LDC DEBT SERVICE BURDEN: A COMPARISON OF WESTERN AND COMMUNIST PORGRAMS (ER RP

Created: 9/1/1973

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LDCftmYt ftm/m;omparis of Western and Communist Programs

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Septemberopy NO. (.

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LDC DEBT SERVICEOMPARISON OF WESTERN AND COMMUNIST PROGRAMS

Summary

dilemma of increasing amounts ofassistance to tho less developedin the face of rapidly expandinge-examination of the financialfor aid giving. Westernf the gross bilateral flowcapital to LDCs, areto international pressures to obtainaid procedures. Communist countries aresituation exists in spite of the lessterms for Communist aid:

Communist aidmaller grant element than Western aid; it is paid off faster andarger share of the annual gross capital flow; the cost per dollar of Communist aid delivered is higher than for Western aid; anddeliveries, net of payments for principal and interest, are declining while net Western aid transfers still are rising. The significant financial advantage of Communist aid is that it can be repaid in commodities {often not salable elsewhere) instead of hard currency. For some LDCs, this may mean the disposal of surplus goods for capital that will enhance development and generate employment.

nations expect the LDCs toobligations and have providedast resort. At the end2 themade principal and interestillion for the5 billionbilateral capital provided them sinceof Still outstanding was

Note: Comments and queries regarding thisare welcomed. They may be directed to the Office of Economic Research

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billion in debts. If repayment of tho LDC debt were to increase as rapidly over the next five years as during the past five, annual debt service would rise to about S6 billionr twice2 level. To sustain current net aid tranferafficial bilateral capital flows would have tobyo moreillion.

Discussion

Introduction

3. The nations of the Third World are trying to acquire increasing external capital assistanceimo when their rising foreiqn debt service is burdensome. Both Western and Communist donors are pressed to expand thoir aid undertakings on more concessionary terms, sometimes to countries that are not able to discharge current obligations or whose debt service is absorbing an inordinate amount of the capital inflow. Anxious to strengthen their political and economic relationships with the LDCs, both are seeking solutions to the debtproblem that will allow debtors to sustain de-velojxnent efforts without severely impairing thoir import capability.

4. ontinuing increase in the not capital flow to LDCsajor expansion of gross disbursements, additional softening of repayment terras, or relief from current debt obligations. Each expedient has been employed, often inbut consistent long-term approaches to the problem have only recently begun to emerge. In spito of those problems, both Eastorn and Western creditors expect LDCs to pay for assistanceunder credits. Aid recipients, on the other hand, are eager to meet their obligations so as not to impair their credit-worthiness in international markets. This publication compares the debtand financial benefits to the LDCs of theaid provided by Western and Communist nations. It also compares Western and Communist efforts to copewindling margin botwoon now economic aid and debt service on old programs.

Gross Capital Flows to the LDCs

hillh.he LDCs received about ^ assistance from bilateraldeveloPedn7

t^anhend only slightlyin thinations (see Table -

Aid disbursements rose

*ea,rly years' combing from an annual average of less thanillionn

ing ChS "eXt

id outlaVs ^se less rapidly because

St^iS US disburs^cntsP But, S

1 recordndched datJillionlthough complete

2 f" fo" exPe?ditUEGS aEG

t is certain that they1 levels.

6. The recently expanded flow of capital re-

Urope5disbu^"tSPby Western

In?reases in US aid have been

^ilionn Che globalf tno CoCal- This was a

Hor ftcontribution of aboutf- Thecountries' annual

haSan9ln9 between

Thelc S6 billion in aid deliveries

S US did ^liveries proviLn hi1?" arge asillion cSSbinS utheargest Western donor.

Sert lefs it h hOSe of eithGr the united Kingdom, Japan, or West Germany.

private flows and multilateralhave totaled

tion.the term West refers to memoers of the Development Assistance Committee

accounted1hiChaccounted for the greater part of the capital cr-

illionp fromillion

7-Payments of principal and interest on aid

sources have absorbedf the total assistance provided since

these payments

weref the annual total. For

some recipients, the ratio was even higher, and

everse flow of resources was being

d' sometimes on both Communist and Western

hat rSSSSS,* hGLDC debt service ll^r^ arger share of Communist than of Western aid. , principal andpayments for Communist aid weret the total value of Communist aide8tem aid "as less. Byoff Communist aid deliveries went for debt service; 2 it. ontrast, repayments of LDC principal debt and interest to Western nations was absorbing onlyf the aid flow in

the ?ndhird World nations had paid anillionillion for

principal and S7 billion for interest) on their

bilateral official debt. illion of the

total went to Western nations and the remainder to

nrfnl:?rTniBS ?ountries <sechile both and interest payments moved consistently

ZleH^iaIly SlnCe theprincipal payments had grown faster (seehese accountedf total debt serviceompared with Increases in recent years reflect the onset of payments foiiow-

