IMF-LED AUSTERITY: IMPLICATIONS FOR TROUBLED BORROWERS

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• Document Creation Date: December 22, 2016
• Document Release Date: January 10, 2011
• Sequence Number: 2
• Publication Date: April 1, 1983
• Content Type: REPORT

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Directorate of -- eCrCi-
Intelligence
IMF-Led Austerity:
Implications for
Troubled Borrowers
An Intel ce As sment
MASTER FILE COPY
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GI 83-10115
April 1983
Copy 472
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Intelligence
IMF-Led Austerity:
Implications for
Troubled Borrowers
International Finance Branch, OGI,
Office of Global Issues, with contributions from the
DDI regional offices. It was coordinated with the
National Intelligence Council. Comments and queries
are welcome and may be directed to the Chief,
This assessment was prepared by
Seeret-
G183-10115
April 1983
rF Directorate of _Seeret"
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IMF-Led Austerity:
Implications for
Troubled Borrowers
Key Judgments We believe that many of the rescue packages coordinated by the Interna-
Information available tional Monetary Fund (IMF) for major debtor countries are in trouble.
as of 25 April /983 These programs have thus far enabled a number of countries-notably
was used in this report.
Mexico, Brazil, and Argentina-to avoid default and to obtain breathing
room for economic adjustment. However, we are concerned that:
? Economic recovery in Organization for Economic Cooperation and
Development (OECD) countries will not be rapid enough to support
programed growth in less developed country (LDC) exports.
? Growing social and political instability in the financially troubled
countries will lead governments to backslide on domestic austerity
measures.
? Banker confidence in the stability of financially troubled LDCs will
wane, jeopardizing lending commitments as well as precluding new loans
that may become necessary.
We believe these concerns will remain valid for the next two to three years
and are particularly doubtful about LDC governments' willingness and
ability to stick with austerity in the face of declining living standards.
Several of the major debtors are already having difficulty implementing
policies and meeting performance criteria agreed to with the IMF.
Specifically, government leaders within key LDC debtors are under strong
political pressure to abandon IMF-mandated restrictions on wage increases
and reductions in price controls and subsidies. Violent protests against
austerity measures have already erupted in Brazil, Argentina, Chile, Peru,
Ecuador, and Bolivia; we expect more and possibly better organized
antigovernment activity in the next few months. In Mexico, although most
interest groups remain quiet, organized labor appears increasingly restless
and is calling for an advanced wage hike and rent controls. Intense hostility
from major interest groups could threaten serious disorder in Brazil,
Mexico, and Argentina.
We do not know how the IMF and commercial banks will respond to
countries' failure to meet performance criteria. One possibility is that
disbursement of funds will be halted, in which case new large bridging
loans will be needed to avoid default until new agreements and targets can
be negotiated. We believe, however, that the Fund will allow a fair amount
of flexibility in judging adherence to performance criteria and that the
banks will follow the Fund's lead in determining whether disbursements
should be interrupted. We doubt, however, that bankers will be receptive to
any new funding requests that may be involved in the renegotiation of
agreements, especially if official creditors are unwilling to share the
burden.
Secret
G183-10115
April 1983
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If funds are curtailed, debtors would almost certainly turn to Washington
for direct assistance, help in renegotiating bank and IMF loans, and new
debt- rescheduling efforts. If such efforts fail, troubled debtors will have to
turn inward and intensify their efforts to adjust as best they can to a lack of
foreign exchange. Without the ability to finance imports, troubled debtors
would have to impose even more austere import restrictions which would
slow the recovery of the United States and other industrial nations by
reducing export markets. If access to IMF and bank credit is substantially
reduced, debtors will have little choice but to move unilaterally to relieve
financial strains. Several of the major debtors have already suspended
payments on portions of their debt, and public speculation is growing in US
and Brazilian financial circles that instead of seeking additional loans the
Figueiredo government will soon declare a payments moratorium.
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Key Judgments iii
Introduction
IMF Targets
International Targets
Domestic Targets 4
Achieving the Targets 7
External Constraints 1
0
OECD Business Cycle 1
0
Banker Confidence 1
0
Domestic Constraints 1
2
The Political Fallout 1
2
Performance to Date 1
5
Additional Demands on the IMF and Banks 1
6
Outlook and Implications 2
0
1.
Major IMF Standby and Extended Arrangements, as of v
i
March 1983
Major LDC and East European Debtors, 1982 3
Quantitative Performance Criteria for 1983 Under Selected IMF
Adjustment Programs 5
4.
Selected Countries: 1983 IMF External Targets, Compared With 7
1982 Data
5.
Foreign Exchange Requirements of Selected Countries, 1983 8
6.
Selected Countries: 1983 IMF Government Budget Targets, 9
Compared With 1982 Data
7.
Selected Countries: 1983 IMF Macroeconomic Targets, Compared 9
With 1982 Data
8.
1983 Debt Service and Rescheduling of Financially Troubled LDCs 1
7
Major LDC D
ebtors: Direction of Exports, 1981
11
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Table 1
Major IMF Standby and Extended Arrangements, as of March 1983 a
Date of
Arrange-
ment
Expiration
Date
Amount of
Agreement
Amount
Available,
1983
Other IMF Total IMF
Disburse- Financing,
ments, 1983 c 1983
Argentina
Jan 1983
Apr 1984
1,650
990
572 1,562
Chile
Jan 1983
Jan 1985
550
253
325 610
Costa Rica
Dec 1982
Dec 1983
101
81
0 81
Hungary
Dec 1982
Jan 1984
523
366
0 366
Morocco
Apr 1982
Apr 1983
309
93
0 93
Philippines
Feb 1983
Feb 1984
347
347
207 554
Romania
Jun 1981
Jun 1984
1,213
404
0 404
Sudan
Feb 1983
Feb 1984
187
187
43 230
Thailand
Nov 1982
Dec 1983
298
256
0 256
209
0 209
Arrangements under the
extended fund facility
Brazil
Feb 1983
Feb 1986
4,663
1,372
779 2,171
Dominican Republic
Jan 1983
Jan 1986
408
140
51 91
India
Nov 1981
Nov 1984
5,500
1,980
0 1,980
Ivory Coast
Feb 1981
Feb 1984
533
170
0 170
Jamaica
Apr 1981
Apr 1984
525
157
0 157
Mexico
Jan 1983
Dec 1985
3,752
1,103
221 1,324
Pakistan
Dec 1981
Nov 1983
1,011
521
0 521
Peru
Jun 1982
Jun 1985
715
275
0 275
a Other LDCs with current upper credit arrangements in which loan
disbursements are contingent upon meeting targets contained in a
mutually agreed upon adjustment program include Barbados, El
Salvador, The Gambia, Guinea, Haiti, Honduras, Liberia, Mada-
gascar, Malawi, Mali, Panama, Senegal, Somalia, South Africa,
Togo, Uganda, and Uruguay. Bangladesh, Bolivia, Venezuela,
Ecuador, Zambia, and Zimbabwe are negotiating arrangements.
b SDRs converted at rate of 1 SDR = $1.1.
Includes compensatory financing for export shortfalls and draw-
ings under the first credit tranche that have been disbursed as of
15 March.
d Currently under negotiation with banks.
e Projected: Morocco is likely to begin negotiations soon and obtain
another standby arrangement.
1983 New Medium-
Term Bank Loans
Tied to IMF
Arrangements
1,500
1,400 d
0
0
0
0
0
0
4,400
0
0
0
0
5,000
0
900d
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IMF-Led Austerity:
Implications for
Troubled Borrowers
The rescue programs coordinated by the IMF have so
far averted international financial collapse. More than
40 LDCs and East European countries with a com-
bined medium- and long-term debt of close to
$475 billion have, or are negotiating, IMF financing
agreements (table 1). These programs have enabled
such countries as Mexico, Brazil, and Argentina to
forestall default and obtain some breathing room for
making needed economic adjustments. Financial dis-
bursements under the IMF programs are made quar-
terly and are contingent upon meeting quantitative
performance criteria, which usually govern interna-
tional reserves, domestic bank credit, and government
budget deficits. In addition, the borrower must agree
not to introduce new restrictions on trade and pay-
ments or new multiple exchange rate practices and, if
possible, also agree to eliminate existing restrictions.
