THE WORLD BANK'S RESPONSE TO THE DEVELOPING COUNTRY DEBT CRISIS

JOHN UNDERWOOD*

The World Bank has responded to what it has perceived as two debt crises. The first is the highly publicized crisis in the middle- income, heavily indebted countries-mainly those in Latin Amer- ica. The second has affected a set of about 20 much poorer African countries. The World Bank's responses to the two crises have been dissimilar as well. In the case of the heavily indebted, middle- income countries, whose debt is mainly to private creditors, the World Bank first responded with its Special Program of Action, beginning in 1983. Under the October 1985 Baker Plan, the World Bank was to increase its gross disbursements to these countries by 50 percent-a goal it has nearly met. Unfortunately, other cred- itors have not met Baker Plan goals, and so investment and growth in debtor countries has stagnated. The World Bank cannot continue providing a disproportionate share of financing needs. The World Bank has responded to the problems of the poorest debtor countries through its Special Program of Action for debt-distressed countries in Africa, and has coordinated its own concessional International Development Agencpsoft loan window-lending with aid from other oflcial creditors and donors.

I. INTRODUCTION

A. The World Bank's Role The basic purpose of the World Bank is to foster growth and development.

The World Bank's response to the debt crisis comes as a corollary to this basic goal. Serious debt service problems have posed and continue to pose a threat to economic development. Seeking a resumption in adequate levels of investment and growth is in the interest of creditors as well as debtor countries. Countries experiencing stable long-run growth are in a much better position to service debt than are countries with flat or declining output.

The World Bank can help debtor countries and their creditors in three basic ways. First, it can provide policy advice as part of its ongoing relationship with debtor countries. Second, it can provide external resources

*Senior Economist, International Economics Department, World Bank. An earlier version of this paper was presented at the Western Economic Association International 63rd Annual Con- ference, Los Angeles, July 3, 1988, in a session organized by Robert L. Hetzel, Federal Reserve Bank of Richmond, Va. The opinions expressed in this paper are solely those of the author, and the World Bank is not responsible for the views expressed herein.

50 Contemporary Policy Issues VoI. VII, April 1989

UNDERWOOD: DEVELOPING COUNTRY DEBT CRISIS 51

through its lending program. Unlike the International Monetary Fund (IMF), the World Bank does not provide direct balance-of-payments support. World Bank loans are designed to finance the external procurement component, and sometimes part of the domestic component, of the costs of a development program or project. Third, the World Bank sometimes can play a role in facilitating discussions and agreements between creditors and debtor countries.

As mentioned above, the purpose of the World Bank is to foster economic development. It performs this role by borrowing money on the international capital market and lending such money to member countries. The World Bank lends for two basic types of operations: project and adjustment. The majority of World Bank funds support specific investment projects in agri- culture, transportation, telecommunications, education, energy, and a variety of other sectors. Adjustment operations take the form of quick-disbursing loans supporting a borrowing country’s structural reform efforts. Adjustment lending has risen from less that 10 percent of total World Bank lending during fiscal 1982 to 23 percent during fiscal 1987, partly reflecting the World Bank’s response to the debt crisis. Regarding its lending program, the World Bank maintains a policy dialogue with borrowing countries and normally lends contingent on policy actions.

B. Two Debt Crises The World Bank sees and has responded to two debt crises. The first

crisis affects the highly indebted countries (H1Cs)-17 countries representing the major share of commercial bank claims on developing countries with debt difficulties. The second crisis affects a group of about 20 low-income African countries. The debt of this latter group of countries is owed pre- dominantly to official creditors.

The HICs generally are more advanced developing economies that at the beginning of the debt crisis had a median GDP of about $2,000 per capita. Life expectancy in HICs averages about 60 years and infant mortality is less than 100 per 1,000 births. Nearly 100 percent of primary-school-aged chil- dren attend school. Such countries’ external debt is about $500 billion- 70 percent owed to private creditors, mainly commercial banks (see table 1). Three-quarters of their debt is at floating rates and 95 percent is at market terms. These countries generally grew rapidly during the 1970s, when real interest rates were low.

