World Bank Document

time being allowed to approach the market. The economic policies. Less control is needed the more
Korean government includes Korean commercial that prices, interest, and exchange rates are
banks (the main private borrowers) in this system, aligned with world market levels; if they are not, a
so as to avoid competing for loans. And Portugal is country runs the risks of large capital inflows or
one example of a country in which the central bank outflows, probably regardless of controls.
can refuse to authorize borrowing if the spread * Where governments have actively encouraged
over the London interbank offered rate (LIBOIR) or private borrowing, the encouragement has almost
the U.S. prime rate is above a specified level.
always been in the context of policies (such as an
Second, countries must establish a good name overvalued exchange rate or an excessive governfor
themselves. Reputation depends partly on eco- ment deficit) that are unsustainable over the long
nomic performance and a willingness to change run. The resulting borrowings have delayed
policies. Indonesia, for example, can borrow at needed policy reforms and have contributed to the
lower cost than most countries at similar income magnitude of future debt-servicing difficulties.
levels because, in times of difficulty during the * Where the costs and risks of foreign borrowpast
decade, its government has consistently ing to the nation as a whole exceed those to the
shown a willingness to cut spending, raise reve- private borrowers-where a government may have
nues, or devalue the currency. to take over private debts, for example-there is a
It is also important for lenders to get to know good case for a modest tax on private foreign borborrowers.
International capital markets are seg- rowing.
mented, so a welcome in one does not guarantee a
welcome elsewhere. In the late 1970s, Mexico
could borrow in the syndicated loan market at
spreads as low as Sweden's, but it failed to borrow Debt servicing in future years is largely deterfrom
the dollar bond market, because it was not mined by the composition of external borrowing.
familiar there. Bond investors-usually individuals The total volume of borrowing that can be underand
nonbank financial institutions-may have per- taken from one year to the next is not independent
ceptions of a country's creditworthiness quite dif- of the source and terms on which it is undertaken.
ferent from those of commercial bankers. Coun- Among the issues on which decisions need to be
tries can gradually gain access to markets by made are (a) the appropriate balance between debt
borrowing on a small scale when money is not and equity capital flows, (b) the relative roles of
urgently needed.
official and commercial sources of funds, (c) the
Although this discussion relates primarily to bor- proportion of debt at floating rates and fixed rates,
rowing from commercial markets, it is also neces- (d) the appropriate maturity structure of the debt,
sary for policymakers to make strategic decisions and (e) the appropriate currency composition of
concerning borrowing from official sources. Coun- borrowing. Of course, these are not totally selftries
can often borrow more nonconcessional offi- contained issues, nor may a borrowing country
cial money if they want to. But building up a pipe- have adequate options. If the desired composition
line of good projects takes time. Bilateral and of capital inflows is not possible, it may be necesmultilateral
agencies usually operate within the sary to cut back on the level.
framework of rolling three- or five-year lending The appropriate structure of foreign liabilities
programs. It is generally not possible to increase differs among countries and varies over time. It
lending quickly. Debt managers must therefore depends on external conditions (such as the outfocus
on foreign exchange needs over the medium look and uncertainty concerning interest rates,
term, as well as for the current year.
exchange rates, and access to international markets)
and internal conditions (such as the growth
Lessons from recent experience
of domestic savings and exports and the capacity
to adjust rapidly in a time of crisis). The more flexi-
The following conclusions emerge from the experi- ble are policies and the more diversified is an econence
of the past few years:
omy's structure, the more risk the country is able
* Close control of government borrowing and to bear.
careful coordination and monitoring of all borrow- Debt managers have two primary tasks. First,
ing by public enterprises are essential.
they must continually assess the extent to which
* Whether it is desirable or necessary to control the structure of existing net liabilities is optimal
private borrowing depends on a government's within the constraints of the financial instruments
76