Innovations in Debt Relief: Creditor Countries Have Increased Concessions in Granting Debt Relief to Reduce the Debt Burden of Indebted Countries

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Innovations in Debt Relief: Creditor countries have increased concessions in granting debt relief to reduce the debt burden of indebted countries

Thomas Klein Debt and International Finance Division, The World Bank

Reccene t moves by the Paris Club have ing severe cash flow problems, moratorium "Agreed Minutes" of the Paris Club), made opened the possibility of reducing the debt interest (interest on restructured debt service comparable debt relief arrangements with burden of severely indebted low-income coun- obligations) could be capitalized (i.e, added to other creditors, and continued appropriate ar- tries through debt cancellation and restruc- the principal) for five years and later pay- rangements with the IMF. turing. In doing so, the Paris Club has at- ments could be graduated and linked to the If the remaining stock were to be restruc- tempted to broaden the approach taken in country's export capacity. tured on no less favorable terms than the ini- September 1988 under "Toronto Terms," More extensive debt relief for severely in- tial agreements, these terms would allow moving to encompass some of the ideas ex- debted low-income countries was endorsed by creditors to partially write off their debts in pressed in a proposal by then UK Chancellor the July 1991 Group of Seven summit in stages: successive Paris Club agreements of the Exchequer, John Major, of September London and by the Interim Committee and dealing with current maturities of three to 1990, known as "Trinidad Terms." the Development Committee during the four years, followed by a final agreement on The Paris Club is the multilateral forum Annual Meetings of the IMF and the World the remaining debt. that helps developing countries restructure Bank at Bangkok in October 1991. Creditors will reschedule ODA loans on a their debts to governments and officially In December 1991, the Paris Club intro- long-term basis at concessional interest rates. guaranteed export credits. Traditionally, the duced new terms for two low-income coun- (Many creditors have already canceled their Paris Club helps indebted nations resolve tries: Nicaragua and Benin, and in January ODA claims on the poorest countries.) For temporary international liquidity problems 1992 these terms were applied to Bolivia and non-ODA loans, creditors have two main op- by restructuring maturities falling due in one Tanzania. At first sight, the new menu of tions: (1) write off 50 percent of the consoli- to three year consolidation periods. Interest terms may appear short of the original dated debt and reschedule the remainder at on rescheduled debt is usually at concessional Trinidad Terms proposal. The agreements market rates, with repayment over 23 years, rates for ODA (official development assis- dealt only with maturities falling due during including a grace period of six years; or tance) debt and at market rates for non-ODA 15-30 month consolidation periods plus ar- (2) reschedule debt at concessional interest debt. Over the past few years, creditor gov- rears (which accounted for a substantial rates so as to reduce by 50 percent in net pre- ernments have realized that many developing portion of Nicaragua's Paris Club debt). Also, sent value terms the payments due, with a 23- countries, especially the severely indebted the accords called for a 50 percent re- year repayment period, but without a grace low-income nations, face intractable debt duction in the net present value of debt, period. For those creditor countries that are problems that demand a more flexible and rather than a uniform cancellation of princi- currently unable to grant concessional relief, longer-term approach and that repeated pal of 66 percent. the agreements allow a third option, which reschedulings through the capitalization of in- The agreements, however, also included a consolidates debt at market rates, with repay- terest have been a major cause of the increase "good will" clause under which the Paris Club ment over 25 years, including 14-years' grace. in the stock of debt in some cases. agreed to consider further debt relief after the In September 1990, the Paris Club intro- This prompted Mr. Major's proposal that expiration of the consolidation period, and a duced new terms for lower middle-income the entire stock of debt up to an agreed cut-off commitment to meet at the end of three to countries (see box for details). One feature of point be restructured. Two thirds would be four years to consider the matter of the stock these accords was to permit voluntary swaps canceled under this proposal, and the repay- of debt. At that time, the debtor country of debt for local currency obligations, such as ment period for the remainder would be 25 would be expected to have fully implemented debt-for-nature swaps. ODA debt can be ex- years, with 5-years' grace. For countries fac- its earlier agreements (captured in the changed without limit; the swap ceiling for