atlon9"ce period, and theshorter repayment periods allowed on

9. Service of the LDC debt for official bilateral economic assistance more than doubled between5 Repayments of principal and interest2 approachedillion,*Tablebillton SGVe" *ears(see This means that debt servicing

aS faSt as the debt itself but much laster than aid receipts, which rose lessetween 5 and

rivate capi

lion inpayments wereS bil

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Table 1

Estimated LDC Debt Payments' for Official Bilateral Economic Aid. by2

Million Current USS

countries

States

countries

Europe

bare been rounded to Ihe nearest is millkin. Because of inundine.components may noi add to Ihe ratals shorn.

Data2 are preliminary.

xclttdutc possibly at much asillion of principal payments to go-emmenis lhat are noi DAC member i.

A. Including esttmaicrof interest paid to DAC couotrBi fw

Table!

Estimated LDC Debt Payments' for Official Bilateral Economic Aid

Million Current US S

OS

ts

vfi.'

Including piiniipal and Interest. Data have

rotinikd tocsf SS i

because of

components may not add to uie totals shownirllinuiory.

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10- On tho average, LDC repayments to Communist creditors have grown somewhat faster than to Western creditors, but the relative share of Communist creditors in the total repaid has not changedover the past decade. Between5DC debt service on Communist aid tripled; it more than doubled for Western aid. at the end2 the LDCs still owed Communist nations aboutillion, representing about two-thirds of total Communist aid delivered since the beginning Their debt to the West wasillion, or lessf total Western aid deliveries. Bocauseuch higher grant element in Western aid, the debt service per dollar of Communist aid delivered has been more than one and one-half times as high as for Western aid. The debt service/delivery ratio for Communist aid is, compared withor Western aid. Although Communist countries have provided only aboutf the official bilateral capital that has flowed to LDCs, they have claimed almost twice that share of the total repaid on aid accounts.

right arants

11. Amortization of the LDC debt to Communist countries also has proceededigher rate than on LDC debt to the west, while interesthare of the total repaid dropped somewhat on both Eastern and Western accounts in recent years. Interest hasarger share of LDC repayments for Western aid (about one-third)of higher average charges and longer grace and amortization periods for Western official loan capital, interest payments for Communist aid have accounted for about one-fourth of the total repaid (see Nevertheless, the coat per dollar of aid provided was less for Western than foraid. This was mostly because of the more favorable western terms. More than one-half of aid committed by Western nationsf their deliveries have been grant aid.* Communist nations provided less thanf their total aid as out-although,hare of deliveries,. estern aid

Tne United States, Prance, and the United Kingdom together provided moref the total grants (see All Australian aid is grant aid.

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commitments allowed amortization over an average7 years, after an average grace periodears. Communist commitments carried an averageS years for amortization.* Average interest rates for Communist aid have been lower than for Western aid. Communist aid extended1 carried interest charges averaging lessompared% for Western commitments. , ir.terest payments to western nations equaledf the total value of their aid deliveries; itf Communist deliveries.

The Size of LDC Debt

At the endhe LDCs still owed anillion to other governments for bilateral economic aidore than three times principal payments. LDC outstanding debt had reached moreillion at the endnd thent nearly doubled. Debt rose somewhat more slowly over the next four, but at the end2 it was two and one-half times the level at the end4 (seend

LDC debt to the West grewomewhat higher rate than debt to Communist nations, but the relationship between deliveries and outstanding debt has been more favorable for Western thanaid. Thus, in spite of the failure ofaid deliveries to grow as part of the total and in spite of the faster pay-off on LDC aid debt to Communist nations, the LDCs still owed Communist countries an4 billion at the end

* Grace periods for Communist aid cannot bewith those for Western assistance because of definitional problems, except for the PRC which usually0 year lag between commitments and the onset of payments. Moscow normally requires initial principal payments one year after project completion, which mayelay in principal payments5 or more years after actualare made.

** Private and privately guaranteed debt would probably add as muchillionillion to this total. Anillionillion also may be outstanding for military aid deliveries.

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Table 3

Estimated OoiitanJirn Exlemal Bib feral OriiciaJ Debt of the Less Developed Countries (End of Year)'

Million Current US S

Tour Western countries Communist countries

TT

11stimated II billion should be tdM for OHof other Western non-DAC

iieum i

ESTIMATED OUTSTANDING OFFICIAL BILATERAL DEBT OF LESS DEVELOPED COUNTRIES

KSTtAMCOMMUNIST COUNTBICS

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Hot Aid Transfer: The Critical Factor

14. The sizeebt is noteasure of strains on its economy, nor is the size of its debt service ratio.* usually occur when the debtor cannot settle trade and aid accounts because debt servicing is encroaching on its import capacity. Thus, because of variations in domestic economic conditions, LDCs have sought debt relief at very different stages of indebtedness and at different debt service ratios. Generally, their problems reflect aof external and domestic factors that surface when debtors' foreign exchangeare not adequate to honor externalor if, by honoring them, domestic development objectives are jeopardized.

