RESCHEDULING OF SOVEREIGN DEBT:
THE EXPERIENCE OF TANZANIA AT THE PARIS CLUB
Contribution by Dr. Chris Maina
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
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"),
(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
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$
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.
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
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.
above author profile was written in February 1992)