Reports on debt crisis
By Ben Mensah
The reports of the International Monetary Fund, World Bank and General Agreement on Trade and Tariffs tend to give an encouraging picture of the world economy based on growth in the American and Canadian economies.
A report issued by an expert group commissioned by the Commonwealth Heads of Government at their New Delhi meeting in November 1983 similarly acknowledged the signs of economic recovery and a decline in interest rates which made the debt burdens of the developing countries. manageable.
The Commonwealth report, however, recognises the fact that almost a year after the signals of growth, the international banking system still faces great danger. One major American bank has had to be rescued by public authorities, the pace of recovery has remained slow outside the US, interest rates have again begun to rise and commodity prices have fallen.
The contents of these reports, whether they cast a shadow of gloom or growth in the world economy have become almost monotonous and succeed only to attract attention when they deal with the specific problems of certain countries.
The latest Commonwealth report to be considered by the Commonwealth Finance Ministers at a meeting later in the month in Toronto asserts that the international community has been almost wholly indifferent to the difficulties of the poorest countries, outside Mexico, Argentina, Brazil, etc and including virtually all West African countries.
According to the IMF, these low- income developing countries, even though numbering forty, have a combined debt of $88 billion which is just over one-eighth of all developing countries' debt. This debt is small in global terms, but it is large in relation to the capacity of many of them to service it. As a result, their debt-service payments on long-term debts have increased from 16% in 1975 to 26% in 1982.
In Africa, low-income countries have also seen their total external debt increase as a proportion to export earnings from about 90% in 1970-73 to almost 250% in 1983. Their debt service payments on long-term debt, which stood at around 7% of their export of goods and services during 1970-73, are estimated to have reached a quarter of their export earnings by 1983.
The report is also noteworthy for its revelation of the movement of countries in the West African region into or out of the group classified as low income and with a per capita income of less than $400.
Since 1978 none of the countries in this group has moved up out of the $350 per capita category. These are Benin, Cape Verde, Chad, The Gambia, Guinea, Guinea-Bissau, Mali, Mauritania, Niger, Senegal, Sierra Leone, Togo and Upper Volta.
Instead their ranks have been swelled by the latest entrant, Ghana, whose economy has slumped from a per capita income of over $400 since 1982 to $360.
The Commonwealth report listed a variety of factors that have contributed to the deteriorating debt situation of low-income developing countries, especially in Africa.
(i) Terms of trade
They suffered a serious deterioration in their current external balance with the decline in their terms of trade, and specifically with the increases in oil prices. Between 1973 and 1982, low- income African countries lost as much as 20% in the purchasing power of their exports. This, together with a decline in the volume of exports, con- tributed to a trebling or quadrupling of their current account deficits in real terms.
(ii) Reduced aid
In seeking to meet current account deficits by capital flows, low-income countries have relied mainly on aid, but ODA (Official Development Assistance) has also declined in real terms. Gross disbursements of ODA rose by 54% between 1975 and 1982, and nominal net transfers, after deducting repayment and interest, by 37%. But net transfers declined by 5% in real terms, when account is taken of changes in exchange rates and prices of goods procured through ODA. Looking to the future the prospects are no better. With a Seventh Replenishment of IDA fixed at $9 billion, it is predicted that Africa will suffer a 21% reduction in real terms compared with commitments in the IDA-6 period.
(iii) Increased use of private markets Increased current account deficits in real terms, combined with declining aid, led low-income countries to rely more and more on non-concessional export credits and private capital markets. They were attracted by negative real interest rates and the absence of strings. The upswing in commodity earnings in the late 1970s also engendered confidence in some countries that they could service commercial debt. Two-fifths of the in- crease in the total long-term debt of the low-income countries between 1975 and 1983 was accounted for by non- concessional flows; as a result, the share of concessional debt fell from 71% of the total in 1975 to 60% in 1983.
A consequence of increased reliance on private markets has been a hardening of terms. This was most evident for variable interest rate commercial debt, but was also true for ODA debt, in respect of its declining grant element. Multilateral loans - for example, from the IMF have also become more costly. In Africa, average interest rates on loans of all kinds rose from 4.2% in 1971 to 10.1% in 1981. Parallel with this, loan maturities on African debt fell from 22 years in 1971 to 15 years in 1981; and the average grace period from six to four years.
(iv) Internal factors While external factors have played a major role in explaining the rise in indebtedness and debt service in low- income countries, internal factors were also important. These include natural hazards such as drought which led countries to buy food through external borrowing; and policy deficiences in the areas of production, savings incentives and debt management.
During the period 1976-83, out of 31 cases of official debt rescheduling, 21 involved low-income African countries; Africa accounted for half of all reschedulings, including commercial bank loans, in this period. Several of these countries were obliged to reschedule their debts repeatedly, with Zaire, Togo and Liberia accounting for 15 reschedulings between them. A further eight countries which had not yet rescheduled were listed by the IMF as being in arrears in 1983.
The report re-asserts here that there are some important variations in the ways in which the international community has treated the debt of low-income countries as compared with that of major and middle-income debtors. First, since a large proportion of the debt is official, the institutional framework for renegotiation is different, involving the Paris Club and aid consortia.
Second, the principle of writing off debt for low-income countries has been accepted by creditor countries. However, a distinction is made between ODA debt which is eligible for write-offs and official debt negotiated in the Paris Club, which is not.
A view held in Western governments, international agencies and banks is that, while the debt crisis has assumed serious dimensions in the last few years, the policies developed in response to it, coupled with economic recovery in the industrial countries, should restore the debt situation to a manageable level. The plausibility of this scenario was reviewed in the Commonwealth report which noted some difficulties with such an assess- ment. First, the underlying assumptions seem optimistic, particularly when we consider that all of them must be realised simultaneously. Second, even if all the assumptions were to be realised, the picture is much less reassuring when we look at the debt profile for some individual countries or sub-groups of countries.
Table 3.1: Classification of Developing Countries by Per Capita Income and Importance of Official Creditors (1982)
Value of Medium-term Official Debt Share of Official Disbursed Cap Debt in Total Debt per capita income $ billion
I. Countries with under $400 per capita income and over 60% official Debt
Bangladesh 4.21 93 140
India 18.37 91 260
Uganda 0.55 91 230
Tanzania 1.55 89 280
Malawi 0.49 69 210
Ghana 0.95 69 360
Sri Lanka 1.42 66 320
Sierra Leone 0.23 65 390
Kenya 1.57 60 390
II. 'Hybrid' Cases
Guyana 0.48 69 720
Jamaica 1.05 67 1180
Mauritius 0.22 55 1270
Indonesia 8.33 52 530
Zambia 1.73 36 600
III. Countries with over $750 per capita income and over 60% Commercial Debt
Costa Rica 1.10 37 1430
Colombia 2.99 33 1460
Ivory Coast 1.34 27 950
Korea 8.33 27 1910
Philippines 3.85 23 820
Algeria 2.90 20 2350
Malaysia 1.77 20 1860
Nigeria 1.14 15 860
Chile 1.31 15 2210
Brazil 8.19 13 2240
Mexico 71.0 10 2270
Argentina 1.99 8 2320
Venezuela 0.30 2 4140
Note: Total debt used to calculate ratios excludes private unguaranteed debt.
Source: World Bank Tables and BIS.