The low-income, debt-distressed countries (LIDS) of sub-Saharan Africa are, on average, much poorer and less developed and have per capita incomes mainly in the $100-t0-$400 range. Life expectancy is around 50 years, and infant mortality is in the range of 100 to 150 per 1,000 births. On average, about 50 percent of primary-school-aged children attend school. In one of these countries, however, only 23 percent attend school. The debt of these

TABL

E 1

Hig

hly

Inde

bted

Cou

ntrie

s Ex

tern

al D

ebt

(US.

dol

lars

, bill

ions

)

1980

19

81

1982

19

83

1984

19

85

1986

19

87

19M

a

Arg

entin

a 27

.2

35.7

43

.6

45.9

48

.9

49.3

49

.7

56.8

B

oliv

ia

2.7

3.2

3.3

4.1

4.3

4.7

5.5

5.5

Braz

il 70

.6

80.4

91

.9

97.5

104.

9 10

6.5

11 2.8

12

3.9

Chi

le

12.1

15.7

17

.3

18.1

19

.8

20.4

20

.2

21.2

C

olom

bia

6.9

8.7

10.3

11

.4 12

.0

14.2

15

.4

17.0

C

osta

Ric

a 2.7

3.

3 3.

6 4.

2 4.

0 4.4

4.5

4.

7 C

ote

d' I

voir

e 6.0

7.

8 7.

9 7.5

8.3

8.6

9.

2 10

.4

Ecua

dor

5.8

6.6

7.8

7.7

8.2

9.8

11.1

13

.6

Jam

aica

1.

9 2.3

2.8

3.

3 3.

4 3.9

4.

0 4.

4 M

exic

o 57

.5

78.3

86

.1

93.1

94

.9

%.9

101.

1 10

7.9

Mor

occo

9.7

10

.6

12.4

13.2

14

.0

16.3

18

.8

20.7

N

iger

ia

8.9

12.0

12

.9

18.6

18.7

19

.5

24.5

28

.7

Peru

10

.0

10.3

12

.3

12.0

13

.2

14.2

16

.0

18.1

Ph

ilipp

ines

17

.4

20.8

24

.3 24

.1

24.4

26

.2

28.9

30

.0

Uru

guay

1.7

2.

2 2.6

3.3

3.3

3.

9 3.

9 4.

2 V

enez

uela

29

.5 32

.1

32.0

37

.4

36.5

34

.7

34.7

36

.5

Yug

osla

via

18.5

20.6

19

.9

20.5

19

.5

20.4

21

.2

23.5

To

tal

288.

9 35

0.6

391.

2 42

1.9

438.

1 45

3.9

481.

5 52

7.3

529

'Esti

mat

e. So

urce

s: W

orld

Bank

Deb

tor

Rep

ortin

g Sy

stem

and

Wor

ld Bank

estim

ates

.

UNDERWOOD: DEVELOPING COUNTRY DEBT CRISIS 53

countries also is different. They owe about $55 billion-nearly 85 percent to official creditors (see table 2). Nearly half of their debt carries conces- sional terms, and about 75 percent carries fixed interest rates. These countries generally grew slowly during the 1970s, and several faced debt difficulties before the end of that decade.

The two debt crises began at different times and had overlapping but not identical causes.’ The world’s response and the World Bank’s response to the two crises also have diverged.

II. THE WORLD BANK‘S RESPONSE TO THE DEBT CRISIS IN THE HIGHLY INDEBTED COUNTRIES

A. The Damage Control Phase The debt crisis in the HICs became public in August 1982, when the

Mexican authorities announced that they no longer could meet their debt service payments as scheduled. The first-stage response to the crisis, during 1982 and 1983, may be termed “damage control.” The main goal at this point was minimizing the disruption to both the international financial system and the developing countries that could be caused by a breakdown in creditor-debtor relationships. This stage was characterized by the first “concerted lending” and rescheduling agreements and by a strengthening of the IMF through a quota increase.

