Adjustment and Financing in the Developing World

INTERNATIONAL MONETARY FUND

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1982
• ISBN:
  9780939934188

NONE

An Overview

TONY KILLICK AND MARY SUTTON¹

The accelerated inflation and large payments imbalances that have plagued the world economy in recent years have created new challenges for economic policy. Institutions such as the International Monetary Fund have found themselves operating in a global environment markedly different from that for which they were originally designed, and developing countries have found their aspirations threatened by large increases in their payments deficits. There have been wide disagreements about the most suitable policy responses by developing countries to these problems and about the appropriateness of the stabilization programs favored by the Fund. During the 1970s the growth in international commercial bank lending to some developing countries served a purpose in recycling the surpluses of the members of the Organization of Petroleum Exporting Countries (OPEC)—but at the cost of a growing external debt, and there are signs that debt problems may intensify during the next few years.

The seven papers in this report are revised versions of papers that were originally presented at a seminar jointly arranged by the Fund and the Overseas Development Institute in Croydon, England, in October 1981. This overview sets out to do three things. The first section presents a brief factual background for the content of the report as a whole, organized around key tables presenting various dimensions of the global disequilibria. The second section summarizes the papers presented at the seminar and published here, while the final section examines some of the issues arising from the seminar discussions. This latter, however, presents only the interpretation of the authors; no attempt is made to provide a systematic record of the proceedings nor can it be said that the interpretation of the arguments represents conclusions agreed to by the participants. It is safe to assume that all participants have their own ideas about what is concluded here—and these undoubtedly range over a wide spectrum.

GLOBAL DISEQUILIBRIA AND THE NON-OIL DEVELOPING COUNTRIES

The general nature of the global disequilibria that first emerged after 1973 is well known. The intent of this section is therefore only to present some of the most recent information on this topic (mostly based on the Fund’s World Economic Outlook, 1981) and to drawattention to the special situation of the non-oil developing countries. Very briefly, the following appear to be the salient points.

• 1. The second oil shock of 1979–80 recreated large global payments disequilibria (Table 1).² The oil exporting group of countries has been running massive current account surpluses, and a large proportion of the counterpart deficits appears in the payments accounts of the non-oil developing countries. The nominal value of the deficits of the latter has been growing and is expected to continue to grow in 1981–85. In absolute terms, most of these deficits have been incurred by the major exporters of manufactures and “other net oil importers” (largely middle-income exporters of primary products).
• 2. As can also be seen in Table 1, the surpluses of the oil exporting developing countries as a group are expected to diminish by 1985 but to remain large, and most of the counterpart improvement in the rest of the world is expected to be concentrated in the Western industrial countries. Forecasts by the Organization for Economic Cooperation and Development (OECD) to 1982 show the same general result (OECD, 1981, Table 30). In billions of U.S. dollars, the current deficits of the subgroup “low-income countries” are of second-order magnitude, suggesting that these deficits could be financed without major international reforms if political decisions were made to do so.
• 3. But data for balances on current account may be misleading because of the importance of capital movements, with large net inflows to non-oil developing countries, and because some countries are experiencing such a compression of imports that current balances tend to understate their payments problem. The grouping by “oil exporting developing countries” also disguises the fact that only a few of these countries actually have large surpluses; more than 90 per cent of the current account surplus of the oil exporting developing countries in 1980 was accounted for by Kuwait, Iraq, Libya, Qatar, Saudi Arabia, and the United Arab Emirates (IMF, 1981 a, p. 44).
• 4. Large increases in import prices for the non-oil developing countries in 1979–80 played a key role in the balance of payments situation described above and resulted in a serious deterioration in the commodity terms of trade (Table 2). Taking all non-oil developing countries together, the terms-of-trade index was 11 per cent lower in 1980 than in 1977; among the subgroups, the “low-income countries” were particularly affected, with a 27 per cent fall in their terms of trade. The expansion of export volumes slowed down, partly because of the recession in the industrial world, which also weakened world commodity prices. There was also a sharp deceleration in import volumes, especially during 1980, and this is expected to continue in 1981. Here, too, the forecasts are in line with OECD expectations (OECD, 1981, p. 125).
• 5. Obviously related to the developments in import prices, Table 3 shows that virtually all the deterioration in the current account of the non-oil developing countries in 1973–80 could be attributed to a drastic deterioration in the balance of oil trade. Over the same period, non-oil developing countries were able to improve their non-oil trade balance, although this was partly achieved by cutting back on import volumes, causing a worsening in the balance on services and private transfers. Much of the deterioration in the services account was due to the rising cost of interest payments on externally owned debt.
• 6. The data summarized in Tables 2 and 3 provide strong prima facie evidence for the proposition that the balance of payments situation of the non-oil developing countries can only be understood in the global context and that their payments problems are essentially international, or exogenous, in character.
• 7. Viewed in relation to gross domestic product (GDP) and to exports and imports, the deficits of the non-oil developing countries in 1980 and since then are enormously larger than those of the industrial countries (Table 4), although this is much less evident when the deficits are simply expressed in U.S. dollars (column 1). In relation to GDP, the problem is particularly acute for the “other net oil importers,” whose deficit is equivalent to 6.5 per cent of GDP: in relation to trade values, the deficit is particularly serious for the low-income countries. A comparison of the ratios of trade values to exports and imports for the low-income countries shows that these countries are already heavily dependent on capital inflows to finance current imports. Table 4 provides a useful first approach to an understanding of the magnitude of the adjustment problems of the low-income countries. It also reinforces the point made above—that the dollar size of the deficits of the low-income countries is small in relation to total world payments (and thus could be financed without a great deal of international effort) but that it is very large relative to the trade and output of these economies.
• 8. Although the absolute size of the external debt of the non-oil developing countries has greatly increased, its rise has been more moderate in relation to export values (Table 5). Nevertheless, there was a fairly sharp deterioration in the debt and debt service ratios in 1977–80—particularly in the interest-payments ratio, which is the most onerous because it cannot normally be rolled over by new borrowing. Among the subgroups “low-income countries” and “other net oil importers,” this ratio nearly doubled during the three years in question and a further increase is anticipated by 1985.
• 9. The ratios of gross external reserves to imports of goods and services, also presented in Table 5, show a considerably sharper deterioration, again expected to continue until 1985. However, these ratios are biased downward because the gold element in reserve holdings has been valued at SDR 35 an ounce. The deterioration has been sharpest for the major exporters of manufactures and low-income countries; by 1985, their ratios are expected to be between a fourth and a third of 1972 levels. When reserves are measured net of liabilities, the deterioration is even more drastic, as indicated by the following Bank of England estimates of net external financial assets of the non-oil developing countries (Stanyer and Whitley, 1981, Table F):

