The idea of debt rescheduling is nothing new or nothing mysterious about it. It is essentially a rearrangement or a stretching of the original repayment schedule. This is related to a particular debt or a set of debts. A country has the option of rescheduling its foreign debt when faced with difficulties in “servicing” it. This involves repayments of principal and interest as they fall due.
A country may face difficulties of debt servicing for various reasons. In Ethiopia, the TPLF regime had devised inadequate macroeconomic policies, leading to the balance of payment problems that diminished its ability to service debt. The junta had also borrowed beyond its capacity to service the debt. Actually, it had borrowed in the name of the country which its leaders had embezzled and saved it in foreign banks.
The terms with which the TPLF junta had borrowed had been unfavorable. It had built up an unfavorable debt repayment schedule leading to huge repayments occurring simultaneously. The country had been adversely affected by events that it could not control and had incurred a rising level of debts for reasons that were not related to its economy. It had been indicated by lenders that for reasons beyond its control Ethiopia might experience temporary export shortfall that would have reduced its foreign exchange earnings. This would have negatively affected its ability to service debt. The export shortfall might be due to climatic conditions. It is, however, reported that export performance in recent months is impressive.
Ethiopia had faced unpredicted developments in the world market for its export commodities. It had also confronted new bank lending mechanisms that might have reduced foreign exchange, creating difficulties for the country. Also, it might have suddenly experienced reduced ability to earn foreign exchange for any reason. In actual practice, several reasons might be present causing the low capacity of the country to earn foreign exchange. J. Barker and other economists and bankers sometimes distinguish two broad types ofdifficulties in debt repayment. The first is related to “liquidity” problem, defined as a temporary shortage of foreign exchange resources. The second is “solvency” problem, where the debt servicing obligations are beyond the longer-term economic capacity of the country in question.
Studies point out that a country facing debt servicing difficulties has three choices. First, it may cease repayments on its debt and thus accumulate debt service arrears. Such an action, however, has serious drawbacks. It will “undermine” confidence in the country, making it difficult, if not impossible, for it to borrow in the future. Moreover, there is the further possibility, although rarely a reality, of the country being formally declared “in default,” in which case that country’s assets abroad (ships, aircrafts, and so on) may be “attached” or confiscated and sold to discharge the debt.
A second option may be for the country to try to service its debt at all costs. But to do so it may have to restrict its other foreign exchange expenditures, which generally means a “reduction” of imports, a difficult task in many developing countries where imports already consist of “essentials.” Thus, on economic as well as social grounds, this may not be a viable course. Third, the country may seek a rescheduling which, as explained above, is a rearrangement of the repayment terms of the original loan. Studies indicate that it may also seek a refinancing which, technically, is different. It involves a new medium-term loan in the amount of the debt due, which is repaid with the proceeds of the loan.
Debt rescheduling may cover the principal only or the principal and interest on repayments falling due in a particular period (generally one year). The rescheduled debt may include a “grace” period and a “stretched” repayment schedule. According to J. Baker, there is, of course, a cost involved, in that the debtor country must pay interest on the amount outstanding until the debt has been finally and fully repaid. The rationale for a rescheduling is to provide time.
In cases where the debt problem is due to a “temporary” foreign exchange shortfall, rescheduling gives time for the balance of payments to improve. Where the problem is more fundamental, rescheduling lightens the country’s burden and gives time for appropriate corrective measures to be taken in order to improve the balance of payments. In the latter case it is important to recognize that rescheduling is not a “panacea” and cannot work in isolation.
In recent years, as an increasing number of countries, including Ethiopia, faced balance of payments problems and debt servicing difficulties, there has been a sharp increase in the number of debt rescheduling. Studies show that the multilateral rescheduling process has generally covered two types of debts the first being, official debt provided or guaranteed by governments or official agencies.
Official debt rescheduling is generally handled through “creditor clubs,” the best known of which is the Paris Club. On occasion, official debt is also negotiated through aid groups. The second is commercial bank debt which is renegotiated under more ad hoc arrangements, involving large and often changing groups of credit banks.
The Paris Club came into being in 1956 when a number of European countries met to renegotiate outstanding balances in their bilateral accounts with Argentina. As studies indicated, it has become the major forum for rescheduling official debt.