The World Bank’s early response to the HICs’ debt crisis was its Special Program of Action (SPA), starting in 1983. The SPA covered a wider group of countries-since a widespread downturn in developing country growth occurred at the time. However, the program benefited mostly HICs. The purpose of the SPA was to provide special help to countries making serious efforts to implement policy measures to restore growth. The SPA incorporated four main features designed to achieve its goals. First, the World Bank would expand its lending for high-priority operations including support for struc- tural adjustment, major policy changes, production for export, fuller use of existing capacity, and maintenance of crucial infrastructure. Second, the World Bank would accelerate disbursements under existing and new com- mitments to countries undertaking SPA-supported policy changes. Third, the World Bank would increase its advisory role, mainly by helping member countries reorder investment priorities in the new environment of limited access to external resources. Fourth, the World Bank would try to encourage similar actions by other lenders.

1. This paper does not discuss the causes of the debt crisis. See Krumm (1985) and Sachs (1985) for views as to the causes of the crises in sub-Saharan Africa and in the HICs. respectively.

TAB

LE 2

D

ebt-

Dis

tres

sed

Sub-

Saha

ran

Afr

ican

Cou

ntri

es

(U.S

. dol

lars

, mill

ions

, unl

ess

othe

rwis

e no

ted)

OFf

icia

l N

umbe

r L

ong-

Ter

m D

ebt

of

ut P

at E

nd 1

986a

U

se o

f M

ulti-

Pe

r C

apita

Pe

rcen

tage

D

ebt

Serv

ice

IMF

late

ral

CN

P in

198

6 Sh

are

Ow

ed

on L

ong-

Ter

m D

ebtb

C

redi

t D

ebt

(198

6 pr

ices

) to

Off

icia

l 19

86

1987

at

End

R

esch

edul

ings

8

(US

. $1

Tot

al

Cre

dito

rs

(Act

ual)

(Sch

edul

ed)

1986

19

75-1

986

Ben

in

Com

oros

Eq

uato

rial G

uine

a Th

e G

ambi

a G

hana

Gui

nea-

Bis

sau

Libe

ria

Mad

agas

car

Mal

i M

aurit

ania

Moz

ambi

que'

Nig

er

Sao

Tom

e Se

nega

l Si

erra

Leo

ne

280

320

n.a.

23

0 39

0

170

450

230

170

420

210

260

340

420

310

78 1

156

14 1

228

1,413

294

1,00

2 2,6

35

1,566

1,6

37

1,02

6 74

2,45

6 45

9

55.3

99

.9

91.6

88

.1

95.1

71.9

81

.8 86

.2

%.5

90.8

80.3

99

.2

88.4

64

.3

58 2 5 11

89 9 28

113 35

77

133 2

212 15

116

0 9

0 18

7

15

21

106

748

28

2 11

5 25

1

357

184

64

85

195

36

166

88

9 0

27 1

24

7 29

72

TAB

LE 2

(con

tinue

d)

Deb

t-Dis

tress

ed Su

b-Sa

hara

n A

fric

an C

ount

ries

(US. do

llars

, mill

ions

, unl

ess o

ther

wis

e not

ed)

Off

icia

l N

umbe

r C

Lon

g-T

erm

Deb

t of

at

End

198

6a

Use

of

Mul

ti-

z g Pe

r C

apita

Pe

rcen

tage

D

ebt

Serv

ice

IMF

late

ral

w 4 (1

986

pric

es)

to O

ffic

ial

1986

19

87

at E

nd

Res

ched

ulin

gs

0

tl s So

mal

ia

280

1,41

5 95

.2

72

1 99

145

2 2 % 8

Uga

nda

n.a.

92

9 92

.6

29

114

229

3 5

zaire

160

5,43

0 86

.6

370

788

786

11

2

GN

P in

198

6 Sh

are

Ow

ed

on L

ong-

Ter

m D

ebtb

C

redi

t D

ebt

(US. $1

T

otal

C

redi

tors

(A

ctua

l) (S

ched

uled

) 19

86

1975

-198

6

r

Suda

n 32

0 7,

057

87.0

55

66

9 74

0 8

2 Ta

nzan

ia

220

3,65

0 89

.4

69

275

45

1 Togo

240

882

90.5

12

8 14

5 81

6

0 < U

Zam

bia

300

3,57

5 83

.7

1 24

520

825

4

All

Deb

t-D

istr

esse

d C

ount

ries

E 36

,804

87

.0

1,63

4 4,

207

4,59

3 71

E 4

cl

6

'Doe

s no

t inc

lude

shor

t-ter

m d

ebt,

priv

ate

non-

guar

ante

ed d

ebt,

or IMF p

urch

ases

out

stan

ding

. bExcluding I

MF

repu

rcha

ses a

nd charges.

