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**Policy, Research, and External Affairs**

# **Debt and International Finance**

# WPS 720

This paper- a product of thC Dcbt and International Finance Division, Intcrnational Economics Departnient --<sup>w as</sup> prepared for the Symposium on African External Finance in thc 1990s, **hield** September 18-19, 1990, at the<sup>World</sup> Bank. Copies arc available frce from the World Bank, 1818 H Street NW, Washington, DC 20433. Please conlact Sheilah King-Watson, room S8-040, extension 31047 (46 pages, with tables).

Since its peak in 1980-82, medium and long-term commercial bank lending to Sub-Saharan Africa has becn de.lihning -- partly becausc of many banks' perception that lending to the African market represents high risks unjustified by the available returns.

The prospects for an appreciable increase in such lending are not promising. Despite some progress under economic a(ljustlnenl programs, banks are skeptical about Sub-Saharan African govenmcnits' ability and willingness to continuc with reform. Many of those countries have been unable to cstablish creditworthincss and the ability to service commieircial debt - and are saddled with (lebts to multilateral agencies. And in a time of tight regulation, most banks have ample opportunities in other parts of the world.

On the positive side, the portfolio clean-up that has occupied commercial banks' resources for threce years should be nearing a close, making it possible for them to begin considering a rcsumption of lending to qualified borrowers under specified conditions.

Siricaf and Nyirjesy examine kcy issues in the luturc of long-term commercial bank lending in Africa, identify constraintis on and opportunities for increased commercial bank lending (as perceived by some commercial U.S., European, and Japanese bankers), and suggest special initiatives lor removing constraints on and stimnulating lending to these SubSaharan African markets. Among poinits they make:

- Private invesimcnt and linancing will not improve in the region without a satisfactory enabling environment, including an appropriate policy framework, tho protection of rights and properties, and - wider political participation and consensus con(litions thal lead to political stability and engender confidence among private decisionmakers.

**o** Scvcral steps can be taken to acceleratc debt reduction through conversion mechanisms. Special funds could be created for the investment of-debt, for example.

- Given the small share of African debt in most banks' portfolios and the conservative posture of those banks, a strong case can be made to the regulatory authorities to climinate mandatory provisioning regulations as quickly as possible.

***** Therc is scope tor rethinking the way risk is allocated in facilities cofinanced by commercial banks and official agencics.

- More open attitudes toward Lhe commnitmcnt of export cash flows appear to be important in accelerating resumcd lcnding, until a country has adopted an opcn foreign exchange regimc or has achieved full convertibility. Concerns about possible distortions could best be mitigated by setting a limit on the amount of funds that can bc so committed by a given country or borrower, and by improved appraisal of the underlying projects.

***** Commercial banks are at a disadvantage in analyzing or projecting a developing country's creditworthincss and fear of the unknown can be particularly acute in Sub-Saharan Africa. The indepth economic analyscs of the IMF and **the** World Bank are the closest the international community has come to establishing an "independent audit function." These are not available to the public unless the member government authorizes their releasc. Thcse authorizations should be routinely granted - at least for basic, accurate, qualitative, and quantitativc macrocconomic infomiation.

Thic lRE Working lPaper Series (isseminales thc findings of work under way in thc Bank's l'olicy. Res,earch, and Extemral AffifirsComplex. An objeclive ofthc scrics is to get thcsc findings out quickly, even ifpresentutions arc Iess than fully polished. Thc findings, intcrprctations, and conclusions in thesc papcrs do not neccssarilv represent<sup>official Baunk policy.</sup> Produced by the PRE Dissemination Ccnter