The Club meets at the “request” of the country seeking to reschedule its external debt. It brings together as many of the official creditors as are willing to participate. Under an informal arrangement, the meetings are chaired by a senior official of the French Treasury, which also provides a small staff to act as the Club’s secretariat. Generally, Paris Club meetings are attended by observers from the IMF, the WB, OECD, and UNCTAD.
While no formal rules govern the operations of the Paris Club, each request for negotiation is assessed individually. Over the years, certain basic features have emerged. The “creditor” countries take a common approach to requests for the renegotiation, thus assuring consistency in treatment of similar types of debt. The Club has been clear about debt renegotiations to alleviate debt servicing difficulties. It also relieved pressure on the balance of payments through official development assistance.
In these meetings, the debtor country begins with a detailed report on its economic situation and an assessment of the amount and nature of debt relief that it regards as necessary. The IMF representative presents an assessment of the country’s economic situation. It especially focuses on balance of payments situation and prospects, including the status of the country’s relations with the IMF. The WB representative then provides a longer-term analysis of the debtor’s economic prospects. After statements by UNCTAD and other participants, the creditors’ representatives reach an understanding on the general terms of a rescheduling of the country’s debt.
In its operations, the Paris Club meets normally for “two” days on a single rescheduling, and the results are embodied in a set of Agreed Minutes. These Minutes establish the general guidelines for the rescheduling in question and serve as the basis for subsequent bilateral agreements between each creditor and the debtor country. These agreements also cover the interest rate that will apply to the rescheduled debt. A renegotiation achieves legal status only when these bilateral agreements have been reached.
Agreements reached through Paris Club rescheduling deliberations normally involve only loans granted or guaranteed by official agencies of participating creditor countries. They exclude short-term debt or debts that have been rescheduled “before” although there have been exceptions in special circumstances. The agreements cover payments in arrears, if any, and those falling due in a specified 12-month period, and in some cases longer. They also reschedule 85-90 percent of the debt falling due in the specified period and allow for a grace period of up to five years, with repayments in a further period of up to five years. The non-rescheduled portion is generally to be repaid during the grace period.
The agreements request that the debtor should “not” accord more favored treatment to debt rescheduled outside the Paris Club and seek to renegotiate other debt on comparable terms. They also require the debtor country, if it is a Fund member, to have in force a stabilization program with the IMF before rescheduling provisions become effective. Some agreements have extended this requirement to the entire period covered by the rescheduling agreement. Recently, agreements have also stipulated that further rescheduling would only be considered if the country has a program with the Fund in place.
Commercial bank lending has become an important source of external finance for many developing countries. With the mounting balance of payments difficulties of countries in recent years, there has been a simultaneous increase in the number and scope of restructuring and rescheduling arrangements involving commercial banks. Unlike the renegotiation of official debt, commercial banks do “not” have a framework comparable to the Paris Club, although there do exist certain modalities and procedures for negotiations between bankers and their debtor countries. Creditor banks have ad hoc arrangements for each rescheduling exercise with several lead banks or the major lenders.
Another difference between commercial bank and Paris Club agreements “relates” to implementation. Paris Club agreements are arrived at relatively “quickly” but are implemented over a period of time as the separate bilateral arrangements are signed. Commercial bank agreements sometimes take a “long” time to negotiate but may be implemented fairly rapidly once the basic conditions are met. On its part, the debtor country may “hire” investment firms either to advise it during the negotiations or conduct the negotiations on its behalf. The actual negotiations can take place anywhere, and the process can be protracted.
In conclusion, both the WB and the IMF have reasons to follow closely the external debt situation in Ethiopia. During its regular consultations with its members, the IMF undertakes a general review of economic and financial conditions and prospects. In these discussions, which focus on balance of payments developments, the debt situation is analyzed.
The IMF emphasized the importance of avoiding debt problems through effective management and control, but the TPLF junta had created havoc by accumulating huge debt, despite the Ethiopia’s balance of payment problems. The current government has inherited huge external debts. The situation warrants support from international financial institutions to deal with it, either through rescheduling or rolling over earlier obligations. The government and people of Ethiopia are, however, determined to engage in “post-conflict” economic reconstruction, poverty reduction and debt rescheduling and settlement.
Editor’s Note: The views entertained in this article do not necessarily reflect the stance of The
The January 23/2022