'Deb

t da

ta fo

r M

ozam

biqu

e are

not

ava

ilabl

e.

Sour

ce: W

orld

Bank, W

orld

Deb

t Tab

les, 1987-1988 ed., Vol.

1, p

. M.

56 CONTEMPORARY POLICY ISSUES

The SPA resulted in about $4.5 billion in incremental disbursements over two years ending on December 31, 1984. About half of these disbursements went to HICs. The SPA did not end when its mandate expired. Instead, the SPA tools were merged into the World Bank’s general lending policies for use as needed in countries facing low growth and a curtailed access to ex- ternal finance. Incorporating SPA policies has increased the flexibility of the World Bank’s response to the problems of individual borrowing countries.

B. The Multiyear Rescheduling Phase The second phase in the HICs’ debt crisis revolved around an attempt to

return these countries to normal market borrowing. Policymakers asked cred- itors to agree to stretch out the HICs’ amortization payment schedule so that the residual financing would be forthcoming without resort to concerted lending. In 1984, commercial banks and debtor countries began a set of negotiations designed to reschedule a massive amount of debt under multi- year rescheduling agreements (MYRAs)-$44 billion in Mexico alone. The World Bank contributed to the process by assisting in analyzing the debt service implications of proposals. When asked by the debtor country, the World Bank also provided the commercial banks with an analysis of the debtor country’s policy stance and medium-term growth prospects and with information regarding the World Bank’s lending program.

For a combination of reasons, the MYRAs did not restore the debtor countries’ access to market borrowing. The favorable external environment of 1984 was reversed partially when the US. growth rate declined from its unsustainably high level without a commensurate increase in growth in other industrial countries. The steep decline in oil prices cut export earnings in Mexico, Venezuela, Nigeria, and other oil exporters. By the end of 1985, creditors, debtors, and policymakers all realized that the debt crisis would not end quickly.

C. The Baker Plan In October 1985, Treasury Secretary Baker announced his now-famous

plan for dealing with the debt crisis. He recognized that an acceptable level of long-term sustained growth in debtor countries was the key to restoring creditworthiness. This growth was in the interest of both the debtor countries and the creditors. The alternative-stagnation-was not conducive to con- tinuing debt service payments. The Baker Plan called for continued market- oriented adjustment measures by the debtor countries, continued commercial bank lending, and a wider role for multilateral development banks.

The Baker Plan called for commercial banks to increase their exposure to the Baker countries-comprising all HICs except Jamaica and Costa Rica-by $20 billion over three years. This $6.5 billion per year of net

UNDERWOOD: DEVELOPING COUNTRY DEBT CRISIS 51

lending would allow banks to decrease substantially their exposure relative to capital. Over the same period, multilateral development banks were to increase their gross disbursements to the Baker countries by 50 percent, or about $3 billion per year, $2 billion of which would come from the World Bank. The remainder would come from increased disbursements from the Inter-American Development Bank, the African Development Bank, and the Asian Development Bank.

The three years of the original Baker Plan have drawn to a close. We can assess the results to date, both in terms of growth and investment in the HICs and in terms of commercial bank and World Bank lending to the HICs. Growth increased during 1985 and 1986 to an average of about 3.5 percent, due not to a return to long-term growth but to consumption booms in con- nection with unsustainable expansionary policies in a few large HICs. In- vestment remained stagnant at levels 8 percentage points below 1980 rates, relative to GDP, and down still further in per capita terms. Growth decreased to less than 2 percent-negative in per capita terms-during 1987 and ap- parently did not pick up during 1988.

Commercial bank net lending to developing countries is difficult to measure overall. World Bank estimates indicate that net disbursements from commercial banks averaged $200 million during the two years through the end of 1987-far short of the Baker goal of $6.5 billion per year. These estimates do not include either short-term debt, which declined over the period, or interest arrears. Taking into account interest arrears-largely capitalized during 1988-net commercial bank disbursements averaged $2.2 billion per year during 1986 and 1987, according to World Bank estimates. Bank for International Settlements (BIS) creditor data indicate that a $10 billion increase occurred in the stock of commercial bank claims on developing countries, to $292 billion by the end of 1987. These same data indicate that the increase was more than accounted for by the depreciation of the dollar against other major currencies and that net flows were negative. However, calculating flow data from changes in stocks-as the BIS does-is fraught with dangers. These include the problem of accounting both for debt write-downs and for conversions either to equity or to domestic debt.