In negotiating agreements with the major debtors
beginning in late 1982, the IMF successfully coerced
major bank creditors to extend new medium-term
loans this year. Again, however, disbursements of
these loans are contingent upon compliance with IMF
performance criteria. In some instances, such as in
Brazil and Yugoslavia, the IMF is also asking that
banks maintain minimum levels of short-term credit
during the year. For Mexico and Brazil, commercial
bank credit associated with the IMF agreements
amounts to several times the value of IMF lending
commitments. In the case of Mexico, the ratio of
commercial bank to IMF lending this year is almost 4
to 1. For Brazil the ratio is 2 to 1. Currently, the
banks are committed to lending $12-14 billion to
troubled debtors this year, while the IMF is to provide
$7 billion.
The IMF has established demanding domestic and
international economic performance criteria in ex-
change for its financial support. To gauge the eco-
nomic and political repercussions of trying to meet
these criteria and associated targets, we have evaluat-
ed IMF programs for 14 high-debt countries. This
group includes the largest debtors-Mexico, Brazil,
Argentina, and Chile (table 2). Taken together, the 14
have an external medium- and long-term debt of
$270 billion, with scheduled debt repayments last
year of an estimated $40 billion. We chose the
countries because of the size of their debt and the
availability of data on their recent economic record.
In addition, their programs are representative of those
formulated for other members needing balance-of-
payments support.'
International Targets
Most of these troubled borrowers must meet an
overall balance-of-payments criterion as measured by
the change in net international reserves (table 3). To
meet this reserve requirement, the programs specify
current account targets as well as projected capital
inflows. Taken together, IMF targets for the 14
countries we examined imply that their overall cur-
rent account deficit this year will be held to $24
' The countries are Mexico, Brazil, Argentina, Yugoslavia, Chile,
Philippines, Peru, Pakistan, Morocco, Romania, Thailand, Sudan,
Ivory Coast, and Costa Rica. Besides constituting over two-fifths of
LDC and East European debt, of which US banks hold about 25
percent, these 14 countries account for nearly one-fourth of OECD
exports to and one-sixth of OECD imports from LDCs and Eastern
Europe; 10 to 15 percent of total US trade; and excluding
Yugoslavia and Romania, some 55 percent of non-OPEC LDC
national output. Of the 14 countries, Thailand currently appears to
be the most creditworthy; we believe it will have no problem
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IMF loans are intended to help members redress
payments deficits and facilitate economic adjustment
toward a more sustainable balance-of-payments posi-
tion without resorting to trade or payments restric-
tions deemed harmful to national and international
prosperity. In cases where a deficit is judged to be
temporary and caused by circumstances beyond the
member's control, limited borrowing is available
subject to few or no conditions. These low-condition-
ality loans include the reserve tranche (equal to the
excess of a member's quota over its currency holdings
in the Fund's General Resources Account), compensa-
tory financing for shortfalls in primary commodity
exports, and loans for member contributions to ap-
proved buffer stocks.
Members with severe payments problems and desir-
ing larger amounts offunds must negotiate an accept-
able stabilization program outlining economic targets
and policies to be pursued for the restoration of
internal and external balance. Generally, standby
arrangements involve one-year adjustment programs
designed to correct deficits caused by price distor-
tions and excess demand. The basic prescription is
upward adjustment of local prices and interest rates,
reduced subsidies and bank credit, and devaluation
of domestic currency. Extended arrangements usual-
ly involve three-year adjustment programs that at-
tempt to deal with protracted price distortions and a
deeply entrenched misallocation of resources, which
require structural changes in addition to pricing
incentives. Extended arrangements often call for
major institutional reforms, shifts in investment
spending, and performance-oriented tax incentives.
Specific performance criteria are monitored quarterly
and must be met for the member to draw installments
of the loan during the program period. Quantitative
performance criteria govern macroeconomic variables
such as international reserves, the volume of external
borrowing, the public-sector deficit, and credit expan-
sion within the economy. Qualitative criteria involve
commitments to avoid the introduction or intensifica-
tion of trade or exchange restrictions. To provide
internal consistency and the specific steps a member
should take to meet performance criteria, the pro-
grams also outline policy understandings concerning
exchange rates, fiscal reform, price and interest rate
adjustments, incomes policy, and institutional reform
and specify related microeconomic targets. Although
no explicit sanctions are attached to failure to imple-
ment a policy understanding, the Fund usually takes
an uncharitable view of any breach of performance
criteria in such cases.
billion, compared with almost $35 billion in 1982. The
improvement reflects export volume increases of
about 7 percent and export price rises in dollar terms
of about 5 percent. An advocate of expanded world
trade, the Fund does not require import restrictions.
Current account objectives, however, imply that the
group will reduce total import costs by about
2 percent this year. This implies a volume change of
close to 5 percent, on top of the estimated 17-percent
decline registered last year. Interest charges and other
service payments in the IMF programs are generally
consistent with these trade targets and current inter-
national interest rates of 9.5 to 10 percent.
The IMF is calling for the largest current account
turnaround to occur in Brazil. Specifically, the Brazil-
ian current account deficit is projected to fall by half,
dropping from $14.5 billion in 1982 to $7 billion in
1983. The improvement, according to the IMF, would
reflect a $3 billion reduction in imports, a $2 billion
gain in exports, and sizable savings in interest and
other service accounts. The Mexican program calls
for a $4 billion current account deficit, compared to a
recently revised figure of $3 billion for 1982. Despite
the reductions in oil prices since the targets were set,
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Table 2
Major LDC and East European Debtors, 1982 a
Total External Medium- and
Debt Long-Term
Debt
Brazil 88.0 70.0
Mexico 84.3 59.6
Argentina 39.1 29.1
South Korea 35.8 23.0
Venezuela 33.0 19.0
Poland 24.0 23.5
Indonesia 23.0 20.0
India 22.0 21.0
Chile 19.3 15.3
Turkey 19.0 16.5
Yugoslavia 18.3 16.5
Egypt 18.0 15.5
Algeria 18.0 17.0
Philippines 17.2 13.0
Morocco 13.8 11.0
Nigeria 12.0 8.0
Taiwan 12.0 8.0
Peru 11.6 8.6
Thailand 11.4 9.5
Pakistan 11.3 10.3
Romania 10.0 9.0
Malaysia 9.5 8.0
Sudan 7.8 7.8
Hungary 7.8 5.9
Ecuador 6.8 4.3
Ivory Coast 6.5 6.5
Costa Rica 3.1 2.5
a Countries shown in italic had IMF adjustment programs as of 31
March 1983.
b Owed to Western banks.
c Includes short-term debt and interest.
d Ratio of medium- and long-term principal repayments and total
interest payments to exports of goods and services. Includes IMF
repayments.
Estimated
Short-Term
Debt
Estimated
Bank Debt b
Debt Due and
Not Paid
Debt Service
Ratio a
(percent)
18.0
59.0
0
70
24.7
64.0
12.0
54
10.0
26.0
7.0
101
12.8
20.0
0
14
14.0
27.0
0
25
0.5
14.0
4.4
80
3.0
9.0
0
10
1.0
1.6
8
4.0
16.0
0
64
2.5
4.0
0
25
1.8
8.9
0.5
25
2.5
5.5
0
23
1.0
8.0
0
25
4.2
11.0
0.1
27
2.8
7.5
0
33
4.0
7.0
3.0
16
4.0
6.5
0
NA
3.0
6.0
0
44
1.9
6.0
0
18
1.0
0.9
0
27
1.0
4.5
0.4
26
1.5
5.5
0
6
NA
2.2
2.2
60
1.9
6.5
0
37
2.5
4.8
0.2
45
NA
5.0
0
32
0.6
1.1
1.2
47
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We believe the IMF program assumptions of an
average 1983 interest rate of 10 percent on short-term
commercial debt and 13 percent on long-term com-
mercial debt for nonoil LDCs are appropriate. Most
economic forecasters are predicting LIBOR rates of
9.5 to 10 percent this year; the higher long-term rate
takes into account the high lending spreads for the
larger debtors and the substantial front-end fees
being charged for reschedulings and new loans. Over-
all, about 50 percent of nonoil LDC debt has been
negotiated at variable rates and would be affected by
a decline in interest rates. For the larger debtors the
ratio is higher, reaching 70 to 75 percent for Brazil
and Mexico according to our calculations. A
I -percentage point decline in LIBOR rates would
mean savings of $600 million for Brazil and
$700 million for Mexico. Such savings would not be
realized immediately, however, since generally there
is a three- to six-month lag until the new rates affect
actual debt service.
the deficit is projected to hold at this level largely
because of declines in imports and interest rates. Both
Brazil and Mexico must improve last year's overall
balance of payments by more than $7 billion. Table 4
shows the trade, current account, and overall balance-
of-payments targets used by the IMF, compared with
actual country performance in 1982.
