policy play view by

3htroduct ion

1, The increasing importance of the debt; issue, is indicated by the number of developing countries facing serious debt servicing difficulties. Some explanation of the origins: of these difficulties was given in the structure 'aha causes of external indebtedness of African countries discussed in

addenda 1 and 2. In order to throw additional light on the debt crisis, it was found necessary to identify some of the major factors contributing to the crisis* In this paper, some concrete proposals are suggested to be included in the policy options for dealing with the debt criaio in Africa*

II • Adiustment policies

2* The experience in African countries shows that policy options taken in isolation cannot deal adequately with the debt crisis of African countries.

It is therefore necessary that concerted action and relevant sectoral adjustment policies should be taken together so that actions are aimed at correcting internal causes whose influences interact together. It should be borne in mind that, to a large extent, internal causes are influenced by external factors« In ecsence, every African country must have a set of economic policies which are expressly intended for and applied to reduce the deficits on current account balances. The best combination of..internal policies from the point of view of decreasing the external imbalance may not necessarily be the same for all countries and may therefore differ from country to country depending on what have been the main causes of the external deficit.

\. If, however, the main causes of the disequilibrium on the current account balances are the low exchange rates and the deterioration of the terms of trade, a more appropriate combination of policies may include adjustment policies in such fields as exchange rates, tariffs or export promotion which by their nature alter the relative prices of tradeable and non-tradeable goods. In the medium- and long-run-terms, these, in turn, would assist in correcting the external imbalance by changing the composition of expenditure and the structure of production-

4« It is also important that prudence be practised with a view to keeping down the recessive and distributive problems associated with policies aimed at reducing internal demand. To effect this, cuts in expenditure should be made primarily in those activities with a high import content. Control of aggregate demand which was identified as one of the major internal causes of external debt as well as disequilibrium on the current account is an indispensable element in the adjustment process. Since excessive expansion of public expenditure and the increase in the magnitude of the fiscal deficit play a leading role in bringing about, external imbalance and acceleration of the inflationary process, it is necessary either to reduce expenditure or to increase the income of the public sector or a combination of both.

5« In iinplementxng the fiscal policies under the prevailing economic and social circumstances, prudence dictates that preference should be given to reducing future outlays more than bringing down current expenditure on investment in order not to affect future economic growth. A positive and lasting adjustment policy calls for changes in the structures of production

yBCA/TRAEE/10/Add. 3 Page 2

and employment so as to increase the size of production of

can be achieved through more intensive use of installed productive capacity for exoort. If installed capacity cannot be fully utilized at the national provided for in the treaties establishing economic integration and co-operation

schemes in Africa, 1/ . ,

6. In the medium term, the reallocation of resources on the basis of

fiscal adjustment policies, requires the expansion of production capacity.

and less costly in social terms it would be prudent

'Wiods so as to facilitate increases in the production o

-and to earn external financing. So long as the net inflow of capital is not guaranteed, it will be preferable to defer investment projects with very

long gestation periods. The deferred projects can be undertaken once the

crisis in the external sector is over*

7. An essential element in any adjustment and otabilization policy is to sion rate of money supply has to be accompanied by deceleration of the

Expansion rates of the nominal values of other key variables such as prices,

wases. the exchange rate and the interest rate. It should be stressed,

and redistributive effects since its impact may have a

effect on those sectors of the economy which are particularly sensitive to

variations in the interest rates and the availability of credit. Thus, it

is imperative that in. implementing a. restrictive monetary policy, endeavours should be made tb: set guidelines to ensure that-t^e share of sue*} sectors m

the total credit line remains the same and that, ac far as possible* .the

is usually applied during the adjustment period.

So In general, several external factors determine the kind of adjustment

that may be less costly. These are: the extent of net external financing,

the level of international interest rates, real rate of growth of world trade

and international prices of the main export commodities. An improvement in

these external factors would enhance:the achievement of equilibria in both the current account ana overall balance of payments in many countries that

adopt domestic adjustment measures- t-: ,

90 In addition to the availability of external financing, there is a,l^o the

■i cost of such financing. If interest rates remain at high levels or if r

V substantial surcharges are imposed due to rescheduling of outstanding external

1/ See the provisions of the Treaties establishing the Economic Community for Pentral African States (ECCAS), Economic Community for West African States

(3C0WAS), and the Preferential Trade Area (PTA) for Eastern and Southern

African States* '!