World Bank gross disbursements have come close to the 50 percent in- crease target. As table 3 shows, these disbursements rose from $4.1 billion during 1984 to an average of $5.5 billion during 1986 and 1987. Measured on a fiscal-year basis (July to June), the World Bank has come even closer to the 50 percent increase target.

Some analysts, including Cline (1988) and the Amex Bank (1988), have argued that the HICs’ situation is improving since interest payments, relative to exports, have declined somewhat over the past year (see table 4). Cline, in particular, criticizes other analysts for using debt-to-export ratios (DIX) as evidence that the debt crisis is worsening.

m

m

TABL

E 3

Wor

ld B

ank

Dis

burs

emen

ts to

Hig

hly

Inde

bted

Cou

ntrie

s (U

.S. d

olla

rs, m

illio

ns)

1980

19

81

1982

19

83

1984

19

85

1986

19

87

Arg

entin

a B

oliv

ia

Bra

zil

Chi

le

Col

ombi

a C

osta

Ric

a C

ote

d' Iv

oire

Ec

uado

r Ja

mai

ca

Mex

ico

Mor

occo

N

iger

ia

Peru

Ph

ilipp

ines

Ven

ezue

la

Yug

osla

via

Tot

al

Uru

guay

71

73

343 14

21

8 29

86

34

55

422 64

63

140

229 4 1

28 1

2,12

6

120 31

387 30

25 1

22

48

54

43

46

0 99

74

76

441 6 0

218

2,36

1

83

19

623 32

277 20

22 1 41

121

408

134

144 85

25 1

22

0 33

0 2,

810

70

10

1,20

4 24

29 1 24

198 47

60

360

175

188

77

600 21 0

292

3,64

0

96

14

1,30

0 40

46

2 36

217 67

49

683

275

26 1

130

29 1 59 0

406

4,38

3

144 11

765

23 1

590 84

70

40

75

840

307

27 1

13

1 26

3 23 0

295

4,13

9

408 4

1,63

0 36

5 52

9 55

118

161 23

1,01

7 36

3 52

4 11

9 18

'9 45 0

20 1

5,74

9

795 2

915

311

365 10

36

5 P

c) s 8

137

z # B

63

2 26

2 kl

64

ii 98

5 40

5 4

385

t;

64 0

184

5,31

1

Sour

ce: W

orld

Ban

k.

TABL

E 4

Hig

hly

Inde

bted

Cou

ntrie

s In

tere

st P

aym

ents

/Exp

orts

(p

erce

ntag

e)

1980

19

81

1982

19

83

1984

19

85

1986

19

87

Arg

entin

a 19

28

36

55

42

48

47

48

Bo

livia

21

23

45

38

43

23

16

14

Br

azil

34

38

49

38

30

31

35

24

Chi

le

19

32

46

36

49

42

31

26

Col

ombi

a 12

15

22

24

17

26

16

16

C

osta

Ric

a 15

12

10

41

20

28

18

12

C

ote

d’ Iv

oire

13

21

25

26

24

25

24

19

Ec

uado

r 16

20

34

19

28

25

28

13

Ja

mai

ca

11

10

14

16

20

21

19

18

Mex

ico

25

32

40

35

35

34

36

26

Mor

occo

17

20

21

20

19

17

19

16

N

iger

ia

3 6

10

13

16

13

9 8

Peru

20

26

27

22

18

16

12

8

Phili

ppin

es

18

25

30

24

24

22

21

21

Uru

guay

11

11

13

19

26

21

22

22

V

enez

uela

14

13

17

17

15

20

28

21

Y

ugos

lavi

a 7

9 10

11

16

11

11

12

T

otal

17

22

29

28

26

26

26

22

Sour

ce: W

orld

Ban

k D

ebto

r R

epor

ting

Syst

em.