A critical variable in the IMF programs is the amount
of funds available to the debtors. In addition to
current account deficits, the 14 debtors owe $32.5
billion on medium- and long-term debt this year. In
addition Mexico, Argentina, Yugoslavia, Sudan, Ro-
mania, and Costa Rica must settle a total of $21.3
billion in arrearages, and Mexico must add $2 billion
to reserves by yearend to satisfy IMF performance
criteria. Altogether, the IMF programs assume that
these 14 LDCs will be able to obtain about $80 billion
in financial assistance excluding short-term credit
(table 5):
? About two-fifths of these needs apparently will be
met by medium- and long-term loans. New com-
mercial bank loans to Brazil, Mexico, Argentina,
Yugoslavia, Peru, Thailand, and Morocco appear to
account for roughly one-fifth of total financing with
the balance to be provided by governments and
multilateral institutions other than IMF.
? Rescheduling of medium- and long-term debt obli-
gations in 1983 meets almost 40 percent of financ-
ing requirements.
? Net private inflows of direct investment provide
close to 4 percent.
? Reserve drawdowns of $2.8 billion and IMF gross
disbursements of $8.9 billion fill the remaining
15-percent gap.
Domestic Targets
The domestic performance criteria and targets con-
tained in the IMF programs are stringent (tables 6
and 7). In almost all cases government operating
expenditures are to be slashed through employment
freezes and wage cuts as well as through the consoli-
dation and elimination of public-sector agencies.
Prices of subsidized goods (including food, fuel, and
industrial and agricultural raw materials) and tariffs
on public services (including electricity and transpor-
tation) are to be substantially increased. Public-sector
investment will be curtailed except in Thailand, where
a meager 1-percent real increase is allowed, and in
Argentina, where a 7-percent real increase over very
low levels last year is programed for the petroleum
sector and labor-intensive projects with low import
content. Public revenues are to be boosted through
higher income taxes (Mexico, Brazil, and Thailand),
higher luxury and new retail taxes (Mexico, Philip-
pines, Peru, Thailand, and Yugoslavia), import sur-
charges (Chile, Peru, Thailand, and Philippines), ex-
port taxes (Brazil,' and Argentina), and the
strengthening of tax administration in all countries.
All countries must meet performance criteria govern-
ing limits on credit extension by either the commer-
cial banking system or the central bank. Sublimits
have been established on net credit to the public
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Table 3
Quantitative Performance Criteria for 1983
Under Selected IMF Adjustment Programs a
Change in
Net Interna-
tional
Reserves
Foreign
Borrowing
by Public
Sector b
Reduction
in
External
Arrears
Mexico
2,000
(-5,500)
5,000
600
Argentina
-500
(-5,500)
2,000,
-500
(1,650)
2,050 r
Yugoslavia
1,500 a
Philippines
1,600
-100
(100)
NA
Thailand
1,500
(600)
0i
Costa Rica
0
(-0.9)
100 k
No new
arrears
Net Domes- Net Domes-
tic Assets tic Assets
of Banking of Central
System c Bank c
Net Credit Overall Total Public-
to Public Public- Sector
Sector c Sector Financing
Deficit c Deficit
18
(99)
133
(348)
-8.5
(-16.5)
33
(114)
11.7
(15.5)
13% limit on
expenditure
growth
16.4
(26.8)
32.2
(96)
18.2
(21.2)
20.6
(14.2)
(2.9)
26i
4
(85.6)
15.2
(36.3)
a Most of these criteria have quarterly limits against which
performance will be evaluated. Criteria are evaluated at the end of
March, June, September, and December for most countries. This
table depicts only limits expected to be observed over the course of
1983. Last year's data, where available, are given in parentheses.
b For Mexico, Brazil, and Argentina, these borrowing limits apply to
all maturities. For Romania, loans with maturities of one to five
years are limited to $500 million and short-term loans to $400
million. For the remaining countries, the limits apply to loans with
maturities of one to 10 or one to 12 years.
Although the program set these limits in terms of domestic
currency, we have converted those figures into annual percentage
changes and percentage of GDP for easier comparison.
d Excludes disbursements of loans to refinance short-term bridge
loans obtained in 1982, and any reduction in short-term liabilities of
monetary authorities resulting from such loans will not be considered
for purposes of the net reserve target.
Monthly depreciation of cruzeiro vis-a-
vis US dollar to match domestic rate of
inflation.
Unification of foreign exchange system
by yearend 1983.
Must meet a monthly real effective
exchange rate target.
Must meet trade surplus target of $1.6
billion.
"Flexible" administration of price and
profit margins, minimum land and
water charges, progress on debt
rescheduling.
e Excludes $1.1 billion short-term loan and $1.5 billion medium-
term bank loan arranged in coordination with IMF funding.
Subceilings on maturity structure are imposed to ensure that no
more than $500 million will fall due within three years of standby ex-
piration date.
r Excludes borrowing by Central Bank, Banco del Estados, and
SINAP.
s Excludes borrowing by National Bank of Yugoslavia or under
National Bank guarantee.
e Excludes credits obtained to refinance $370 million in suppliers'
debt.
Nonconcessional loans. Does not apply to new loans that may result
from refinancing of debt.
i Annual change from June 1982-June 1983. These criteria will be
evaluated in July.
k Excludes loans related to debt rescheduling.
-8.0
(-14.2)
-1.7
(-4.0)
-3.8
(-6.6)
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Table 4
Selected Countries: 1983 IMF External Targets,
Compared With 1982 Data
1983 1982 1983
Mexico 23.7 21.0 15.2
Brazil 22.2 20.2 16.1
Argentina 9.5 8.1 5.6
Chile 4.5 3.8 3.5
Yugoslavia 6.3 5.9 7.9
Philippines 5.5 5.0 7.9
Morocco 2.4 2.4 3.7
Peru 3.5 3.2 3.2
Thailand 8.1 7.2 9.6
Pakistan b 3.0 2.6 6.6
Romania 6.6 6.2 5.0
Ivory Coast 2.7 2.5 1.8
Costa Rica 1.1 0.9 0.8
Sudan 0.7 0.5 1.8
Total 99.8 89.5 88.7
Current Account Overall Balance of
Balance Payments
1982 1983
1982 1983
1982
14.4 -4
.2 -2.7 2.0
-5.5
19.4 -7
.0 -14.5 0
-7.5
4.8 -1
.0 -2.2 -0.5
-5.5
3.7 -1
.6 -2.5 -0.5
- 1.1
8.8 -0
.5 -1.4 0.2
-1.6
7.8 -2
.5 -3.4 -0.6
- 1.2
-1
.5 -1.8 NA
-0.5
3.5 -0
.9 -1.4 -0.1
0.1
8.4 -2
.0 _L5 -0.4
-0.4
6.0 -1
.3 -1.3 -0.2
-0.3
0
.8 0.7 0
0.8
-1
.1 -1.2 0
-0.3
-0
.3 -0.4 0
-0.1
-0
.7 -1.0 -0.8
0
Convertible currency.
Fiscal years beginning June of stated year.
sector. Expansion of private credit is to he curtailed in
all countries except Chile and Thailand; and in Ar-
gentina any private investment will have to be fi-
nanced by repatriation of private funds abroad. In
Yugoslavia, the IMF is requiring a 30-percent decline
in interenterprise trade credits. Restrictions on both
private and public bank credit translate into reduced
gross domestic investment and higher unemployment.
