RESCHEDULING OF SOVEREIGN DEBT:
THE EXPERIENCE OF TANZANIA AT THE PARIS CLUB
Contribution by Dr. Chris Maina Peter*
(Article Reference: Document No.1, Chapter 2, February 1992)

This paper describes the circumstances in which developing countries find themselves constrained to renegotiate their debts owing to foreign creditors and, in the light of Tanzania's experience, discusses the procedure followed in such cases.

Debt rescheduling negotiations have become a common phenomenon because many developing countries, precisely on account of the weakness of their economies, are almost chronically on the verge of defaulting on their external commitments. In the case of debts owing to official creditors, these negotiations are usually carried on in the context of the "Paris Club". Negotiations concerning debts owing to commercial creditors tend to be conducted in the "London Club".

The "Paris Club" is a convenient term for describing a loose (and obviously variable) grouping of creditors whose representatives meet in an informal setting with representatives of countries that are experiencing difficulties in servicing their debt. In consequence of the intensifying debt crisis, as many as 29 countries resorted to Paris Club procedures between 1978 and 1984 for the purpose of negotiating 56 debt rescheduling agreements covering about US$ 27 billion of debt service obligations. While there is no fixed membership of the Paris Club, the participants usually include the members of the Organization for Economic Cooperation and Development (OECD), the European Community (EC), the International Monetary Fund (IMF), the World Bank, the UN Conference on Trade and Development (UNCTAD) and, of course, the debtor country.

Before a debtor country can initiate a rescheduling process in the context of the Paris Club it must produce evidence showing that, in the absence of relief, it will default on its external payments. In addition, creditors are not usually prepared to enter into debt rescheduling negotiations with a debtor country unless that country has agreed to apply an adjustment programme conforming to terms prescribed by the IMF - the so-called "conditionality". The reasoning of the creditors in insisting on the condition is that by carrying out reforms on the lines supported by the IMF the debtor country's economy may recover sufficiently in the time allowed by the postponement (i.e. rescheduling) of payments on the debt to be able to resume the service of the debt. Almost inevitably, the requisite adjustment programme involves the application of austerity policies, retrenchment of social services and other restrictions that hit the population hard and are not without political risk.

In the Tanzanian experience, the proceedings can be unpleasant and humiliating for the debtor country. However, they have the advantage of being expeditious and relatively cheap. After the representative of the debtor country (usually the Minister of Finance) has presented its case for rescheduling and after observers for the interested international organizations (IMF, World Bank, UNCTAD, EC) have made comments, the creditors ask the debtor country's representative certain questions. The creditors then gather in a meeting, or caucus, of their own to which the IMF representative is customarily invited. During their private deliberations the creditors work out a "package" which is offered to the debtor country. At this point some arduous and critical bargaining may ensue between the two sides. When agreement is eventually reached the terms are set down in an "Agreed Minute" which records the decision of the meeting and essential particulars (the parties in attendance, the size of the debt, the proposition rescheduled, interest rate, the terms of an arrangement with the IMF, etc.). The terms of the "Agreed Minute" are given legal effect as between the debtor country and individual creditor countries by the conclusion of bilateral agreements in the form either of treaties or of an exchange of letters.

At the 1988 summit in Toronto, the industrialized countries proposed a number of options in the case of debts owed by African developing countries to official bilateral creditors. Recognizing that, despite repeated reschedulings, the actual service of the debts was seriously in arrears, the industrial countries agreed that some relief could be offered by bilateral creditors to African debtor countries through three options (the "Toronto terms"), viz:

(a) to write-off or forgive one-third of the debt due by a borrower with the balance outstanding being repaid over 14 years with an 8 year grace period and at market rates;

(b) a rescheduling of all outstanding debt over a 14 year repayment period with an 8 year grace period and the applicable market rate of interest being reduced by the lesser of 3.5 percent or 50 percent;

(c) a rescheduling of all outstanding amounts due over 25 years with a 14 year grace period and with interest payable at market rates.

This formula was applied for the first time at the Paris Club rescheduling in the same year, 1988. This was in respect of rescheduling negotiations by Mali, Central African Republic, Madagascar, Niger and Tanzania. The Toronto terms were also applied in agreements signed by Senegal and Uganda in 1989.