60 CONTEMPORARY POLICY ISSUES

Two problems exist with using interest-to-export ratios (ZlX). First, most measures of interest payments do not include interest accrued but not paid. The major reason for the 1987 decline in HICs’ interest payments was not a decline in interest rates but Brazil’s now-reversed moratorium on interest payments on commercial bank debt. Second, nominal interest payments are not a true measure of the interest burden. In an earlier paper (Dooley et al., 1986), we suggested an alternative measure of the interest burden for heavily indebted countries. That measure took into account the amortization-or inflation compensation-component in nominal interest rates. The numerator of the ratio is interest payments less the product of debt-measured at the end of the previous year-and the percentage rate of increase in the U.S. GNP deflator. Based on preliminary data, this measure has dropped from 18 percent of exports at its peak during 1983 to 15 percent of exports during 1987-much less than the decline in the unadjusted ratio (see table 5) .

One can make a case for using DIX as a proxy for the debt burden that an HIC faces. (Table 6 shows debt-to-export ratios.) So long as real interest rates are fairly stable, the real interest burden on an economy increases linearly with DIX.

D. The Current Stage: Baker Plan Plus As indicated above, the World Bank has responded to the HICs’ debt

problems by increasing both its policy dialogue and its lending to these countries. However, other creditors must play their part in financing the HICs’ current-account deficits. In many countries, such deficits are a nec- essary counterpart of an increase in investment. Most HICs would continue to run trade surpluses. The key is the proportion of interest payments coming due that is refinanced. So long as DIX is projected to remain stable or to decline, creditors may be in a better position if they refinance a relatively large share of interest payments than if they collect more interest now but, in so doing, weaken the country and the value of their claim over the longer term.

World Bank policy currently calls for assisting HICs in mobilizing incre- mental finance from other creditors. The basic method for achieving this result is through the World Bank’s policy dialogue with the debtor country. A good program should both deserve and attract finance.

In some cases where finance is not forthcoming, the World Bank may play a catalytic role in facilitating new “menu items” among the options available to creditors as part of new money (partial interest refinancing) packages. These include debt conversion schemes, whereby external debt is converted either to domestic debt or to equity claims. The menu items also include debt reduction schemes whereby claims are reduced in return for some method of credit enhancement. An example is the Mexico bond scheme, in which the principal of the new bonds-exchanged for debt at less than

TABL

E 5

Hig

hly

Inde

bted

Cou

ntrie

s A

djus

ted

Inte

rest

Pay

men

ts/E

xpor

tsa

(per

cent

age)

1981

19

82

1983

19

84

1985

19

86

1987

b 19

81b"

Arg

entin

a B

oliv

ia

Braz

il C

hile

C

olom

bia

Cos

ta R

ica

Cot

e d'

