/* Written 2:10 am Feb 23, 1994 by [EMAIL PROTECTED] in igc:intl.economics */
/* ---------- "Debt crisis still hits the poorest" ---------- */
DEBT CRISIS STILL HITTING POOREST COUNTRIES
The latest figures from the World Bank on the Third World debt
situation show that the poorest countries are still burdened
by external debt.
By Ed Mayo
The 1993/4 World Bank Debt Tables were launched in London in
early December 1993 with a meeting between non-governmental
organisations (NGOs) and World Bank staff. The Tables are the
most influential regular report on Third World Debt, and, for
the second year running, presented a remarkably upbeat picture
of overall external financing for Third World countries. Like
the previous year's Tables, the message essentially is that
'the Debt Crisis is over for all but the poorest countries'.
If the Debt Crisis was defined by two simple criteria, net
financial outflows and the extent to which countries were
creditworthy in the eyes of international capital markets, the
figures from the new Tables bear this out.
Net flows of external finance rose to US$157 billion in 1992
(rising, in the event, well above the 1992/3 World Bank
projection of US$89 billion). Governments in, for example,
Mexico, Argentina, Colombia and China raised substantial funds
in bonds from the international markets, and private sector
borrowers were increasingly doing the same. Overall, private
financial flows are up two-and-a-half times from 1990.
For private finance, this represents a considerable turn-
around. Some of the faces are the same as before (around 60%
of private flows to Latin America, according to World Bank
economist Ron Johannes, has been returned capital flight), but
overall the private finance has been of a form and scale many
countries have not seen before.
The story has not been one of commercial bank financing.
Private finance has grown strongest in the form of bonds,
foreign direct investment and equity portfolio investment: up
273%, 180% and 344% respectively from 1990 - 1992. For the
second year running, these have exceeded funding from official
sources.
As a whole, the Third World now attracts 35% of total foreign
direct investment.
Indicators on the Rise
At the same time, more cautious analysis might point to the
fact that, in terms of total debt service, most countries are
paying out to creditors no less than they did at the height of
the crisis and overall debt stocks continue to rise. Total
debt stocks for all developing countries reached US$1,662,173
by the end of 1992.
Behind the aggregate figures lies a more varied picture with
considerable regional variations. Most private financing went
to middle-income countries in East Asia and Latin America.
Exceptions include China, which attracted the highest amount
of foreign direct investment and commercial bank flows, and a
few other large low-income countries such as Indonesia. Sub-
Saharan Africa again suffered substantial negative net flows
from private sources.
On the one hand, the Bank points out that much of the finance
is better based than sovereign lending at the start of the
Debt Crisis, equity investment, for example, implying a
sharing of risk between borrower and creditor. But on the
other, in the haste to give credit to the model of economic
adjustment it has promoted for some time, the Bank rather
plays down more changeable international factors such as low
US interest rates.
And, while the stockmarkets are booming, some observers recall
the heady days in the 1970s of high profits, over-aggressive
competition, poor information and fringe players. As one
syndicate manager put it: 'People see you make one-and-a-half
million dollars on an LDC deal, so they go out and get one.'
But the Debt Tables, like the OECD (Organisation for Economic
Cooperation and Development) external finance report which
preceded it, represent 'a tale of two cities'. Barely is the
good news over, when we hear of the poorest countries. Neither
the World Bank nor the OECD say anything new about the
severely indebted group of low-income countries. The
statistics change year on year but all point to the same
conclusion that, as the OECD puts it, 'debt obligations, even
after restructuring, are still beyond their ability to repay.'
And how much relief is enough? By the end of 1991 the group
had received debt relief of US$22 billion (over half of which
went to Egypt). New debt initiatives trumpet large sums -- in
old money cancelled or new credit offered. But the annual debt
service burdens remain excessively onerous, even though actual
payments of principal and interest by severely indebted low-
income countries (according to Ron Johannes) are around 40% of
scheduled debt service, even after repeated rescheduling.
'Debt Hurdle' Remains
Falling behind on scheduled payments means the debt burden
continues to rise. So if relief is insufficient to clear this
'debt hurdle', debt relief does not leave the debtor country
with additional funds for domestic development but it is
simply servicing a greater proportion of its scheduled debt
than it would otherwise have done.
Both the Bank and the OECD are clear that greater debt relief
is needed, albeit on a case-by-case basis. However both fail
to recognise that insufficient relief is only marginally
better than no relief.
Existing initiatives such as the Enhanced Toronto Terms (a
weaker version of the Trinidad Terms) fail to rise above this
'debt hurdle' despite headline figures such as 'two-thirds
relief' because of limiting conditions (such as the moratorium
period, the cut-off date, exclusion of non-Paris Club members,
and lack of coordination with commercial and multilateral
creditors). These reduce the real proportion of overall debt
stocks forgiven to below what is needed.
For middle-income countries, the underlying triumphalism of
the new Debt Tables suggests that the World Bank should now
begin to build a more sophisticated analysis of what kinds of
finance best promote sustainable development. To start with,
it is pointless for its own lending in faster-growing
countries to compete directly with private finance. A recent
World Bank working paper also points to a wider issue; of
different kinds of public investment, spending on human
resources is around twice as productive as investment in
private capital. How far do the new flows support this kind of
balance?
But what the country-by-country figures within the Debt Tables
also confirm is that no current debt relief initiative for
sub-Saharan Africa rises above its 'debt hurdle'. Welcome as
they may be as political gestures, they are still postponing
the problem and prolonging the agony. -- Third World Network
Features/EURODAD
- ends -
About the writer: Ed Mayo, the UK's EURODAD representative and
chair of the British Debt Crisis Network, is Director of the
New Economics Foundation, which supports the practice and
development of new forms of economics based on the needs of
people and the environment.
When reproducing this feature, please credit Third World
Network Features and (if applicable) the cooperating magazine
or agency involved in the article, and give the byline. Please
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