In fact, total investment is projected to decline by 1 to
2 percentage points of gross domestic product (GDP)
in most country programs. Peru and Yugoslavia ex-
pect a much sharper decline of close to 10 percent
over last year. Chile's program originally allowed for
a marginal increase spurred by increased private-
sector outlays. This, however, appears in jeopardy,
given continued financial uncertainty in the aftermath
of nationalization of major banks and large outflows
To achieve the domestic and international trade and
financial targets set in the IMF programs would
require that all the parts fit together perfectly. Specif-
ically, it would require:
? Rapid economic recovery in OECD countries to
support programed growth in LDC exports.
? Enough social and political stability in the financial-
ly troubled countries to implement the domestic
austerity programs and stem capital flight.
? Sufficient bank confidence in the economic and
political stability of financially troubled countries to
permit large new medium-term loans and the main-
tenance of short-term credit lines.
We do not believe these results can be counted on to
materialize.
of private capital.
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Table 5
Foreign Exchange Requirements
of Selected Countries, 1983 a
Current account balance -7.0 -4.2
Argentina Chile Yugoslavia Philippines Peru
Debt repayments
Longer term maturities
7.1
7.5
2.5
1.1
1.2
1.8
4.2
3.0
0.5
NEGL
0
NEGL
0.5
NEGL
0.2
0.1
3.7
2.6
2.2
2.8
2.0
0.6
0.8
1.0
1.1
0.8
1.6
0.6
0.6
0.5
0.3
1.5
1.2
0.6
1.2
0.9
1.8
4.2
2.9
Bridge operations
2.3
0
0
Short-term rollovers
9.6
6.8
NEGL
NEGL
1.9
0
0
0e
2.0e
-0.5e
0.5e
0.6
-0.6
-0.1
Pakistan b
Morocco
Romania
Thailand
Sudan
Ivory Coast
Costa Rica
1.3
1.0
-0.5
0.5
0.2
1.0
2.0
NA
NA
NEGL
0.4
0
2.2-
NEGL
1.2
1.9
5.0
3.4
1.6
1.7
Financed by:
Direct investment
NEGL
0.1
NA
NA
Medium- and long-term credit
1.8
2.0
1.0
0.4
Official and suppliers' credits
1.5
1.2
0.2
1.3
0.3
1 M F
0.3
0.3
0.4
0.3
0.1
Commercial bank loans
0
0.5
0.4
1.0
2.8
1.0
0
Bridge operations
0
0
Compiled from IMF program documents. Items may not add to
totals shown because of rounding.
b Fiscal year beginning June 1983.
Financing sources are estimated.
d Includes short-term debt arrearages and interest in 1982.
IMF performance criterion.
-0.5 -2.5 -0.9
NEGL.
1.4
0e
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Table 6
Selected Countries: 1983 IMF Government Budget Targets,
Compared With 1982 Data
Government Revenues Government Spending Public-Sector Deficit Public-Sector Investment
1983 1982 1983 1982 1983 1982 1983 1982
Mexico 98.0 67.0 59.0 73.0 -8.5 -16.5 8.6 10.8
Brazil 82.0- NA 78.0 a NA -2.5 -4.9 NA a NA
Argentina 23.7 21.6 18.1 19.7 -8.0 -14.0 9.4 8.5
Chile 7.0 -8.3 3.4 5.2 -1.7 - 4.0 5.0 5.5
Yugoslavia 24.0 20.0 25.0 17.0 0 -0.1 NA NA
Philippines 13.9 6.4 0 9.4 -2.4 -4.2 2.7 3.0
Peru -8.5 -0.5 -6.7 -13.9 -3.8 -6.6 8.3 70.1
Thailand 25.0 2.0 10.2 17.6 -3.5 -5.3 4.1 4.3
Romania -5.9 -1.0 -6.4 -5.2 2.4 b 2.7 b NA NA
Ivory Coast 13.2 24.6 11.9 18.7 -6.2 -8.9 13.4 15.5
a Targeted current revenues and expenditures for 335 largest state
enterprises.
b Romania traditionally runs a public-sector surplus.
Table 7
Selected Countries: 1983 IMF Macroeconomic Targets,
Compared With 1982 Data
Annual Percent Change Gross Domestic Investment
Share of GDP
1983 1982 1983 1982 1983 1982 1983 1982
Mexico 0 -0.2 55 92 26 a 78- 22.7 23.6
Brazil -3 0 78 95 78 105 - 3.4 6 - 2.5 b
Argentina 5 -4.3 168 215 106 131 19.2 17.1
Chile 4 -12.8 25 19.6 Less than 25 9.3 15.5 15.4
Yugoslavia d -2.5 0.3 30 31 27.5 28.5 28 29
Philippines
1.0 55 63 NA NA -job NA
4.9 6 4.8 0 5 25.6 24.1
Romania f
Ivory Coast
Costa Rica
3.8 3.2 7.0 17.8 8.1 8.7 30.4 31.4
2.6 10.1 9.3- 12.0- 6 a 14.1 a 21.8 26.4
Public sector. d Gross social product.
b Annual percent change. e Limited to productivity gains.
GDP deflator. f GNP.
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External Constraints
OECD Business Cycle. IMF export targets estab-
lished for the 14 countries imply a relatively rapid
pace of economic recovery in the major industrial
countries. Our economic models suggest that the IMF
export targets seem more consistent with a 1983
industrial country growth rate of 3 to 3.5 percent than
the 2- to 2.5-percent rate that most forecasters now
anticipate. In any event, we believe that it will take
longer than usual for the business upturn in industrial
countries to feed back on demand for Third World
exports.
We would, therefore, expect a delay of six months to a
year in LDC export responses to stronger OECD
growth. OECD demand for key LDC agricultural
exports, such as sugar, are not sensitive to the business
cycle in industrial countries. Beyond this, the excess
capacity and the inventory overhang for most raw
materials sold by LDCs will tend to dampen the price
response. In the case of copper, for example, stocks in
non-Communist countries still amount to 1.5 million
tons, This equals 15 to
20 percent of annual copper consumption by non-
Communist countries. This is not to say that the
business cycle advantages will materialize slowly for
all debtor countries. If past business cycles are a
guide, the LDCs providing consumer-oriented manu-
factured goods will capitalize earlier on Western
recovery. South Korea, Hong Kong, Taiwan, and
Singapore-countries in relatively healthy financial
positions-would be the chief beneficiaries. Mexico
and Brazil will also benefit so long as they have access
to supplier credit.
The financially troubled group cannot count on any
significant increase in sales to Third World markets.
Third World markets for Latin American debtors will
be particularly constrained because of their heavy
dependence on each other and on other financially
troubled LDCs for export sales (see figure). Brazil's
previous "growth" markets of Nigeria, Mexico, Chile,
Argentina, and Poland, which helped increase export
earnings to an average 17 percent annually in
1974-81, are currently restricted because of their own
payments problems. Brazil, Mexico, Peru, and Argen-
tina accounted for 16 percent of Chile's sales in 1981.
We estimate Chilean and Brazilian exports to nonoil
LDCs were down by almost 30 percent last year.
Countries such as Pakistan, Sudan, and Yugoslavia,
which depend on Arab oil producers for 10 to 25
percent of export sales, will have trouble selling in
these markets because of revenue shortfalls brought
on by the soft oil market.
Banker Confidence. Banker confidence, a critical
ingredient for the success of the major debtors' IMF
programs, is fragile.
they are increasingly concerned that the
rescue packages being arranged by governments, the
IMF, and the banks are only bandages. They believe
that the financial problems of LDCs cannot be cured
by short-term stabilization programs, in large part
because the social and political costs of the associated
austerity measures are too high. In the absence of new
measures by Western governments to increase LDC
access to financial resources, they foresee many of
these countries returning again and again for resched-
ulings. They are already convinced that Brazil and
Mexico will need more debt relief or new credit before
the end of the year. With a number of major banks
having a large portion of their assets tied up in
nonliquid loans to LDCs and their concern about
political instability growing, we do not believe they
will be receptive to additional requests for funds. Lack
of bankers' confidence could undercut a critical IMF
assumption-that short-term debt outstanding at
yearend 1982 is successfully rolled over or, in the case
of Mexico, partially rescheduled.