Ivoi

re

Ecua

dor

Jam

aica

M

exic

o M

oroc

co

Nig

eria

Pe

ru

Phili

ppin

es

Uru

guay

V

enez

uela

Y

ugos

lavi

a To

tal

7 13

-3

22

13

27

11

27

2

10

-10

-8

1 7

1 18

-2

3

14

22

-3 2

2 4

3 11

6

13

2 5

1 7

0 3

6 14

38

24

24

22

14

35

14 8 8 24 7 9 10

13

12

10 6 18

~~~~

25

24

17

34 9 7 14

18

11

23 5 10 6 12

16 7 11

16

~

32 3 19

27

17

18

16

16

13

24 5 8 5 11

19

12 7 17

~

33

-2

24

22

11

10

18

19

13

25

11

2 1 13

15

20 8 18

~~

31

13

17

10 3 11

-1 11

16

5 -2

-5 11

15

13 8 12

15

-13

'Inte

rest

paym

ents

redu

ced

by e

stim

ated

am

ount

of

impl

icit amortization.

See

text

for

a m

ore

com

plet

e de

scri

ptio

n.

htim

ate.

'A

djus

ted

for

inte

rest

arrears in s

elec

ted

coun

trie

s. So

urce

: Wor

ld Bank

Deb

tor Reporting

Syst

em a

nd a

utho

r's

estim

ates

.

TAB

LE 6

Hig

hly

Inde

bted

Cou

ntri

es

Exte

rnal

Deb

t/Exp

orts

(p

erce

ntag

e)

1980

19

81

1982

19

83

1984

19

85

1986

19

87ea

Arg

entin

a B

oliv

ia

Bra

zil

Chi

le

Col

ombi

a C

osta

Ric

a C

ote

d’ Iv

oire

Ec

uado

r Ja

mai

ca

Mex

ico

Mor

occo

N

iger

ia

Peru

Ph

ilipp

ines

U

rugu

ay

Ven

ezue

la

Yug

osla

via

Tota

l

226

260

303

192

117

224

165

1%

129

233

224 32

20

7 21

2 10

4 13

3 10

3 17

1

287

3 17

298

279

170

274

268

222

147

257

260 61

243

235

118

131

105

202

434

363

392

336

204

318

276

289

197

311

327

100

293

295

157

159

102

259

461

454

400

375

274

355

297

288

24 1

325

343

171

313

290

223

216

123

295

475

506

347

412

223

302

27 1

27

5 25

3 29

2 35

9 15

1 33

1 30

2 23

8 19

2 11

7 27

7

470

65 1

363

437

302

344

269

296

285

326

394

150

362

326

291

205

119

296

548

811

446

378

219

315

249

426

273

427

380

353

470

328

245

3 10

111

353

661

896

432

0

327

220

315

cl s 5

288

* 56

9 4 8 x1

263

363

382

4

t;

369

503

318

256

285

147

357

5 z v)

%tim

ate.

Sour

ce: W

orld

Bank

Deb

tor

Rep

ortin

g Sy

stem

and

auth

or’s

est

imat

es.

UNDERWOOD: DEVELOPING COUNTRY DEBT CRISIS 63

par-was collateralized by Mexico’s purchase of a zero coupon U.S. Treasury bond.

World Bank involvement in support of debt conversion or debt reduction schemes are premised on the following conditions. The World Bank will support only voluntary agreements that result from negotiations among cred- itors and debtors. The scheme must play an important part in meeting the financing needs of the debtor country. In addition, the World Bank will offer its support only when such support is a key to the creditors’ or the debtor country’s accepting the scheme. The World Bank’s role could vary from information sharing to partial guarantees or co-financing. 2

111. THE WORLD BANK’S RESPONSE TO THE DEBT CRISIS IN AFRICA

In a 1986 report (Financing Adjustment with Growth in Sub-Saharan Africa, 1986-90), the World Bank, identified a set of low-income African countries with serious long-term debt-servicing difficulties. The study reached this conclusion on the basis that traditional debt rescheduling did not (i) allow for import capacity sufficient to support adjustment or restore growth or (ii) leave the countries in a creditworthy situation at the end of any reasonable rescheduling period.

Table 2 gives a list of debt-distressed countries in sub-Saharan Africa and data indicative of the problems they face. One should not view this list as definitive. As in any country classification of this nature, a few countries are at the margin on either side. Positive or negative external shocks can quickly move these countries into or out of the debt-distressed category.

A. The Other Baker Plan Baker recognized the plight of these low-income debtor countries in his

famous 1985 address in Seoul, Korea, at the IMF-World Bank Annual Meet- ings. The Baker Plan for the middle-income countries has received more attention, but his plan for the poorer countries has made considerable prog- ress.

As a result of the Baker initiative for the poorest countries, the Structural Adjustment Facility (SAF) was created at the IMF. The facility provides loans for up to 10 years, with a five-year grace period, at an interest rate of 0.5 percent. Roughly $3.5 billion is available, drawn from reflows from earlier concessional IMF trust fund loans. SAF programs require close co- operation among the IMF, the World Bank, and the debtor country. As a prerequisite for SAF drawings, the three must agree on a medium-term policy

2. See World Bank (May 1988) for a more complete description of World Bank policies toward these highly indebted, middle-income countries.

64 CONTEMPORARY POLICY ISSUES

framework for adjustment. SAF programs now are in place in many African countries, (The SAF, unlike the World Bank program outlined below, is not limited to Africa. Poor countries in Latin America and Asia also have set up SAF programs.)