In accepting long-term repaymentaid recipients weigh future liabilities against the contributions of additional foreign capital inputs to their domestic growth. Critical to the cost-benefit judgment, particularlyhort-run consideration, is net. gross aid deliveries, not of principal and interest). Because the actual net transfer of resourcesunction of the size and terms of gross capital flows, it is an important criterion for judging relative benefits among aid programs.

The failure of capital flows to expand sufficiently to compensate for the more rapidly growing debt service has led to an overallin the expansion of net aid transferred over time. Even though gross capital flows to the Third World froa official bilateral sources have been increasing in the past few years, the rate of increase, net of debt service, has decelerated, and net availabilities from some donors have dropped. Evenncrease in net official bilateral capital transfers1 wasless than an effective addition to LDC capital availability because of inflation. net aid transfers from the West haveto grow. Since the beginninghose fromns have fallen (see Figure The divergence in the not transfer

* The ratio between total debt service and total export earnings.

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patterns between Communist and Western aidprobably is the most important difference to have emerged botween the two programs. It is the result of the much larger growth in gross flows from Western nations as well as qualitative differences in Western and Eastern programs. Ono of the most important factors responsible for the difference is the high grant element of Western aid% for commitments madender the most liberal interpretation of current Communist aid terms, the grant element would be no more.

17. Net aid receipts from the West have grown in almost every yoar They rose rapidly during the first decade of the aidecause of sharply expanding aid deliveries and large amounts of grant aid. Then,49 deliveries leveled off. More concessionary terms of aid and debt relief continued to provide some

The grant element measures the concessionary element of aid terms. It is derived by relating the present value of interest, principal payments, and the length of the grace period.

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growth in receipts. Larger gross flowsgain contributedontinuing increase in Western net aid transfers. Meanwhile, the netf Communist aid had fallen,540 million The decline was noted in every yearhen unusually large Chinese aid deliveries, made before large repayments on Chinese aid fell due, drove thesomewhat. If Chinese aid deliveries arefrom the Communist total, the narrowing gap between deliveries and repayments is even morea net ofillion moved under these accountsown5 million in

"nless, therearked change in Communist aid policy, the net flow will fall to zero and then Decome negative in the next several years.

Impact of Debt Service on the LDCs

18. Debt service on all LDC accounts* was equivalent tof total merchandise exports io?? tfe natJlons in slightly higher than The ratio is higher for some countries and groups of countries. For example, itor boutn Asia because debt payments more than doubled while merchandise exports increased by5 In the aggregate, the ratio of debt service to total merchandiseor Communist and Western official bilateral aid was roughly the same, but the ratio was far higher for the USSR than for the United States. Soviet debt serviceercent of LDC merchandise exports has run about twice as large as for the United States. ,f totalexports from Soviet aid clients wasto repayment of their aid debt to tlie USSR. During the same period, LDC repayments to the United States rangedf the total exports of LDCs that had received credits from the United States. 6 the ratio for the United States, comparedor the USSR (see Figure

- Based on data forDCs and including private and privately guaranteed debt servicing as well as multilateral global debt service. ** Merchandise exports are used for comparing Western and Communist ratios because exportdata are not readily available for the latter nations.

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LESS DEVELOPED COUNTRIES' DEBI SERVICEMERCHANDISEUMITEOIHE USSR

Mi MMI.HO

no:

nin

;:io

uaui inca

SS

19. These ratios for Communist and Western countries may not bo exactly comparable forLDC ability to repay debts. Communist aid may be easier to repay than Western aid because of the "'means of repayment." Most Western old is tied to purchases in the donor country, butof principal and interest is in free foreign exchange. Communist aid also isutis in local goods. Commodities used as repayment for LDC debts to Communist creditors would be equivalent to hard currency payments if they could be sold for hard currency, but frequently these goods cannot be disposed of, because of their inferiorack of demand, or other barriers in developed country markets. Communistto accept cheap consumer goods from Egypt and India, foods from African nations, and crude products and raw materials not salable on world markets allows LDCs to pay their debt without creating pressures on limited foreign exchangeand hard currency earnings. It enables thorn

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ds for development: capital. Meanwhile, the demand for these goods

dome"ic employment. Of particular

mnnf^V0 ChG LDCS is willingness of Com-

i? accept as "Paynent the output

?nif^llS Sllt Withaid' least

initially there may be no ready market. The weight

of this repayment consideration differs^ but ifc^ critical to the decision to accept Communist aid on what appears to be more burdensome terras than for Western aid: Iran's

reviouslv flaredaste product, is now paying0 million annual flow of Soviet capital to Iran, other Soviet-aided natural gas from Afghanistan, bauxite rrom Guinea, and alumina from Turkeywill pay for Soviet aid. Steel rails from India and Soviet use of port facilities in Berbera, Somalia, also fall into this category.

