Adjustment and External Debt in Low-Income Countries

Résumé du document

The debt crisis of the early 1980s had severe impact in Latin America and several developing countries. Closure of world capital markets led to inflationary financing of fiscal deficits, a slowdown in investment, and low rates of economic growth. Servicing external debt continues to be a key concern for policymakers in low-income countries. The crisis has led to a variety of proposals aimed at ensuring that debt burden does not hamper capital formation and growth world over.

Extraits

[...] = rf* + Using the change in the capital-effective labor ratio is given by, k = (Sp + Sg) - K + AL - [k + ( + )]k . Model composes a system of two differential equations in and k. See Figure 16.1 for graphical solution. Figure Implications: Fiscal adjustment reduces foreign debt burden and has a permanent and positive effect on growth. Despite high marginal returns to capital, risk premium may still be high enough to lead to credit rationing. [...]

[...] Alternative measures: Comparing present value of debt obligations against the present value of estimated future export revenues. World Bank looks at present value of debt obligations against current revenues. Practitioners consider ratios below 200% as sustainable. Three weaknesses of indicators: Data requirements complex; considerable uncertainty over future exports; volume and prices. Results sensitive to assumed discount rate. Ratios provide no information about a country's credit risk profile. Observed ratios In many countries, conditions have worsened: In HIPC countries, external debt reaches $207 billion in 1996, or 1.5 times GNP. [...]

[...] Option or extended maturities. Debt rescheduled over 25 years with 8 year grace period. Option or concessional interest rates. Debt rescheduled over 14 years year grace, with interest rate set at market rate - 350 basis points. London terms: December 1991-December 1994; 50% reduction in NPV terms. Naples terms: Since January 1995, terms of concessions as outlined by the Paris Club: Eligibility; decided by creditors on individual basis. Concessionality; most receive 67% NPV reduction on non-ODA (official development assistance) debt. [...]

[...] Second Stage: Normally three years. Debt relief through flow rescheduling, up to 80% of present value of Paris Club debt. At completion point of second stage, Paris Club provides 80% reduction in NPV of debt stock. Eligibility: Debt sustainability analysis determines eligibility and amount of debt relief based on following criteria: ratio of NPV of debt-to-export ratio between 200-250% by completion point; debt-service-to-exports ratio between 20-25% at completion point; various measures of vulnerability; ratio of NPV of debt to fiscal revenue below 280% with 2 other criteria: export-to-GDP ratio of at least 40% and fiscal revenue to GDP of 20%. [...]

[...] Found significantly negative relationship between external debt levels and investment. Argued that debt overhang impacts investment through two channels: direct disincentive effect, fear of appropriation of funds invested for debt servicing; indirect effect; via adjustment measures undertaken to face debt-servicing difficulties, e.g. imports cuts and decreased public sector investment. Depshande implications: Complementarity between public and private capital outlays implies that fiscal adjustment programs would tend to reduce private investment. However, fiscal consolidation that reduces government spending, by reducing the crowding out effect of public sector demand for credit, may lead to an expansion in private investment. [...]