable position, debt indicators by 1979 suggested a somewhat more serious situation than for developing countries as a whole. At the end of 1979, outstanding debt was equivalent to 109 per cent of aggregate exports, debt service payments amounted to 19 per cent of exports, and reserves covered only 43 per cent of outstanding debt, compared with 97 per cent, 17 per cent, and 51 per cent, respectively, in all developing countries (see Table 3).

Since 1973, non-oil developing countries have been exposed to a more unstable external environment. Most have suffered from the increases in petroleum and other prices, while in many cases their exports have been affected by relatively stagnant conditions and protectionist tendencies in their major markets. The resulting wide fluctuations in the curren...

Table of contents

• Cover Page
• Copyright
• Contents
• Prefatory Note
• I. Introduction
• II. Dimensions of Developing Country Debt
• III. Inflation and External Debt
• IV. Survey of Recent Debt Problems
• V. Multilateral Debt Renegotiations
• VI. Debt Restructuring by Commercial Banks
• Appendices
• Footnotes