Jul 24, 1987


GENEVA, JULY 22 (IFDA/CHAKRAVARTHI RAGHAVAN) – The chairman of the Committee on Resources, Amb. Taniguchi of Japan, circulated to regional coordinators his "non-paper" on debt problems that recommends and "evolving" debt strategy, based on the OECD’s "decompression" and "menu" approach for official and private creditors.

He was due to put forward later Wednesday night other "non-papers" on resources for development, related monetary issues and conclusions.

"Non-paper" is a term used in such negotiations to describe drafts that bind no one, but could be a basis for negotiations.

On the fact of it, while the paper on debt makes some right noises in description and assessment that could be attractive to third world debtor nations, it does not really take the issue forward in the shape of recommendations or decisions, or even flag any new ideas for solving the debt crisis.

As one third world delegate put it, "it is a homily form the north as to what the south should do, rather than an approach based on joint and shared responsibilities".

The paper as some other third world delegates noted did not really address the crux of the problem, namely the net transfer of resources form the indebted "periphery" to the creditor "centre" – a situation that could not be cured either by new lending that merely adds to the debt burden or other gimmicks that merely postpone the day of reckoning for the debtors.

No one really expects detailed agreements here – even in terms of what proportion of GNP or export earnings should go to debt servicing – but there should be an advance in the conceptualisation of problems and solutions, and is a step forward from the vague OECD or Venice summit communiques and generalities, another delegate remarked.

It talks of the "decompression" of debt – an expression used in the OECD to describe proposals to reduce the burden of existing debt of poorer countries in the Paris Club (the mechanisms to deal with official and officially-guaranteed debt), and the "menu" approach, a Washington-coined expression to signify a choice for banks of instruments to reduce their debt exposure and not a choice for debtor-countries.

Despite recent analysis (official and non-official) in western quarters seriously questioning the usefulness of the debt-equity swap and other such instruments – for neither reducing the debt burden of the debtors nor assuring any new money – the Taniguchi paper holds these out as solutions to solve the crisis and enable adjustment with growth.

The debt-equity swaps in reality only mean that the banks (after setting aside reserves to take account of real value of their credits), sell off their papers on the basis of its values in secondary markets to a foreign investor, who will present it to the debtor country and get full value in local currency for investment.

This could very well create a domestic inflation problem, would assure no fresh inflows of investment funds, and, without new restrictions that would be characterised as creating a negative environment to FDI, could even result in greater outflows (through transfer-pricing, flow of dividends, and even repatriation of capital).

The Taniguchi paper on debt was distributed to coordinatory wednesday evening, and is due to be studied by G77 Thursday along with the other papers, Taniguchi is due to put forward. They are all expected to be discussed in a contact group of the Committee on Thursday.

In a factual analysis, the paper speaks of debt problem and substantial net outflow of resources being a prime obstacle to development in debtor countries, and its "depressive influence" on the global economy and as a source of tension in international trade relations and financial markets.

It talks of the need to tackle the debt problem in ways that would help revitalise growth in debtor countries and world economy.

It speaks of due account being taken of "differences among individual debtor countries" in dealing with the problem, and of "the first and principal" element of the strategy being "adjustment by debtor countries to external environment".

It concedes that a number of debtor countries had undertaken extensive adjustment measures, and recognised that costs of adjustment in general have been "extremely heavy".

Nevertheless, it adds, countries with debt servicing difficulties have neither achieved satisfactory growth momentum nor received credit-worthiness, and since outbreak of the debt crisis "the external environment has improved very modestly".

It then mentions a number of factors, which it says have impaired debt-servicing capacity and offset efforts of debtors.

OECD countries have avoided another recession and achieved output growth for several years in a row, though growth has been unduly slow. Terms of trade of third world countries have deteriorated as commodity prices have weakened in real terms.

Real interest rates continue to be very high and while nominal rates have fallen significantly they are again rising. External markets are characterised by mounting protectionism, exchange rates have been volatile, lending by banks has contracted and flows from official sources have stagnated.

The non-paper speaks of the general acknowledgement that adjustment is essential for sustained growth and revival of growth in essential for sustained adjustment.

Also, the twin objectives of aligning indebtedness with debt-servicing capacity and unleashing development potential could only be realised if all parties concerned – creditor industrialised governments and debtor third world countries, multilateral financial institutions and private banks – discharged their responsibilities towards finding a durable solution.

In the face of a debt crisis that has become worse after four years of an OECD strategy that first questioned the existence of a crisis and then dealt with it as a mere cash-flow problem, and now as a transfer problem, the Taniguchi paper speaks of "the debt strategy has evolved significantly over time", especially in type of growth and financial techniques used, and need for continued flexibility and evolution to secure adjustment with growth.

The paper then outlines the direction for evolution of policies and measures, but couched in very general terms and lacking in any specificity that would assure a real reduction in debt burdens of debtor countries.

The policies and measures, it says, should include:

--Coordination of contribution of various parties in the context of medium-term investment programme oriented towards adjustment and growth and agreed upon by all parties.

Such a programme should explicitly examine and take full account of various determinants of debt-servicing capacity- prospective export earnings, terms of trade, import requirements, GDP growth, and volume and terms of likely future financial flows.

--Providing policy-makers and adequate planning horizon – with long-enough consolidation, maturity and grace periods to enable a country’s debt-service profile to be properly aligned with prospective earnings, and making provision for unforeseen changes in terms of trade.

--Appropriate policies in debtor countries will be of key importance, and they must pursue efforts to raise savings and investment, reverse capital flight, reduce inflation, improve efficiency, etc. Policy advice should take fully into account the economic, political and social factors determining the capacity to adjust.

--Adjustment by third world countries should be backed by more supportive international economic environment. This would require further efforts by the major market economy countries and strengthened multilateral surveillance to ensure revitalisation of global growth, lowering of interest rates, more stable exchange rates, more accessible markets, and substantially higher levels or new financing from official and private sources.

In line with current realities, appropriate combination of new lending and "decompression" to reduce debt overhang should be worked out.

The reduced exposure of commercial banks would enable them to participate actively in this process, and they have already embarked on "decompression" to a degree through debt-equity swaps and use of "menu" options.

The debt-equity swaps would continue to be significant, even if marginal, and a further widening of "menu" of options would be needed.

--"Decompression", new bank lending and rescheduling should be encouraged through appropriate regulatory and other measures in creditor countries.

--A "realistic assessment" of debt-servicing capacities of individual countries should govern treatment of rescheduled official and officially-guaranteed past loans, with significant concessionality accorded to LDCS, Sub-Saharan African countries, and "small hard-hit" countries of Africa, Asia, and Latin America and Caribbean.

--Greater relief of ODA debt should be given along the lines of the UNCTAD board decision for retroactive adjustment of such debt.