Small- and medium-size US and foreign banks, many
of which began to lend abroad for the first time in the
late 1970s, have already pulled in their horns. As of
midyear 1982, smaller US banks accounted for over
one-fifth of the lending to Brazil, Mexico, and Argen-
tina. They have nearly all refocused their lending
operations on domestic customers. To the extent that
they are still involved in foreign lending, it is only
because they have been forced to join restructuring
programs or are financing overseas trade for firms in
their domestic marketing area.
European bankers consider the finan-
cially troubled Latin American countries a US prob-
lem and intend to focus their international lending on
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Major LDC Debtors: Direction of Exports, 1981
\levi,o
B1,1/il
\roenuna
ene,uela
Chile
ugo'l;1, la
Philippines
'd orocco
Peru
Ihailind
Pakistan
Romania
gel ;1
Sudan
I cuador
[,on Coast
am I
0 10 20 30 40
Percent of total
50 60 70 SO '01 11111
a Pinanciullv troubled countries include Al Ur the dhu,c 11111. PoI.ntd. Boll, 1,1,
Costa Rica I)urninienn Republic. Ilondur;is.
/tire. and /anthia
their own national export firms and on countries with
which they have traditionally close ties. The retreat
by foreign and smaller US banks has enormously
increased the risks for the major US banks.
The IMF financial programs are vulnerable on anoth-
er front as well. Specifically, the IMF assumes that
large private capital outflows, which badly hurt Mexi-
co, Chile, and Argentina last year, can be held in
check by favorable interest and exchange rate poli-
cies. If capital flight remains a problem, as it report-
edly has in Chile, Brazil, and Mexico, it would
seriously disrupt the programs and further undercut
Western bankers' confidence in the effectiveness of
the present approach. Although exchange rate policies
can be helpful in stemming capital flight, we believe
that increased risk of political instability in countries
such as Brazil and Mexico could give a strong push to
these outflows. In Yugoslavia's case, restrictions on
withdrawals from private foreign exchange accounts
are causing reductions in remittances from workers
abroad.
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Domestic Constraints
Implementation of austerity programs has high politi-
cal and social costs for the ruling governments. While
austerity programs usually have a positive effect on a
country's external accounts, their short-term impact
on the domestic economy is recessionary and infla-
tionary. The IMF programs themselves call for no
growth in several of the 14 countries we examined. In
fact, we believe that the IMF programs are consistent
with real GNP declines of 3 to 5 percent this year for
four of the five largest debtors. In most countries real
wages will decline, unemployment will rise, and pri-
vate-sector credit will constrict sharply, if not be
eliminated altogether. We believe the risk that politi-
cally powerful groups will protest the fall in their
living standards is one of the key reasons many LDCs
find it difficult to comply with IMF conditions.
In our judgment the major debtors have a less-than-
even chance of meeting the tough IMF performance
criteria governing bank credit and public-sector
deficits:
? Inflationary pressures generated by devaluations
and higher prices on subsidized goods will make
sharp credit restrictions difficult to control in coun-
tries experiencing inflation higher than assumed in
their financial packages. Inflation targets are par-
ticularly stringent for Mexico, Argentina, and Bra-
zil. In addition, these three will have to rely on
domestic credit to a far greater extent than original-
ly anticipated by the IMF because new foreign
credits are being used to service interest and short-
term debt. We expect new corporate bankruptcies in
the Philippines and Mexico, in particular, as a result
of tight credit.
? The significant improvement in government reve-
nues expected by the IMF in most programs is not
likely to occur this year because of the time lags
involved and the pessimistic outlook for economic
growth. On the expenditure side, spending by pow-
erful government ministries and public enterprises
in Brazil, Mexico, Argentina, and the Philippines
will be hard to contain, especially if inflation re-
duces real-budget allocations. We believe Mexico,
for example, is unlikely to fire thousands of employ-
ees in order to meet budget limits with unemploy-
ment already at 20 to 30 percent. Forced to assist
banks, businesses, and farmers with their debts, the
Chilean Government is exceeding expenditures as
well as credit targets
Even though governments in the major debtor coun-
tries probably will backslide on carrying through
austerity measures, we believe the risk of political
instability will grow. Widespread anger and frustra-
tion with austerity will almost certainly spark periodic
strikes, worker demonstrations, and possibly food
riots. Protests against austerity measures have already
erupted in five countries-Brazil, Mexico, Argentina,
Chile, and Peru. Businessmen in Brazil, Mexico, and
Chile have generally supported their governments, but
they are protesting devaluations and high interest
rates and are sending funds abroad. Moreover, the
political impact of austerity goes well beyond the 14
countries we examined:
? Bolivia and Ecuador have experienced more wide-
spread labor disruptions than have occurred else-
where in South America. Labor leaders in Ecuador
staged a three- to four-day general strike in late
March to protest the government's devaluation and
reported intention to raise prices and interest rates
to qualify for IMF assistance.
? In Africa, Zambia's powerful trade union confeder-
ation threatened in March to call a nationwide
strike if the government refused to discuss demands
for the repeal of wage ceilings and the restoration of
price controls on essential commodities. The wage
restrictions and deregulation of prices were among a
series of austerity measures imposed by the govern-
ment in December and January to meet IMF
conditions for a loan.
The Political Fallout
In Mexico, early compromises with organized labor
leaders and general acceptance by the business com-
munity of the need for austerity should enable the
government to remain firmly in control. The rural
sector is relatively quiet, and opposition parties re-
main reluctant to attack government policies directly.
However, perceived inequities in public policy or a
loss of confidence over the government's management
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of a particular issue could translate into internal
security problems. We believe government officials
would have little difficulty rationalizing the use of
force, de la Madrid appears ready to deal quickly and
forcefully with potential disorder to provide an object
lesson to dissident elements. He has already warned
those planning protests that established procedures
must be followed. In the less likely event that the
military does not intimidate protesters and crush
opposition early, however, the armed forces will en-
counter serious problems in regaining control should
disorders spread.
Mexicans will be more likely to bear the pain if they
have confidence that de la Madrid's austerity pro-
gram will eventually bear fruit. Nevertheless, the
chance of sporadic wildcat strikes and antigovernment
demonstrations will grow as the sacrifices begin to
bite. Sensing a restiveness in their constituency, union
leaders are already pushing for an advanced pay hike
and rent controls. Victories by dissidents in local
union elections this year-particularly among influen-
tial unions such as the government-affiliated Confed-
eration of Mexican Workers-would send a clear
message to union and national leaders that policy
changes were in order.
A series of political blunders by de la Madrid, an
unwillingness to take quick action to maintain order,
or lack of agreement on what to do, could provoke
widespread challenges to the ruling party-government
system. Moreover, differences among ruling party
leaders over the proper economic strategy could lead
to defection of party notables. Labor chief Fidel
Velaquez's demise-at his age of 82, a distinct possi-
bility-could throw the labor movement's hierarchy
into disarray and deprive the President of crucial
union support.
The Brazilian Government's austerity policies are
drawing widespread domestic criticism and have al-
ready triggered the first significant social violence in
three years. While we do not expect that effective
political resistance will evolve, intense hostility will
test the government's ability to cope with political
stress. Even before convening, recently elected Con-
gressmen were publicly challenging administration
economic policies, including the IMF agreement. In
the opening session, opposition leaders intensified
their attack, and some government party members
threatened to obstruct legislation reducing cost-of-
living raises. According to the US Embassy, hundreds
of labor leaders packed the galleries to support Con-
gressmen denouncing the proposed changes in wage
laws. The Brazilian press has also chastised the
government's austerity program. In addition, the Em-
bassy has reported widespread hostility among busi-
nessmen to high interest rates and currency devalu-
tion.
Implementation of the austerity program will be
complicated by the fact that for the first time since
the 1960s elected officials from the opposition now
control the wealthiest and most populous states and
the lower house of Congress by a narrow margin.
With this greater strength, congressional critics are
likely to continue challenging planned austerity mea-
sures. Moreover, the popularly elected governors, who
will be more sensitive to public opinion than their
appointed predecessors, can be expected to lobby
against cutbacks in federal spending that benefit their
constituencies
We expect the government to face more manifesta-
tions of social unrest like the violent protests by
unemployed workers in Sao Paulo and other cities this
month. Wildcat strikes-already frequent-are likely
to spread in protest of layoffs of industrial workers
and the administration's wage policy. Demonstrations
by the middle class could spread to reflect growing
political alienation, largely related to discontent with
deteriorating economic conditions. Producer protests
will likely become more frequent, and some food riots
are also possible.