• 10. The deterioration in the debt ratios mentioned in paragraph 8 was related to changes in the composition of the debt and to changes in the terms of borrowing. Data on the structure of external debt of non-oil developing countries in Table 6 show a relative decline in debt to official creditors (aid, export credit agencies, etc.) and a rise in the proportion of debt to private financial institutions. However, Table 6 also shows very large differences between the country subgroups. “Low-income countries” have experienced only modest changes in the composition of their debt, whereas the position of the “other net oil importers” has changed most radically. The low-income countries remain largely dependent on aid and other official inflows; the other subgroups, especially the “major exporters of manufactures,” borrow large proportions from private financial institutions, chiefly because of their superior access to commercial bank sources. Since credits from private sources have an average maturity of less than 9 years, against nearly 24 years for official creditors, the relative growth in the former types of borrowing has led to a shortening in the average debt maturity of developing countries, from 18.0 years in 1973 to 14.6 years in 1979 (Nowzad, Williams, et al, 1981, Table 7).
• 11. Average interest rates have also risen, partly because of the changes in debt structure and partly because of rising nominal interest rates (Nowzad, Williams, et al, 1981). The first column of Table 7 shows trends in the rates paid by developing countries for Euromarket credits, recording a near doubling of rates in 1976–80. The coincidence of the second oil shock and high nominal interest rates in 1979–80 has resulted in larger transfers of income to the OPEC surplus countries than would have occurred under the rates prevailing in 1974–75. On the other hand, when adjusted for a trend value of export prices to obtain an estimate of the real resource cost of debt servicing (columns 2 and 3), the cost was still modest. It had, however, risen by over 3 percentage points in 1978–80.
• 12. Data on the purchasing power value to non-oil developing countries of development aid flows (Table 8) show these to have grown only slowly in 1970–72 through 1980. In fact, the implied annual growth rate is only 2.0 per cent, which is below population growth. Aid went down sharply as a proportion of the current account deficits of non-oil developing countries between 1970–72 and 1975 but then staged a modest recovery in 1980. Although low-income countries are particularly dependent on aid, the largest share still goes to middle-income countries. In 1979, low-income countries (excluding the People’s Republic of China), whose populations made up 55 per cent of the total population of developing countries, received only 37 per cent of total OECD and OPEC aid and only 32 per cent of bilateral aid (World Bank, 1981 a, p. 56). Even within the low-income countries, there are numerous inequalities of access to aid.
• 13. Despite a downturn in 1980 and predictions of further difficulties in 1981 and beyond, there has been a recovery in bank lending to non-oil developing countries, as indicated by the following data on Eurocurrency bank credits:³

• However, some qualifications are in order: (a) the purchasing power of the projected 1981 lending is well below 1978–79 values; (b) non-oil developing countries are also large depositors in the Euromarket, so that net flows to non-oil developing countries are much smaller;⁴ (c) access to the Euromarket is highly skewed and is determined by criteria that coincide roughly with the level of development, so that the low-income countries are actually net depositors (Killick, 1981).
• 14. In 1974–80 net Fund credits financed only a little over 4 per cent of the total current account deficits of non-oil developing countries, but the volume of Fund credits rose sharply in 1980–81. That there has been a resurgence in utilization of Fund resources is indicated by the following data on credit tranches and extended facility commitments to de...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Foreword
• Acknowledgment
• Seminar Papers
• Seminar Participants
• Contents
• Adjustment and Financing in the Developing World
• Footnotes