By Pedro-Pablo Kuczynski, vice-president, Kuhn, Loeb & Co, New York
There is at present no lack of mechanisms, existing or proposed, to cope with the problem, although few are addressed specifically to the problems of developing countries. The main one is, of course, the oil facility of the IMF, which is already operating. Even though a major but undefined part of its total funds (the equivalent of about $3.4 billion) will be directed to the Third World, the total available is not enough in relation to the size of the prospective balance-of-payments gap of developing countries, even after assuming a considerable amount of belt tightening on their part*. The United Nations emergency operation, which is aimed at the poorest countries, has a staff and offices, but so far not much money. Two major international ministerial committees are looking, among other things, at the recycling question. The interim committee of the IMF and a joint IMF-World Bank development committee were established at the last annual meeting of both institutions in Washington DC. And, of course, there is a variety of proposals from governments and informed observers: sales of SDRs to the surplus OPEC countries, interest subsidization schemes for loans to the Third World, indexed bonds, use of the US Export-Import Bank, etc.
Unfortunately, the creation of a workable recycling instrument or scheme faces almost insurmountable obstacles because there is little international agreement on the nature of the problem. It may therefore be useful to begin by stating the obvious.
First, the duration of the balance-of-payments problem for the majority of oil-importing countries is still uncertain. Although rather unlikely, oil prices might weaken as the recession intensifies in the industrialized countries; two-tier pricing in favour of developing countries – with all its problems and in spite of the present public stance of oil-exporting countries against it – might gain a less precarious foothold than it has at present. Moreover, in the longer run, a greatly expanded World Bank programme of development loans could lighten the recycling load. With uncertainty there is not much point in designing a recycling scheme that is supposed to be permanent. That would take too long, would undoubtedly be met with opposition from the surplus countries, and would be too complicated to negotiate.
Second, the recycling problem involves, on the one hand, developing country borrowers who have a greatly impaired creditworthiness and, on the other hand, new lenders who are especially interested in the security of their investments. Unless the majority of lenders are willing to accept a much greater degree of risk than they appear at present, or unless leading OECD countries – mainly the United States – find it acceptable to guarantee such loans (an unlikely prospect), no large-scale recycling scheme to the Third World is possible.
Third, while most industrialized countries, at least for the time being, can alleviate the balance-of-payments problem by borrowing in the capital markets, a large majority of the developing countries cannot. At the same time, the absolute size of the balance-of-payments gap of developing countries is about one-quarter that of the OECD deficit countries, so that obtaining a recyclable sum for the former looms less large in the international monetary system than for the latter.
Fourth, while bilateral arrangements, such as those between Iran and India, circumvent many of the issues already mentioned, they do not cope with the problems of every deficit country. A multilateral arrangement is preferable both to lenders and borrowers.
The IMF oil facility already copes with several of these issues: it is temporary (the entire scheme is supposed to be reviewed at the end of 1975), it is supposed to pay special attention to the needs of developing countries, and it is multilateral. But it does not have enough money. Is it realistic to expect a much larger oil facility? This depends in part on the issues of price and risk.
Interest rate
Under present arrangements the IMF pays the seven lenders to the oil facility (Abu Dhabi, Canada, Iran, Kuwait, Oman, Saudi Arabia and Venezuela) 7% interest. In present circumstances, with the probability of a continued decline in short-term interest rates, a trend which will be an incentive for OPEC countries to seek longer-term investments, a rate of 9% for IMF oil facility borrowings from surplus countries would seem adequate to attract such funds and would be in line with commercial alternatives. In fact, it could be too high.
The higher rate will, of course, intensify the debt-servicing problems of the borrowers. In the case of medium-term loans of the type made by the facility (final maturities are up to seven years), the major burden is that of repaying principal rather than meeting interest. Interest rate subsidization is merely a minor palliative, since the main problem is to repay the principal a few years hence. Still, some form of interest rate subsidization for the neediest countries would make at least a partial contribution to alleviate their problem, although it should be seen as nothing more than that.