The defect of the Paris Club is that its rules are made by one side only (the creditors) which the debtors have no choice but to accept, owing to their weak position. Furthermore, in any rescheduling negotiation the debtor country is alone and faces a veritable cartel of creditors.

As regards debts owed to banks and other commercial lending institutions, by developing countries and unpaid when due, rescheduling negotiations take place in the so?called "London Club". These negotiations are governed by conditions analogous to those applicable in the Paris Club (e.g. an arrangement with the IMF) but are far more complex because of the large number of creditors (530 banks were involved in the rescheduling of Mexican debt). At the end of the negotiations, if agreement is reached, all the parties sign a model restructuring agreement which, in turn, forms the basis of a separate agreement to be entered into between each creditor bank and the debtor or government.

The vicissitudes of Tanzania's experience are worth describing in its dealings with the IMF and the Paris Club when the country was having difficulty with servicing its debt. Relations with the IMF were strained. In the late 1970s the conditions stipulated by the IMF for the purpose of granting financial relief to the country were considered unacceptable by the government. In 1989 Tanzania succeeded in negotiating a stand?by credit with the IMF and made its first drawing on that credit. This was also the last drawing, for the IMF claimed that Tanzania was not fulfilling the conditions to which the credit was subject. Fresh negotiations between the two sides were beset with acrimony and it was not until August 1986 that an agreement was reached with the IMF which enabled Tanzania to request rescheduling of its debts in the context of the Paris Club. In the course of the first round of negotiations, in September 1986, agreement was reached on the rescheduling of about US$ 637 million of Tanzania's external obligations to official creditors, on specific terms. As the country's economic situation did not improve, its debt burden grew more onerous, its balance of payments worsened and the relief given at the Paris Club's negotiations fell short of the country's needs. There were multiple defaults on many of the provisions of the agreements made with its creditors. Accordingly, a further round of negotiations took place with creditors in Paris in December 1988, after the IMF had approved the disbursement of SDR 32 million to Tanzania (later in the same month the World Bank approved a credit of US$ 135 million in support of the country's recovery programme). As a result of the negotiations, and by selective application of a maximum of the "Toronto terms", the rescheduling of about US$ 280 million of Tanzania's debts to official creditors took place.

In 1990 Tanzania again requested relief of its external payments obligations, on account of its critical balance of payments situation. After protracted negotiation in the Paris Club, the official creditors agreed selectively to reschedule Tanzania's debts in accordance with the Toronto set of options. The terms of the agreement were expressed in the "Agreed Minute" drawn up at the end of the negotiations.

It was estimated that, when all the bilateral agreements had been signed, the debt relief during the calendar year 1990 would be approximately US$ 270 million.

To implement the 1990 "Agreed Minute", the Government of Tanzania was inter alia required to continue maintaining the Special Account with the Bank of England in which it was required to deposit SDR 1.2 million at the end of each month from April to December 1990. It was also required to seek comparable debt relief from non-Paris Club governments, commercial banks and suppliers. In addition, the government was to effect 80 percent of interest payments due as a result of the 1988 rescheduling before May 1990. This amounts to SDR 12.4 million.

Conclusion

1. The Paris Club proceedings are a humiliation which should be avoided at all costs.

2. The process does not in any way assist the debtor countries. It provides temporary relief but does not solve the problem.

3. The rescheduling actually amounts to postponement of the debts to the future, which in reality amounts to shifting the present generation's sins to the future generations without their consent.

4. In addition, the so-called Toronto terms, through which the creditors agree to cancel the debts in future, tie the debtor countries and curtail their freedom.

5. To avoid embarrassments in future, governments of developing countries should be more careful in negotiating and contracting debts.

6. Being heavily indebted, the developing countries should hold together against the united creditor cartels like the Paris Club. There should be more unity among the debtor countries.

* Dr. Chris Peter (Tanzania) - From 1986 to the present, Dr. Peter has been a Senior Lecturer in Law at the University of Dar es Salaam. From 1980 to 1981, State Attorney at the Ministry of Justice. From 1983 to 1986, Assistant Lecturer in Law. Born in 1954, Dr. Peter obtained a Ph.D from the University of Konstanz in Germany. Dr. Peter is the author of several books.
(The above author profile was written in February 1992)