E/ECA/TRAEE/10/Add. 3 Page 3

debts, then the current account deficits will increase and so will be the difference that has to be covered by the adjustment policies. Therefore, lower interest rates would greatly facilitate the adjustment process both in the short-run and medium- to long-run terras. Accordingly, the future ; trend of international interest rates and the availability of additional credit from both private commercia.1 banks and public international financial institutions should be issues of great concern to African countries

particularly if the chosen short-term solution to the present cricis is rescheduling of external outstanding debts.

III. Debt management

10. The persistence of debt repayments and debt servicing crises which many African countries are experiencing, is a manifestation 6f either the absence of debt management policies or the inadequacy of those policies. These crises clearly highlight the need for debt management policies at the national level. In most African countries debt management as a policy instrument has to be effectively applied. It should therefore be stressed that while the present debt crisis in African countries is caused by many factors, external and internal, one of the internal causes of the crisis is poor debt management» 2/

11. Proper debt management must be related to a country's ability to repay the loan before the debt is contracted. At the same time, effective debt management requires accurate projections of the time profile of debt service obligations and forecasts of export earnings as well as projections of domestic

revenues and future access to various sources of finance. ^J Therefore, debt

management should be incorporated into the development strategies of African countries in order to reduce costly debt servicing difficulties. Poor debt management in Africa is evidenced by excessive borrowing in relation to the :profitability of the projects financed and to export earnings, inappropriate

borrowing terms, and inadequate information about the volume and composition

of external debt.

12- It should therefore be stressed that foreign borrowing must be viewed in the broader framework of a country's economic policy decisions so that over—borrowing and borrowing costly loanc are avoided. For this reason, it is proposed that the African countries should establish a national bureau or

council for the management of debt and mobilisation of resources* ^/ Such a

organized by the African Development Bank, Nairobi, May 1983«>

3/ For a detailed analysis see Nicholas Hope and Thomas Klein "Issues of

External Debt Management", Finance and Development, Vol. 20, No. 3, September 1983

within the Office of the President; the Ministry of Finance or the Ministry of Economic Planning* Ito membership could be senior officials from various disciplines, such.as financial or investment analysts, development economists, trade experts, legal experts and banking specialists who would appraise all

aspects of the loans before they are contracted* (See also Prof. Adebayo Adedeji

"foreign Debt and the Prospects for Growth in the Developing Countries of Africa in the 1950s", United Nations Economic Commission for Africa*)

/ Page 4

bureau or council would be charged the responsibility of

raana/

jing th;

processes! \\ ,

(\\\ rW>iHincr how iduch

servicing capacity. The importance of nation lectors borrow oubctanti

impact onthe growth of the economy. National bureaus or councils are equally

ZSiS In entries where individual .inistriec or parastatal organizations

have the authority to contract loans.

« One of the main functions of the national bureau would be to ensure the Payments. Such information is essential for the day-to-day management of _ foreign exchange transactions as well as for planning foreign borrowing. In mS Srlcan countries formation on the size of the debt is inadequate^

thereby making mechanisms for controlling foreign borrowing poor. The absence loans are reported to the bureau or council by parastatals, ministriesjind pr^ate borrowers so that a country has an overall picture of its external

indebtedness. <

1A toother major task of the bureau would be to consider how much to borrow

xn'thfSht of the available information on outstanding debts.- The importance

« wha; te^lS from wh^: in deciding how much to borrow, two other factors

ought to be considered: ho^Uch ^^^^^JS^CZ^^

external parents difficulties. The implications of a country's ^™™f for its balance of payment, debt servicing capacity and development orospect*

are also overriding factors.

right sources of financine is a crucial element of external

i b ■ u i l mth Accordin

the task If the bu.-er.u v,ould be to chooSe; the beat combination of external inXidua! p^ec^lnd the^onony as awhole, and paying particular attention to orofits, dividends, prepayments for exports and cash flows, bj It should be 'stressed in this regard, that grants and foreign loans on concessional terL are the cheapest, although more often than not come with conditions not

conducive to development ■>

cooinercial

; (c) the maximum amount of capital that

TD/B7C3/l09/Revols New York,

mmj io/Add. 3

Page 5

can be rolled over eaciiy? and (d) the minimum suount of debt servicing in the the interest payable should also be analyzed with a view to having a tolerable

debt structure. There should also be an adequate spread of maturities, a

diversity of borrowing sources, and a margin of borrowing capacity for

unforeseen requirements such as emergency support for the balance of payments..