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Toronto Terms: October 1988-June 1991 Eligibility: Countries designated by the World Bank as "IDA-only" borrowers (L&, eligible for concessional assistance from the International Development Association) that have very heavy debt-service obligations, low per capita income, and chrome balance of payments problems that render the country unable to service debts on conventional terms. The countries must have comprehensive adjustment programs in effect that are supported by IMF upper-credit tranche, or SAP or ESAF arrangements. Eligibility is determined on a case-by-case basis. Repayment terms: ODADebt Non-ODA Debt The Maturity: 25 years Option A: Cancel one third of eligible Grace: 14 years maturities and reschedule the remainder Interest: No higher than with a 14 year maturity including 8-years' P'aris Club original rates grace. Market-related moratorium interest rates. Option B: Same repayment period as for ODA debt but market-related moratorium interest rates. Option C: Same repayment terms as Option A but moratorium interest limited to 3J/2 percentage points below market rates or 50 percent of the market rates, whichever is the smaller reduction. non-ODA debt is normally equal to 10 percent New terms for lower middle-income countries: September 1990 or $10 million, whichever is higher. These EKgibtiUy: Per capita below $1,195. Countries must also have a high proportion of debt to offi- swap possibilities were incorporated in the cial creditors and must demonstrate a heavy burden of overall indebtedness. Beneficiary countries Poland and Egypt agreements of 1991 and must have comprehensive adjustment programs supported by upper-credit tranche IMF re- also in the new terms of low-income sources. Eligibility is determined on a case-by-case basis. countries. Repayment terms: Innovations, in brief ODADebt Non-ODA Debt Maturity: 20 years Maturity: 15 years Broadly speaking, five major changes have Grace: 10 years (maximum) Grace: 8 years (maximum) been introduced by the Paris Club over the Interest No higher than Interest Market-related past few years to help the low-income coun- original rates tries: • Under exceptional circumstances, the Swap Arrangements: Paris Club eligible debt can be exchanged for local currency obligations, Paris Club will consider canceling or provid- such as debt-for-nature and debt-for-equity swaps. Participation on a voluntary basis. No limits ing equivalent restructuring of the entire on ODA debt. For non-ODA debt, 10 percent usually of eligible maturities or $10 million, stock of a country's official debt contracted whichever is higher. before a cut-off date; New exceptional terms for low-income countries: December 1991 • The interest rates on consolidated non- EKgib&iy. Same as for Toronto Terms. concessional debt can now be substantially Coverage: Agreements reschedule arrears and current maturities for 12-18 month periods with below market rates; an understanding that the remaining stock of debt will be considered for debt relief after a three- • Longer repayment periods for resched- to-four year period. uled nonconcessional debt; Repayment terms: Graduated repayment schedule. • A menu approach for creditors, under ODA debt To be rescheduled Non-ODA debt: Menu approach, which they can choose the modality of debt on a very long-term basis. relief; and Option A: Write-off 50 percent of debt and • A move toward equalizing burden shar- reschedule the remainder at market rates. ing among creditors so that each creditor's Maturity: 23-years; grace: 6 years. debt relief agreement would achieve an Market-related moratorium interest rates. Option B: Consolidate at concessional agreed net present value target. rates so as to reduce by 50 percent in The Paris Club is not likely to respond with net present value terms the payments restructuring of concessional debt or debt due. Maturity: 23-years, no grace period. cancellation for countries that need debt relief Consolidate at market rates. only to bridge temporary liquidity problems. Maturity: 25 years; grace: 14 years. Conventional Paris Club agreements are (Same as Option B on Toronto Terms.) likely to continue in those cases. Swap arrangements: Same as under the new terms for lower middle-income countries.

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