The lenders to the facility would probably wish the OECD countries to grant this subsidy, in order to show that compensatory financing to the developing countries was not only a burden for the oil rich. It is equally obvious that the OECD countries would find the idea unacceptable. One possible compromise might be for the OECD countries (or at least some of them, as explained below) to grant the subsidy, but with funds obtained on a pari passu basis from surplus countries through the purchase by the latter of special securities. The impact of the subsidy from the point of view of the balance of payments of the industrialized countries would in the first instance be nothing (as long as the special security purchases by oil countries were supplementary to the investments which would have been made in any case by oil countries in those capital markets), and the eventual burden would amount to the interest cost of the interest subsidy scheme under an expanded oil facility.
Let us suppose optimistically that at the end of the first year the expanded oil facility had credits outstanding to developing countries of $10 billion and interest payments due to it from these countries of $700 million (9% on the average outstanding amount during the year). Based on a survey of the balances of payments of the borrower (such as the IMF at present undertakes for creditor countries to determine its periodic currency budgets), the facility decides to grant an interest subsidy of $500 million for the year just ended. At the same time, let us suppose that four OECD countries are determined at that point to be in relatively strong balance-of-payments positions: these four countries (in prearranged proportions, according to their quotas or to a facility decision) would then issue a total of $500 million in special securities at market rates to be purchased by lenders to the facility (in proportion to their outstanding loans), with the proceeds to be handed over to the facility and an equivalent amount deducted from borrowers' interest payments.
There are obvious problems with this type of scheme, one of them being that it would merely be a band-aid, a temporary palliative which could not be continued indefinitely, but then neither could large-scale recycling on quasi-commercial terms without leading to a debt moratorium. Among the possible subsidiary benefits of an arrangement of this type are that of using the capital markets to provide some funds to deficit countries of the Third World, and that of alleviating the consequences of the present special sales of securities to OPEC countries by major industrialized countries, such as the United States and Germany, which at present are not recycled directly into the international monetary mechanism.
Taking a risk
How much of a risk are the oil countries realistically willing to take in this type of lending? As little as possible, while the industrialized countries (or at least the major ones) want them to take as much as possible but are so far definitely unenthusiastic about accepting the quid pro quo of this risk taking, namely, a major restructuring of voting rights within the IMF (the seven lenders to the existing oil facility, including Canada, account for 6.4% of voting rights while their merchandise exports in 1974 can be expected to account for about 15% of exports of the IMF membership). Such a stalemate seems to argue for a legally separate window of the IMF or a separate institution, but then the lenders would be expected to take a higher proportion of the risk than they are willing to accept at present.
A partial compromise could be to use the services of a multilateral institution such as the IMF on an agency basis, with the lenders assuming the commercial risk. While it would be difficult, not to say impossible, for the lenders to accept such an arrangement politically if it was directed at assisting industrialized countries, it might be more palatable if it were directed exclusively to developing countries. For that purpose institutions which lend largely or exclusively to developing countries may be more politically suitable than the IMF, which has a mandate to assist in correcting disequilibria in the balances of payments of all its member countries regardless of their level of development. The World Bank has for the last two years explored the idea of a 'Third Window', between the terms of IDA and those of the Bank itself, which could be used for that purpose. Another alternative, which might be complementary to the 'Third Window', would be to divide the funds between the African, Asian and Inter-American development banks.
Have we said anything more than to confirm that large-scale recycling to the Third World is a virtual impossibility unless major sacrifices are made both by lenders (in accepting a high degree of risk in their investments) and borrowers (in borrowing without a clear view of where the repayments will come from)? However, an imperfect and temporary scheme is better than nothing.
* See IMF Survey, 16 September 1974, for a description of the procedures of the oil facility and also of the ‘Extended Fund Facility’, a new medium-term window of the IMF. A major problem faced by both facilities is funding.