Argentina's IMF agreement has met stiff popular
resistance, and the weak Bignone government has
backed away from implementing credit, price, and
wage measures as required by the IMF agreement.
On 17 March, for example, it went against the I M F
agreement by extending price controls and providing
interest subsidies to business. Moreover, the govern-
ment has implemented a costly unemployment com-
pensation program. A variety of reports indicate the
ruling junta intends to ask the IMF to renegotiate the
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agreement. To further dissipate dissent, regime offi-
cials will also probably replace those responsible for
negotiating the IMF agreement.
The regime's tactics have thus far p-evented large-
scale labor strife. Low-level criticism of its policies is
certain to continue, however, and any attempt to
reimplement full austerity measures would prompt
intense reaction. At a minimum there would be
widespread strikes and demonstrations-some of
them violent. A worst-case scenario would involve
intense pressure on the government from within the
military to control the unrest, which could result in
escalating violence and continued erosion of the gov-
ernment's authority. Regime leaders, increasingly vul-
nerable to coup plotting, could be ousted. The military
as an institution is divided over implementation of the
agreement; hardline nationalists oppose the IMF pro-
gram, and several have spoken out publicly against
appeasing Western banking interests; more moderate
elements have demanded that the government take
steps to curb inflation and regain control over govern-
ment spending.
In Chile, the poor economic situation is contributing
to increased political activism against the Pinochet
regime. Demonstrations in late March against Pino-
chet's economic and political policies drew larger
crowds, reflected better organization, and sparked
more violence than any opposition activity in recent
years. Economic reversals have given the repressed
and largely inactive opposition a concrete, exploitable
issue. At the same time, we believe they have made
the public-including some proregime elements-
more receptive to increased political activity. As a
result, we expect Pinochet's popular support to decline
and hinder his capacity to govern, but we see no
threat to his continued rule in the near term. The
memory of the chaotic Allende period still grips most
Chileans and is thus a strong factor in promoting
stability. Moreover, the military continues to back the
President, and, as the US Embassy reports, the
opposition still lacks any clear concept of how to deal
with this phenomenon.
For the Philippines the greatest danger, in our judg-
ment, is a private-sector financial crisis, which we
believe Manila cannot gauge precisely. Corporate
bankruptcies and new requests to the government for
financial assistance during the next year could grow
beyond Manila's financial management capacity. In
our judgment, there is ample reason to fear this
prospect, given the poor state of the government
budget and the fact that the technocrats are already
having difficulty coping with the private sector's
limited present difficulties.
Marcos's political agenda could be decisive in deter-
mining the timing and extent of actions Manila will
take to avert more serious financial problems. Marcos
will almost certainly want to avoid more unemploy-
ment, slowing growth, and accelerating inflation in
1984-when he faces the first National Assembly
elections since he dismantled martial law two years
ago. Amid recurring charges by his political oppo-
nents that he has mortgaged the Philippines' future to
multinational corporations and foreign bankers,
Marcos will also want to avoid a rescheduling of the
foreign debt through the next year. Over the longer
term, Marcos will have to deal with Asia's highest
projected labor force grox~th-3.7 percent annually in
the mid-1980s.
In Pakistan economic conditions would worsen and
public dissatisfaction mount if President Zia fails to
obtain official donor assistance of $1.3-1.4 billion
during fiscal year 1983/84 and is forced to make
painful economic adjustments. To stem discontent,
President Zia has managed to resist implementation
of the more painful IMF measures since the program
was initiated in December 1981. Recently, however,
he did raise petroleum and other prices to obtain
continued IMF support. While there is currently no
indication that Zia's disorganized political critics are
successfully exploiting economic issues to discredit the
President, a sharp decline in living standards could
affect the stability of the Zia regime with key groups,
such as the bazaar merchants, shifting their support.
Living standards will decline if foreign aid and worker
remittances from wealthy Arab oil states are cut back
and IMF austerity measures are more stringently
enforced.
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In Sudan public discontent over declining living
standards constitutes the most serious threat to Presi-
dent Nimeiri's continued rule. Most Sudanese resent
IMF austerity measures, which sharply increased
food prices last year. Additional austerity measures
under the new IMF program signed in February,
including higher land and water charges, could pro-
voke massive demonstrations. There is a further risk
that the military will not continue its support for
Nimeiri sufficiently to quell widespread protests. Mo-
rale, perhaps the key factor in the willingness of the
military to support the regime, appears now to be the
lowest it has been in recent years.
We believe the greatest source of domestic discontent
with the moderate, pro-Western regime of Morocco's
King Hassan II is the continuing economic deteriora-
tion which has accompanied recent financial difficul-
ties. Foreign exchange reserves dipped to only about
one week's worth of imports early this year despite
imposition of controls on imports and foreign currency
transactions. Outside assistance appears to be dimin-
ishing. Saudi and other Gulf state financial support
dropped by about two-thirds last year, and we believe
prospects for an increase this year are slim. Negotia-
tions are scheduled to resume in late April for a new
IMF standby loan, but the amount almost certainly
will be less than Morocco received in 1982. Food
subsidies will continue to be an obstacle to reaching
an agreement with the IMF because the government
wants to avoid civil strife similar to the food-price
riots that broke out in Casablanca in June 1981
following the imposition of IMF-mandated price in-
creases. Organized opposition to the government has
been in disarray since the King's crackdown on
opposition leaders following the Casablanca riots.
Nevertheless, key groups, particularly students, the
labor movement, and some religious fundamentalists,
are searching for issues on which to challenge Hassan.
Yugoslavia thus far has implemented the IMF-man-
dated economic program without major political re-
percussions. But, as the IMF program-price in-
creases, devaluations, interest rate hikes, and tight
monetary policy-accelerates a four-year drop in
living standards, pressures to ease belt tightening will
build. The federal government, already having trouble
establishing its authority over regional power centers
in the decentralized system, will face tougher opposi-
tion as hardships increase. The Communist Party has
no serious rival for power, and it still can rely on the
military to restore order in a pinch. However, the
party leadership itself is weakened by internal differ-
ences and distracted by ethnic nationalism, which is
once again on the rise. Declining popular morale,
eroding confidence in the federal system, and the
stringencies of a long-term stabilization struggle will
seriously threaten the post-Titoist system of govern-
The evidence to date indicates that several of the 14
countries are already running into trouble meeting the
criteria agreed to with the IMF:
? The IMF has found Chile to be in noncompliance
with its performance criteria for net domestic assets
of the Central Bank and net foreign reserves, mak-
ing Santiago ineligible for its first-quarter tranche
of $54 million.
? Embassy reporting indicates that Argentina appears
to have come close to meeting its first-quarter
performance criteria, although the IMF has yet to
respond to Argentina's recently imposed price con-
trols and interest rate subsidies that will almost
certainly cause a violation of criteria at a future
date. Moreover, the Embassy believes military im-
ports are being underestimated in official trade
accounts.
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? Brazil's $840 million trade surplus for the first 25X1
quarter represents only 14 percent of the IMF's
ambitious $6 billion target for the year. Banks'
reluctance to extend short-term trade financing,
growing speculation in financial circles that the
government may soon declare a payments moratori-
um, and increased capital flight are also adversely
affecting Brasilia's ability to meet international
reserve targets.
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Meeting the IMF conditions is critical to securing
needed funds. Disbursement of close to 30 percent of
the combined financing needs of Brazil, Mexico,
Argentina, and Yugoslavia is contingent on successful
implementation of adjustment programs. A portion of
new medium-term bank loans to these countries has
been disbursed, but almost $7 billion in quarterly
installments is tied to future IMF loan disbursements.
In Yugoslavia's case future IMF disbursements are
contingent upon completion of a bank-refinancing
package and new loans.
Even assuming all IMF and bank disbursements are
made on schedule, debt relief anticipated by the IMF
is completed, and short-term credit lines are main-
tained, we believe financing gaps still exist this year
for at least three countries:
? Press reports indicate Brazil is seeking an additional
$3 billion in short-term financing and may have to
reschedule $2.1 billion in amortization due to offi-
cial creditors this year if cash-flow problems are not
eased.
