Return to: Index of "Economic and Business Issues" || Electronic Research Collections Index || ERC Homepage

U.S. Department of State
95/06/06 Fact Sheet: Developing Country Debt
Bureau of Public Affairs



Fact Sheet: Developing Country Debt

Background

The ability of many developing countries to pay their foreign debt 
deteriorated in the 1980s, leading to a debt crisis. As a result of 
actions by creditor countries and continued support by international 
financial institutions, the situation clearly has improved. By providing 
financial support for countries undertaking macroeconomic adjustment, 
and through an improvement in commercial bank relations with major 
debtor countries, the risk to the international financial community has 
been greatly reduced. 

The U.S. has encouraged debtors to undertake economic reforms and 
persuaded banks, governments, and international financial institutions 
to support such efforts. In 1985, the U.S. introduced an international 
debt strategy designed to improve and sustain growth in debtor 
countries. Since 1990, it has complemented this strategy with efforts to 
reduce bilateral official debt--both alone and in concert with other 
governments, most notably through debt reductions in the Paris Club.

Origins of the Crisis

Several factors contributed to the debt crisis of the early 1980s. 
Inappropriate domestic policies in many debtor countries resulted in 
large budget deficits and overvalued exchange rates. Many countries used 
substantial borrowing to maintain these policies, financing consumption 
and inefficient investment rather than investing in needed 
infrastructure or productive enterprises. Many of the same countries 
relied on short-term, variable rate loans that made them vulnerable to 
rising interest rates. External shocks, such as the 1979 oil price jump, 
a sharp increase in international interest rates, a large drop in 
commodity prices, and recession in the developed countries compounded 
the repayment strain on heavily burdened countries. Finally, commercial 
banks overestimated the ability of these economies to generate the 
necessary foreign exchange to repay their large commercial debts.

The Initial Response

Beginning with the Mexican crisis of August 1982, the U.S. was a leader 
in responding to the developing country debt problem of the 1980s. In 
1985, to restart growth in the debtor countries, the U.S. proposed an 
international debt strategy which encouraged International Monetary Fund 
(IMF), World Bank, and commercial bank lending to support economic 
reform. In 1989, the plan was strengthened by incorporating voluntary 
commercial bank debt and debt service reduction to support economic 
reform.

Dramatic progress has been made under the strengthened international 
debt strategy. Twenty-one countries (Argentina, Bolivia, Brazil, 
Bulgaria, Chile, Costa Rica, Dominican Republic, Ecuador, Guyana, 
Jordan, Mexico, Niger, Nigeria, the Philippines, Poland, Sao Tome and 
Principe, Uganda, Uruguay, Venezuela, and Zambia) have reached 
agreements which feature debt reduction options. These countries 
represent the great majority of the total commercial bank debt of the 
major debtor nations. Similar negotiations are at various stages with 
Congo, Cote d'Ivoire, Gabon, Honduras, Nicaragua, and Panama. Some 
countries, such as Argentina, Chile, and Mexico, have made significant 
progress toward attracting private foreign capital, as evidenced by 
their ability to maintain access to international capital markets 
despite the uncertainty created by Mexico's liquidity crisis early in 
1995.

Multilateral Debt Relief

With the success of the strengthened international debt strategy in 
gaining voluntary, market-based reduction of commercial debt, focus has 
shifted somewhat from commercial to official bilateral (government-to-
government) debt within the Paris Club, an informal group of official 
creditors. Creditor governments have supported country reform efforts by 
rescheduling payments--both interest and principal--due on official 
bilateral debt. Such re-schedulings are provided to countries receiving 
IMF support of their comprehensive economic reform programs.

In the fall of 1988, the Paris Club implemented the Toronto economic 
summit mandate to provide debt relief to heavily indebted, low-income 
Sub-Saharan African countries. "Toronto terms" offered three options for 
providing debt relief: debt reduction, concessional interest rates, or 
extended maturities. In 1990, these terms were extended to the poorest 
and most heavily indebted countries in other regions on a case-by-case 
basis.

In addition, in response to the 1990 Houston economic summit mandate, 
the Paris Club devised more generous terms for lower middle income 
countries (LMICs)--those not poor enough to qualify for enhanced Toronto 
terms but still heavily indebted. Congo, Dominican Republic, El 
Salvador, Honduras, Jamaica, Jordan, Morocco, Nigeria, Peru, and the 
Philippines have received reschedulings on these LMIC or "Houston 
terms," which extend the repayment periods but do not provide debt 
reduction.