IV. Rescheduling of deotc

.,„ In an appropriate debt management policy, rescheduling of debts is seen

only as a. temporary and exceptional policy measure occasioned by circumstances under which/all other alternatives are economically, socially and politically

unacceptable. However, the rescheduling of debts has become a popular and temporary form of debt - management. Most countries facing debt servicing

difficulties now resort to this form of debt relief. j/ Debt rescheduling

?fr$k re^a^angement or restructuring of payments falling due in a given year

"so that .repayments on" the principal arid interest payments can be made over a longer.-.period Rescheduling is therefore one of the options available to a

country which is facing difficulties in servicing its external debt.

18, Some options available to a country facing debt servicing difficulties

could be (a) to cease repayments on its debt and thus accumulate arrears with

the intention of resuming such payments later? (b) to service its debt at

all costs by cutting down the expenditures on all other activities including imports5 and (c) resort to refinancing which involves getting a new medium-

term loan in the amount of the debt due which is repaid with the proceeds of the loan. Each of these three options has serious implications on the adjustment programmeo, economic development and political stability. The number of African countries opting for rescheduling of debt would seem to suggest that the cost of rescheduling, in both economic and financial terms, ic considered more tolerable when compared with costs attached to the other options. Lenders (mostly banks) hold the view that debt servicing crises

are due to shortcomings of economic policies of borrowers. 8/ It is this

attitude towards paymentr difficulties which has influenced the rescheduling

processes*

19. The purpose of debt rescheduling, from the point of view of lenders, is .to provide minimum relief necessary to allow a country facing debt servicing difficulties to recommence normal debt servicing as soon as possible. Ekring renegotiations on debt servicing, banks usually regard such servicing as

having just as high a priority as the purchase of essential goods, 9/ The terms

and characteristics of rescheduling debt are largely determined by lenders,

TD»275, Belgrade, June

stimated at $US ClO billion out of which $US 100 billion, involving some 30 countries, was renegotiated (see A.W. Clausen's statement to the European

Management Forum, Devon, Switzerland, 26 January 19&4)•

of the External Debt, E/C2PAiySSGo20/C.17, 22 February 9/ Ibid,

E/BCA/TRA1E/ 10/Add. 3

Page 6

ly'loans falling due'over a period of one to two years are rescheduled

may cover the pr

in arrears on interect payments, such arrears be settled before the

rescheduling negotiations are finalized.

20. While reschedule provide some form of debt -lief, it should be jessed that this generally involves an increase in borrowing costs ana often also

thftotal St increase?. This is because banks impose sharp increase xn the

price of credit in the form of higher spreads and commissions ontte^

^ndorinterbank Offered Rate (LIBOR) plus the spreads and commissions. It is these a number of rescheduling processes provide insufficient relief in respect of

ZrklT^shortl'zez of~autonomous financing, negative transfers of resources to the benefit of creditors, repetitive and multiple renegotiations and economic stagnation in the debtor countries. 10/

21. In conclusion, it should be stressed that the borrowing countries^are invariably forced to adopt these austerity measures, including the phasing o^t of subsidies on certain economic activities and social services, internal

price p

SSS«iSr5^rS5S aiso^-politlSal costs that could- have ^--aching

consequences.. The debt crisis has also forced debtor countries to adopt strict (B1F) austerity programs - phasing out subsidies, slashingh^T

^^mL^. especially investments, devaluing currencies, enforcement ox redit controls with the consequent result that real 1:

the"very Wghcost of rescheduling has itcell become a major source o^ concern

as no formula attempts to li^ debt service pay^ts to debt serviemg capacity

of the country involved in negotiations on rescheduling of debt.

Vol. 20, No. 3, September 19&3, and see also JjCLk, op. cit.

11/ For a detailed analysis of the shortcomings of deflationary programmes,

see^hriXne ^ogdanowic.-Bindert, "Debt Beyond the Quick Fix", ThxrO-M

Quarterly, Vol. 5, No. 4, October 1983-