? We estimate that Argentina will also need addition-
al short-term debt relief. As an indication of this, in
March Buenos Aires suspended payments of $1.4
billion on private short-term debt maturing under
swap arrangements.
? Even with a followup standby agreement expected
later this month and $300 million in new IMF
funds, Morocco is likely to have difficulty raising
the $1.8 billion in funds it needs (table 8).
The remaining countries are operating under extreme-
ly tight cash-flow conditions with little if any reserve
cushion to smooth seasonal fluctuations in payments
positions or to meet shortfalls resulting from errone-
ous trade projections or unforeseen economic or finan-
cial shocks. In the current financial environment, for
example, it is possible that the Philippines may be
unable to raise the $1.2 billion in new medium-term
bank credit the IMF estimates they will need this
year. Although Manila raised a similar amount in
Failure to obtain this
financing will result in reduced import levels and
possibly a request for debt rescheduling. The Ivory
Coast, which we estimate needs $1.4-1.7 billion in
official funds this year, could also request a reschedul-
ing if the French Government refuses to cover financ-
ing shortfalls.
(current French
economic conditions probably mean that Paris's finan-
cial commitment cannot be open ended.
Recent requests for short-term bridge loans by Brazil,
Peru, and Chile to the US Government demonstrate
the continued shortfall in financing needs of these
troubled borrowers. Moreover, these official short-
term loans are being repaid with scheduled disburse-
ments of IMF and new medium-term bank loans. This
practice not only jeopardizes repayment of these
Western short-term facilities if IMF and bank funds
are curtailed but prevents longer term funds from
being channeled into productive investments or im-
ports that could contribute more directly to the longer
term adjustment process. This use of longer term
funds also violates a crucial IMF assumption that
short-term debt is being rolled over. To the extent that
IMF and commercial bank loans are being used to
pay off official short-term bridging loans without an
equal increase in short-term credit during the year,
debtors will create even larger financial gaps.
Additional Demands on the IMF and Banks
In addition to the 14 countries we analyzed, the IMF,
governments, and the international financial commu-
nity will likely have to manage financial packages for
one or more OPEC oil exporters. The prolonged weak
oil market and recent OPEC price cut have added
Venezuela, Nigeria, Ecuador, and possibly Indonesia
to the long list of LDCs unable to meet current
payments. Ecuador is currently negotiating an IMF
arrangement and debt relief with commercial banks.
We expect Nigeria, with $3-5 billion in arrears, and
Venezuela, with continued reserve drawdowns, to go
to the IMF later this year. Indonesia, which we expect
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Table 8
1983 Debt Service and Rescheduling of Financially Troubled LDCs
Amortization Arrears at Amount Estimated Estimated Comments
Due on Yearend Rescheduled Amortization Interest
Medium- and 1982 a Under Payments b
Long-Term Negotiation a
Debt
Mexico 7.5 10.0 23.0 1.5 11.0 Rescheduling talks have yet to begin. IM F
has set target date of May for completion
of rescheduling agreements. Mexico wants
to reschedule amortization due on 1983
and 1984 medium-term debt and $15
billion on short-term debt, including ar-
rears, for a total package of $26-27 billion.
Brazil 7.1 0 4.7 3.1 10.0 Brazil has rescheduled $4.7 billion due to
private creditors. Recent press reports indi-
cate it may seek rescheduling of official
debt maturing this year.
Argentina 6.5 7.0 15.7 0.5 4.4 Government assumed a large share of
private-sector debt last December and is
seeking to reschedule all debt maturities
and arrears due to commercial banks this
year. In March Argentina stopped pay-
ments on short-term private debt owed to
foreign creditors.
Yugoslavia 2.5
Chile 1.7
Philippines 1.3
0.5 1 . 9 1 . 1 1 . 8 As condition to obtaining 1983 I M P dis-
bursement, Yugoslavia rescheduled princi-
pal due this year to banks and government.
0 1.7 NEGL 2.3 Talks in progress. Chile seeking reschedul-
ing of $3.5 billion in principal due in 1983
and 1984.
0.1 0 1.3 1.9 Rescheduling possible later this year if
Philippines has difficulty raising $1 2-1.5
billion in new commercial bank loans this
year.
Peru 1.1 0 3.1 1.2 1.0 In March Peru stopped payments on short-
term trade credits and working capital
loans to force a partial rescheduling of
short-term debt repayments due in 1983
and a refinancing of medium-term loans.
Pakistan 0.5 0 0 0.5 0.6 Likely to ask official creditors for resched-
uling if $200-300 million in new bank loans
is not raised in second-half 1983.
Morocco 0.9 NEGL 0 0.9 1.0 Rescheduling possible if Morocco fails to
raise $1.8 billion from official and private
sources this year.
Romania 1.3 0.4 0.8 0.9 1.0 Rescheduled 70 percent of 1983 principal
owed to banks.
Sudan 0.5 2.2 2.7 0.1 0.3 Paris Club official creditors have resched-
uled $500 million in arrears and principal
due in 1983. Sudan currently seeking $1.2
billion in rescheduling from privatc credi-
tors and $ I billion from Arab governments.
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Table 8
1983 Debt Service and Rescheduling of Financially Troubled LDCs (continued)
Amortization Arrears at
Due on Yearend
Medium- and 1982-
Long-Term
Debt
Amount Estimated Estimated Comments
Rescheduled Amortization Interest
Under Payments b
Negotiation a
0.7 Ivory Coast depends on French Treasury to
meet financing shortfalls. Debt servicing
could become a problem for Ivory Coast if
French were to cut back large aid flows.
NEGL 0.2 Costa Rica obtained $400 million in debt
relief on interest and principal from Paris
Club creditors in January. Currently seek-
ing $1.1 billion in relief from commercial
banks.
NEGL NA Seeking rescheduling of public-sector debt
1983 and arrears. Ecuador will need to
reschedule $1.7 billion in private-sector
debt.
a Includes short-term debt and interest arrears in the cases of Sudan,
Costa Rica, and Ecuador.
b Total interest due on all debt maturities.
4.5 On 22 March, Caracas declared 90-day
moratorium of principal payments on pub-
lic debt seeking to reschedule $13 billion,
most of which is short-term obligations.
Refinancing of private-sector debt possible
later this year.
will run a $9-11 billion current account deficit this
year, will be hard pressed to meet debt obligations and
has held preliminary talks with IMF officials on
potential borrowing arrangements
In addition to reduced oil earnings, Venezuela has
been hurt by soaring capital flight triggered by
declining private-sector confidence in President
Herrera's economic policies and by reduced commer-
cial bank credit. Capital flight depleted $5 billion in
reserves last year, according to Central Bank data,
and another $2 billion were used to pay maturing
short-term debt that Caracas was unable to refinance
in commercial markets. Reduced short-term credit
lines and continued reserve drawdowns led Caracas to
suspend principal repayments on commercial debt in
March and request a rescheduling of all public debt
maturing in 1983, about $13 billion. Debt relief
negotiations are likely to drag on because of the
absence of a realistic economic and financial program
for the longer term and bankers' desire for Venezuela
to negotiate an IMF agreement first. In our judg-
ment, an IMF agreement-which would entail mas-
sive cuts in public spending, reduced consumer price
subsidies, smaller wage increases, and devaluation-
presents insurmountable political difficulties for the
incumbent party in the face of presidential elections
to be held this December. We expect IMF negotia-
tions will also be difficult, given the current review
team's dissatisfaction with Caracas's economic poli-
cies to date and particularly its current exchange
control system. An IMF agreement could offer a
maximum of $4.5 billion over three years, according
to Embassy reporting.
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We believe Venezuela's worsening economic problems
will almost assure a presidential victory-of perhaps
landslide proportions-by the opposition Democratic
Action Party in December. Economic difficulties are
placing unaccustomed stress on the political system
and heightening local concerns over the resiliency of
the country's democratic institutions. The sectors of
society that have benefited most from the oil drive
prosperity-the middle class, organized labor, the
military, and businessmen-are also Venezuela's most
politically powerful groups. The demands that each
will be pressing upon the government in a time of
austerity are likely to conflict with those of other
groups as well as with what the government will see as
the national interest. Nevertheless, we believe Vene-
zuelans by and large still overwhelmingly prefer their
present system of strong democratic institutions, de-
spite its shortcomings, to alternatives represented by
either domestic radical groups or foreign systems.