Debt Relief

nations rarely have defaultedrefusal to honor their debts, andsought relief onlyast resort. Communist creditors, although they bothwilling to renegotiate LDC repaymenta real need has existed, have refused toautomatic relief. ravda article of

kachkov, Chairman of the State Committee of the USSR Council of Ministers for Foreign Economic Relations, stated: "Soviet economic assistance is not charity. It is givenutually advantageous basis and rests on the principles of equality and respect fornterest."

totaling aboutillion commercial debt) have beenmoreozen LDCs and their Communist countries have givenas many countries, with deferredillion. Although many LDCs bearservice burdens, most of them haveeasonable balance betweenliabilities and exports. Acuteproblems have affectedewsome countries have had temporary problems

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because of the bunching of payments or severexn export earnings. The latter countries have sought temporary relief; others, with sustained shortages of foreign exchange and severe imbalances in their debt structure, have sought broadermeasures. Seven countries* were responsible for moref the LDC total outstanding debt to tho USSR at the end Except for Afghanistan, Indonesia, and Syria, these countries have met their obligations, India, Iran, and Indonesia also accountarge portion of LDC debt to the West, with Pakistan, Brazil, Mexico, South Korea, and Turkey added to the list, these nations account for one-half of the LDC total debt to the West.

relief may take any of the Cl) cancellation of the debt,of payments,efinancing the debt. nations are not known to have canceledpayments although occasionally they havepayments due. ery fewcountries have converted loans tothey have canceled interestreschedulinga rearrangementulge in debt servicingiswidely used form of relief provided byand Communist creditors. The thirdreliefrefinancing (most commonly usednations)ebt rollovernew credits are extended to equaldue on the outstanding debt. Thisthat financed investments yield enoughthe interest due. Sometimes debtescheduling of maturities. is not known to have been useda relief device by Communist nations,some cases the resulting flow pattern aftermayollover.

major debt renegotiations withare conducted through multilateral channels.

* Afghanistan, Algeria, India, Iran, Indonesia, Iraq, and Syria.

** China's conversion to grants0 million of credits extended48 to Pakistan-Bangladesh is the most recent example.

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whichrocedural framework within which individual creditor nations effect bilateral These multilateral arrangements started56 to deal with largo commercialaccumulated by Brazil and Argentina with their West European trading partners. Broad rescheduling negotiations currently are under way among Western consortia with Chile, Ghana, India, and Pakistan. Communist countries usually have provided debt relief bilaterally, but often the East European nations follow Moscow's format. The renegotiation of Indonesia's debt to Communist nations wasbecause most of the Communist creditors followed the Western accord.

Outlook

24. The pressure of debt servicing on LDCwill become more burdensome in the latter half of. Long grace periods, which have begun to expire, on loans granted earlier; thein the amount of grant aid sometimes offsetigher volume of lending; and lessterms by some major lenders allontinuing rapid rise in debt service. Even if debt service were to grow only as fast in the next five years as it did in the last five,7 LDCs would have to maken interest and principal payments. To sustain the amount of net aid transferrednd assuming the same concessional terms, the gross capital flow would have to bo increased by. Nevertheless, as LDC import requirements grow and debt service rises, more of the LDCs will be forced to seek relief, and further accommodation to their hard currency shortages may have to be made. nations have recognized the relationship between debt relief and the conditions of aid. Communist nations have not, although they are morein thoir aid undertakings than before. nations will continue to stress theofnd so long as local goods are in surplus but acceptable as repayment for Communist aid, the burden on LDCs of making these repayments will be less than for Western aid. Thus the "moans of repayment" probably will continue to condition the acceptability of further Communist aid in spite of the heavier debt service responsibilitiesrobable negative flow of aid. Western

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nations will have to continue to accommodate to the problems related to limited LDC foreign exchange availabilities and the erosion of aid availabilities for development* But if Communist nations are unable to absorb LDC export surpluses (or if LDC goods can be disposed of for hard, Moscow and Eastern Europe may be forced to conform more closely to optimum aid criteria being pressed on the developed nations in international councils.

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Untied Kingdom Oih*i*

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incajfaL, fiou en Ami in

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Official BUateral Grant Aid Deliveries lo Less Developed Countries

Million Current US S

Kingdom

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Germany

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Europe

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