A View from the Paris Club
- I. Patel
- Published Date:
- December 1992
The question I would like to broach this morning concerns the Paris Club’ s handling of the debts of African countries, in terms of present status as well as on a more forward-looking level. This, indeed, is a very important issue for these countries, which are often indebted primarily to the governments of donor countries represented in this group of creditors that makes up the Paris Club.
I must add that the topic of this morning’ s session, “Adjustment in Africa and the External Debt Problem: Issues and Options,” seems to involve a great deal of consistency: the external debt of debtor countries can only be handled effectively after they have adopted adjustment policies that take them down a path of lasting growth; and debt handling and adjustment require a dual approach—the settlement of balance of payments problems combined with a more structural, medium-term improvement in the reaction capability of currently indebted economies.
What is known as the debt strategy, in other words, the pragmatic, evolving approach taken by the international community to ensure that these countries, within the context of an acute external payment crisis in many countries, receive adequate financial flows, is based on these briefly summarized principles. The International Monetary Fund (IMF) and World Bank have a central role to play in clarifying these different concerns.
First of all, I would like to review the status in the Paris Club of the application of the Toronto terms to the poorest and most indebted countries, which are the majority in Africa. To date, they have already been applied to 19 countries, including 17 in sub-Saharan Africa and two in Latin America. Accordingly, $5.7 billion in debt has been rescheduled, including $1.5 billion under the partial write-off option, $1.7 billion using the extended repayment period option, and $2.5 billion under the concessional rate option. Mali was the first country to benefit, in October 1988. Subsequent beneficiaries have been Benin, Central African Republic, Chad, Equatorial Guinea, Guinea, Guinea-Bissau, Madagascar, Mauritania, Mozambique, Niger, Senegal, Tanzania, Togo, Uganda, and Zaïre. Some of these countries have already been granted loans under the Toronto terms twice, that is, in two successive debt tranches. This group of beneficiaries comprises the Central African Republic, Madagascar, Mali, Niger, Senegal, Tanzania, and Togo.
The approach involving extension of the rescheduling period also evolved considerably over the past year—in some cases (Mali, Mozambique, and Niger) to the point of actual multiyear agreements. This practice, however, cannot be used systematically. Indeed, we are still wedded to the link between agreements with the IMF and rescheduling agreements that make the efforts of the creditor countries consistent with the adjustment program pursued by the debtor country. Consequently, immediate coverage of maturities over several years can only be considered when the debt is rescheduled at the onset of an agreement with the IMF that covers several years.
The financing needs of the country in question must also be sufficiently visible. In several cases, the debtor country quite legitimately wished to limit the period covered by the consolidation to one year, so that it could adjust its liabilities to official creditors as effectively as possible from year to year. In other cases, the period covered by the consolidation has been limited, owing to the prospect that the debtor country could free itself of successive reschedulings.
The sharp reduction in the rescheduling need for some countries has, indeed, been a significant accomplishment. Much of it results from the writing off of development aid debts, which a variety of creditor countries have elected to do over the past few years, often involving large amounts of money.
The combined effects of these write-offs, aid granted primarily under the special program for Africa, and the adjustment efforts made by debtor countries makes the Paris Club’ s contribution to the financing of some countries sometimes seem so marginal that we are led to wonder whether it is worthwhile to call a meeting to reschedule such small amounts. In my opinion, we can only be pleased with this phenomenon of countries freeing themselves from the rescheduling process and regret that it is still limited to so few of them. For too many countries, however, the need to reschedule debts is still very great—indeed, it is increasing. Consideration of ways to improve the treatment of these countries must thus be continued.
I will now briefly report on this thinking, which is still in a very preliminary stage. As you know, some creditor countries have announced fairly radical proposals for relieving the bilateral debt of the poorest countries. A Dutch proposal, presented at the Paris Conference on the Least-Developed Countries in September 1990, calls for writing off all debt of the poorest and most indebted countries to governments of developed countries. This very generous proposal runs the risk of presenting considerable problems for many creditor governments. The United Kingdom has formulated a less radical proposal, known as the Trinidad terms. It consists essentially of writing off two thirds of the outstanding bilateral debt balance, rescheduling the rest at market rates over a 25-year period, including a 5-year grace period, and capitalizing all or part of the interest on overdue payments during the grace period. Beneficiary countries should have an agreement with the IMF. Eligibility decisions would be taken by the Paris Club, as is the case for the Toronto terms.