Any further weak-
ening in Jakarta's external accounts, or even a failure
to show signs of improvement, could intensify bank-
ers' fears and sharply reduce the availability of funds.
This, in turn, would force Jakarta to turn to the IMF
and deal with additional politically difficult spending
cutbacks.
The sharp deterioration in current account prospects
from the OPEC oil price cut has forced the Soeharto
government to devalue the rupiah by 28 percent and
to reevaluate its development strategy and the need
for additional austerity measures.
Soeharto may yet have to make politically unpalat-
able decisions to put off some projects in order to
avert a financial crisis. In our view he would find IMF
conditions a useful scapegoat on the domestic political
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A precipitous decline in oil prices, which would force
sharp cuts in imports and economic growth, could
produce political change. The military would be the
most likely to seize power, given its anger over
widespread corruption, political interference in the
allocation of scarce defense dollars, and fear that the
left would benefit from the political and economic
chaos. The military probably would find considerable
support for its action among businessmen and con-
servative politicians, who would see such an alliance
as more profitable than acting on their own.
Ecuador started negotiations with its creditor banks
late last year and has tentative agreements to refi-
nance $5.6 billion of public debt contingent upon the
outcome of continuing IMF negotiations. President
Hurtado recently devalued the sucre 27 percent, one
of the measures necessary to break the deadlock in the
negotiations. Other sticking points include wage lev-
els, the fiscal deficit, and interest rate increases.
Although Hurtado wants to implement the needed
austerity measures, popular opposition is constraining
his ability to act.
Indonesia encountered difficul-
ty in marketing a $1 billion syndicated loan in March
scene for such moves.
The Indonesian Government is carefully monitoring
the political opposition and potentially disruptive
groups such as unemployed youth, students, labor,
and Muslims. Although opposition to the regime has
been muted, there seems little doubt that disaffection
is growing. Indeed, some observers see growing disaf-
fection even among Soeharto's loyalists in the bureau-
cracy because of the government wage freeze and an
increase in corruption to compensate for the loss in
real income caused by the freeze. The possibility of
anti-Chinese riots sparked by some minor incident is
always present, and the current economic situation
increases the danger that such riots could quickly
develop an anti-Soeharto or antigovernment charac-
ter.
We estimate Nigeria is likely to face a $4 billion
current account deficit even with a planned
30-percent cut in real imports. In March Lagos
announced plans to raise a $2 billion loan in order to
reduce a backlog of $3 billion in short-term debt. 25X1
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place. However, the IMF is politically unpopular in
Nigeria and President Shagari is unlikely to agree to
IMF conditions prior to the August presidential elec-
tions. Once the elections are over, the government
probably will seek IMF help, but effective implemen-
tation of austerity measures is uncertain given the
country's extensive corruption and bureaucratic inef-
ficiency. Lagos will continue to press Saudi Arabia
and other wealthy OPEC governments for aid and has
also approached Washington.
Acceptance of a strict IMF package could provoke
unrest by students, labor, and the growing pool of
urban unemployed. Eroding public support for the
government coupled with widespread, violent protest
could, in our judgment, lead to a military coup. A
coup by the predominantly Western-oriented senior or
middle-level officer corps probably would not funda-
mentally alter Nigerian-US relations. The regime
might attempt to build domestic support by increasing
anti-US rhetoric over Namibia, but economic realities
will preclude more serious steps. Although the struc-
ture and complexity of the Nigerian military makes
an enlisted men's coup less likely than in smaller
African countries, a government dominated by popu-
list-oriented lower ranks would prove far more diffi-
cult to deal with and could pursue unorthodox and ill-
advised economic and foreign policies.
The next six months should offer the test of how well
the IMF programs are being carried out and how the
Fund and the banks react to the results. Most coun-
tries faced their first quarterly evaluations at the end
of March, although much of the pertinent data will
probably not be available until at least the end of
April with disbursements to be made in May. We
expect performance criteria to be missed by midyear,
although the Fund will probably allow a fair amount
of flexibility in judging adherence to performance
criteria if it perceives the thrust of government efforts
as positive. We do not know how the IMF and the
commercial banks will respond if criteria are missed
by wide margins. One possibility is that disbursement
of Fund and bank money will be halted; in this case
new large bridging loans will be needed to avoid
default until new agreements and targets can be
negotiated. In our judgment, banks will follow the
Fund's lead in determining whether disbursements
should be interrupted.
If additional funds are not available, troubled debtors
will have to turn inward and intensify their efforts to
adjust as best they can to a lack of foreign exchange.
In the near term, growth and unemployment would
probably deteriorate further and public-sector deficits
mushroom as governments try to maintain living
standards by avoiding sharp cutbacks in public spend-
ing. Without the ability to finance imports, troubled
debtors would need to impose even more austere
import restrictions, undermining the gradual liberal-
ization of international trade that has been a longer
run feature of rescue programs so far. Such moves
would slow the recovery of the United States and
other industrial nations by reducing export markets.
Under these conditions, we believe that Washington
probably will be caught in the middle. Debtors would
almost certainly turn to the United States for direct
assistance, help in renegotiating loans with banks and
the IMF, and new efforts to reschedule official cred-
its. They will also look to increase exports to the
United States. Creditors probably will seek greater
official assistance in sharing the burden of meeting
debtors' new money requests and will lobby for more
expansionary policies in the industrial countries.
Countries with reduced access to IMF and bank
credit will have little choice but to move unilaterally
to relieve financial strains. The pattern is already set:
? Chile suspended debt repayments in early January
after bankers cut credit.
? In early March Argentina announced a postpone-
ment in meeting some short-term debt repayments,
while Peru declared an extension of maturing short-
term credits.
? Uruguay recently announced a 90-day delay in
principal payments as a prelude to formal debt
rescheduling.
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? Brazil is now running commercial arrears because
bankers remain reluctant to provide new short-term
trade financing.
It is highly uncertain how the international debt
problem will evolve over the next three to four years.
Except for Argentina, the major debtors face increas-
ing debt service payments through 1987. IMF adjust-
ment programs are counting on strong export earnings
coupled with severe demand management policies to
attain viable payments positions. Mexican exports, for
example, are projected to grow 12 percent annually in
1983-85, while private-sector consumption is project-
ed to decline steadily to 52 percent of GDP in 1985,
9 percent lower than in 1977-79. In Brazil, exports are
to grow 13 percent a year, with total consumption
declining steadily from 81 percent of GDP in 1982 to
77 percent in 1985. The IMF further anticipates
Mexican and Brazilian average annual real GDP
growth of 2.5 to 3.0 percent in the period 1983-85,
which offsets the expected annual rate of population
increase.
Such large increases in LDC exports may not be
possible for several reasons:
? The Western recovery may not be rapid or
sustained.
? Major oil exporters, such as Mexico and Venezuela,
will face continued soft oil markets.
? There will be political pressure in the industrial
countries to restrict a rapid expansion of imports
from the LDCs.
In our opinion, political resistance to austerity in
debtor countries will build over time and become
better organized. We believe strong political opposi-
tion will develop if the adjustment process is perceived
as unfair or too harsh. Although at this time, we do
not foresee a full-scale revolution or an outright
repudiation of debt in the major debtor countries,
there are substantial risks:
? In Mexico, a sufficient weakening of the broad 25X1
political consensus behind the ruling party could
threaten serious disorder and a polarization between
left and right.
? Without additional credit from Western banks this
year, Brazil is likely to declare a moratorium on all
debt repayments, including interest.
? In Argentina, there is a prospect that the civilian
regime coming to power later this year will demand
a drastic renegotiation of IMF and bank
agreements.
? There could be repeated debt reschedulings in a
number of countries that could, as in Poland, result
in only partial payment of interest obligations.
In the current environment, there is always the risk of
an isolated default or bank failure that might dramat-
ically shrink the market for international loans and
provoke a chain of further defaults. At best, the
international financial system will remain taut until
recovery in the West is well under way and the
banking community becomes convinced that LDC
export prospects and ability to handle debt are im-
proving.
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