B. The World Bank‘s Special Program of Action The major drawback of the SAF is its size. Drawings are limited to just

63.5 percent of an eligible country’s IMF quota-too small an amount to meet the total restructuring needs of many low-income African debtor coun- tries. Recognizing the need for further resources, the World Bank and the IMF proposed a set of programs for the poorest debtors in spring 1987.

The IMF proposed an Expanded Structural Adjustment Facility (ESAF) funded by contributions from donor countries. The ESAF now is in place with more than $5 billion in resources, and this allows the IMF to increase access limits. To date, ESAF loans have been at the same terms as those of SAF loans.

At the same time, the World Bank proposed its Special Program of Action for debt-distressed countries in Africa, The World Bank proposed allocating to those countries a larger share-about $1 billion over three years-of the concessional funds available from the Eighth Replenishment of the Interna- tional Development Agency (IDA), the World Bank’s concessional loan fa- cility. Additional funds would come from official bilateral co-financing, at concessional terms, of adjustment programs. To date, governments have com- mitted to disburse about $3 billion, mostly in the form of grants, under the program. These funds support case-by-case, growth-oriented adjustment pro- grams. The last leg of the program called for concessional debt relief in cases where such relief is crucial to the success of an adjustment program.

At the 1988 Economic Summit in Canada, the creditor governments com- mitted themselves to the concept of some form of exceptional debt relief for the debt-distressed African countries. Creditors subsequently agreed on a “menu of options” under which they have a range of choices, each roughly comparable in terms of relief to the debtor but each fitting better the budg- etary and legal situations of the individual creditor government. These choices include rescheduling terms of 25 years, forgiveness of one-third of debt service coming due, and interest rate reductions of up to 3.5 percentage points. Debt-distressed countries that have benefited from the new resched- uling arrangements include Madagascar, Mali, Niger, Senegal, and Tanzania.

IV. CONCLUSION

The role of the World Bank in the highly indebted countries is threefold. The World Bank maintains an ongoing policy dialogue with all borrowing countries. That dialogue is especially important in countries with extremely

UNDERWOOD: DEVELOPING COUNTRY DEBT CRISIS 65

limited access to external finance. The World Bank also plays a role in facilitating agreements between creditors and debtors. Lastly, the World Bank has a role as a lender. The World Bank cannot, however, assume a dispro- portionate share of HIC external financing needs. Other creditors must play their part in the form of new money or in other ways that reduce the resource outflows from these countries and put them on a path to restored creditwor- thiness.

In contrast to arguments made elsewhere, the data here indicate that the interest burden of the HICs’ external debt has not improved markedly over the past few years. That burden is down from its 1983 peak but still remains high relative to its level during the late 1970s and early 1980s.

The role of the World Bank in the low-income, debt-distressed countries in Africa is defined in its Special Program of Action. The World Bank will continue increasing its own lending through the soft-loan IDA. It will help coordinate the support of bilateral donors and will work with the IMF and the debtor countries in defining the policy framework within which adjust- ment will occur. These countries’ structural problems indicate that adjustment will be a medium-term undertaking and that donors should be prepared to make a commensurate medium-term commitment. In particular, the needs of the debt-distressed countries of Africa should be taken into account when bilateral donors pledge funds to the Ninth Replenishment of IDA.

REFERENCES

Amex Bank, “LDC Debt: The Debate Widens,” Amex Bank Review, May 18, 1988, 1-8. Cline, W. R., “International Debt: Progress and Strategy,” Finance and Development. June 1988,

9-11. Doolev, M., W. Helkie, R. Tryon, and J. Underwood. “An Analysis of the External Debt Position

df Eight Developing &untries Through 1990.” Journal if Development Economics, May 1986, 283-318.

Krumm, K., The External Debt of Sub-Saharan Africa: Origins, Magnitude, and Implications for

Sachs, J. D., “External Debt and Macroeconomic Performance in Latin America and East Asia,”

World Bank, Annual Report, 1982, 1983, 1984, 1985, 1986, 1987.

Action, World Bank staff working paper No. 741, 1985.

Brookings Papers on Economic Activity, No. 2. 1985, 523-564.

, Financing Adjustment with Growth in Sub-Saharan Africa, 1986. , “The World Bank and the Heavily Indebted Middle Income Countries,” World Bank

, World Debr Tables, 1987-1988 ed. and 1988-1989 ed. News, Special Report, May 1988.