In comparison with the Toronto terms, the Trinidad terms would thus represent considerable progress in at least two ways: quantitatively, by moving from the write-off of one third by only part of the creditors to the write-off of two thirds by all creditors, and methodologically, because this approach would immediately apply to the stock of debt, rather than to successive tranches.
The Paris Club is examining these proposals along with others that have not been announced publicly. The main questions they raise can be summarized as follows: (1) Can all creditor countries accept one approach, or must a system of options be maintained so that each country can respect its internal constraints? (2) Is it possible to deal with the stock of debt all at once while still maintaining sufficiently strong conditionality and allowing a sufficiently flexible response to fluctuations in the payment ability of debtor countries? The answer is complex and merits thorough examination.
In its deliberations, the Paris Club must also be very sensitive to the efforts of other creditors. Of course, I have in mind creditor countries that do not participate in Paris Club meetings. We are making every effort to inform them of our practices and to encourage them to respect the principle of comparable treatment. I am also thinking of banks, which, of course, have lent very little to the poorest countries. But we are concerned to see that some of the agreements between these countries and their bank creditors only provide for conventional rescheduling, with no debt-reduction option. This underscores the urgent need for the prompt use of the $100 million that the International Development Association (IDA) has earmarked for support of operations to reduce bank debt. In this respect, I am pleased with the agreement being negotiated between Niger and its creditor banks, which is the first case in which this IDA facility has been used.
Finally, as you are aware, the Paris Club is also involved in detailed consideration of another category of countries, that is, middle-income countries, and primarily those in the lower range of this category. The outcome of these studies will surely affect how the poorest countries are treated. For this reason, it would be useful for me to describe how the Paris Club treats middle-income countries.
Last July, the heads of state and government of the seven major industrial nations who met at the Houston summit encouraged the Paris Club to continue to examine further options for handling the debt burden and to begin extending repayment periods for the lower middle-income countries. In line with these guidelines, the Paris Club last September approved a set of new measures that could be applied to the lower middle-income countries on a case-by-case basis. This essentially involves extending the rescheduling period for commercial loans to 15 years, including an eight-year grace period, and for official development credit to 20 years, including a ten-year grace period.
Creditor countries also agreed to give interested creditor countries the option to undertake the conversion of debt into local currency for purposes of in-country investments, financing for development projects or environmental protection. This option applies to the entire debt stock in the case of official development aid and direct government credits, and to 10 percent of commercial credit balances. The Paris Club has already applied these measures to three African countries: Morocco, Congo, and Nigeria.
It must be emphasized that the possibility of debt conversion is the first example of concessional treatment in the Paris Club for countries in this category. These operations are clearly of value to debtors in part because they are executed at a discount from the transfer price. They consequently involve a partial write-off of the debt.
Several creditor countries have already expressed the desire to go further. One of them is France, which, at the Houston summit, proposed a menu of options for dealing with the bilateral debt of these countries, including debt reduction, debt-service reduction, and the granting of new money combined with rescheduling of old debt.
All of the above requires exhaustive discussion among creditor countries. Our examination of the matter in the Paris Club is still in progress, and it is still difficult to predict when it will be concluded.
Finally, to conclude these brief remarks, I will point out that, as you can see, the treatment of debt by the Paris Club is a process that has been evolving for a number of years. World economic conditions require these adjustments. Of course, the Paris Club does not claim that it alone holds the key to economic recovery for African countries, and the effort of all parties involved, including commercial banks, as well as the active participation of multilateral institutions, are needed now more than ever. This, quite obviously, is the meaning of the principles underlying the debt strategy, and gives particular pertinence to the topic of our session this morning.