In December 1991, the Paris Club implemented the London economic summit 
mandate to provide even more generous terms to the poorest of the poor 
countries. Stimulated by a proposal by U.K. Prime Minister John Major in 
Trinidad, these "enhanced Toronto terms" introduced options under which 
creditors reduce debt service by up to 50% on a net present value basis. 
Since December 1991, Benin, Bolivia, Burkina Faso, Cameroon, Central 
African Republic, Cote d'Ivoire, Ethiopia, Guinea, Guyana, Honduras, 
Mali, Mauritania, Mozambique, Nicaragua, Niger, Senegal, Sierra Leone, 
Tanzania, Togo, Uganda, Vietnam, and Zambia have received reschedulings 
under enhanced Toronto terms. 

In December 1994, the Paris Club took another critical step to support 
reform efforts and improve the prospects for economic growth and better 
living standards in the poorest countries by agreeing to terms for 
further reduction of the debt of the poorest countries. The new terms, 
known as the "Naples Terms" because they were recommended at the 1994   
G-7 Economic Summit in Naples, provide, on a case-by-case basis, two-
thirds debt service reduction for the poorest countries. More 
significantly, the Paris Club creditors also agreed for the first time 
to provide for reduction of the stock of debt for countries with a 
sustained record of economic reform (rather than just for payments 
coming due in a specific period). The countries that have so far 
benefited from Naples terms include Bolivia, Cambodia, Chad, Equatorial 
Guinea, Guinea, Guinea-Bissau, Haiti, Nicaragua, Senegal, Togo, and 
Uganda.

Bilateral Debt Relief

In June 1994, in recognition of steps Jordan had taken toward peace with 
Israel, President Clinton pledged to seek congressional authorization 
and funding to forgive all of Jordan's approximately $700 million in 
debts to the United States. In September, Congress authorized 
cancellation of Jordan's debts and appropriated funds sufficient to 
forgive $220 million of the total debt. The Administration is working 
with Congress to obtain funding for the forgiveness of the remaining 
$480 million. The Administration also has urged the G-7 to join the 
United States in addressing Jordan's financial needs in view of the 
courageous steps Jordan has taken for peace.

In April 1991, the Paris Club agreed to special debt relief for Poland, 
providing 50% phased-in debt reduction on a net present value basis in 
support of multi-year economic restructuring agreements with the IMF. 
The U.S., citing the need to provide extraordinary assistance to Poland 
in its transition from a centrally planned to a free market economy, 
approved a 70% reduction in May 1991. 

At the end of 1990, the U.S., in recognition of Egypt's supportive role 
during the Gulf crisis, canceled Egypt's $6.7-billion military debt. In 
May 1991, Egypt's Paris Club creditors followed this action with a 
phased-in 50% debt reduction, available within the context of IMF-
supported economic reform programs.

In 1989 and 1990, the U.S. Congress provided authority to forgive, 
first, U.S. Agency for International Development economic assistance 
and, later, PL-480 loans to Sub-Saharan Africa and other least developed 
countries that are undertaking economic reform. More than $2.7 billion 
owed by 27 African, Latin American, and South Asian countries has been 
forgiven under these authorities since FY 1990. The U.S. also has 
reduced the non-military debt of seven Latin American nations under the 
framework of the Enterprise for the Americas Initiative, an integrated 
program to increase trade, promote capital flows, ease debt burdens, and 
protect the environment.

Conclusion

The decade of the 1990s is seeing a new focus on the debt problems of 
the poorest countries, as private capital flows increasingly replace 
official financing for the more creditworthy developing countries. In 
particular, increasing attention is being given to debt owed to 
multilateral lending institutions by some of the world's poorest, most 
heavily indebted countries. Mexico's liquidity crisis in early 1995 
highlighted the increasing integration of global capital markets and the 
potential for such crises to spread rapidly.  As a consequence of this 
crisis and the lessons learned in organizing an international financial 
package for Mexico, greater attention is being given to the need for 
transparency and international cooperation in surveilling and regulating 
international capital markets. 

June 6, 1995
To the top of this page