21

# funds in off-shore banks.

This subsection will focus only on the relative size of credit from external and internal sources during the 1990s, and use World Bank data. Specifically, it will focus on the ratio of domestic bank credit (net credit to government, credit to non-financial public enterprise, and credit to the private sector) to external debt from private sources (short term external debt, external debt to banks and other financial institutions, and bonds). Henceforth, this external debt will be called private external debt. The use of the word <u>private</u> in this context is to distinguish this debt from bilateral and multilateral debt. Thus, this use of the word private refers to the source of credit, not the type of borrower. The subsection also compares private external credit to the private sector—“private-to private” credits. It will not discuss competition for deposits due to lack of data.<sup>48</sup> Comparing the size of external and internal sources of credit is complicated by the need to use an exchange rate. When a sharp devaluation occurs, the stock of external credit (measured in local currency) immediately rises sharply relative to both GDP and domestic bank credit (in local currency). However, this simply indicates that external credit has become more burdensome, not that more external credit in foreign currency has been extended. Then, as the adjustment process continues, domestic credit tends to rise and the ratio of external debt (in local currency) to domestic credit tends to decline. For example, the sharp devaluations in East Asia in 1997 and 1998 immediately raised the ratios of external debt to GDP and to domestic credit sharply, even though external debt, measured in dollars, actually fell in 1998.<sup>49</sup> Sharp devaluations near the end of a year create a particular problem for comparisons with domestic credit by raising the domestic currency value of external debt sharply.<sup>50</sup> Total private external debt grew fairly rapidly from 1990 to 2000, nearly 8 percent per year in dollar terms in the sample countries, as shown in Table 4.<sup>51</sup> However, two

> 48 Two data sources exist on external funding of developing countries, (1) the World Bank’s _Global Development Finance_ on developing countries’ public and private sector debts reported by the debtors and (2) the Bank of International Settlements’ data on OECD banks’ off-shore assets and liabilities reported by OECD banks.  The World Bank data set seems to have greater coverage, probably because it includes loans of non-OECD banks and bond issues not held by OECD banks.  It shows a much faster rise in developing countries off-shore borrowings than the BIS data.  Only BIS provides data on off-shore deposits and it does not cover what is probably the fastest growing area of off-shore deposits and loans, off-shore banks in Asia.

49 Note that such cycles may be associated not only with crises, but simply with the flow of foreign capital and repayments in what is sometimes called the transfer problem.

50 This paper uses the end-of-year exchange rate to compare local currency and foreign currency values, in an attempt at compatibility with the end-of year figures used for domestic banking liabilities and external liabilities. In contrast, the World Bank’s _Global Development Finance_ uses an unpublished average of past exchange rates to convert national income into dollars in order to generate ratios of external debt to GNI. This average smooths the sharp fluctuations in the ratio of external debt to national income that would occur if the end-of-year rate were used. However, this approach also changes the time pattern of ratios compared to use of end-of-year exchange rates. Moreover, for countries that devalue in most years at fairly high rates, such as Brazil and Turkey, the ratio of external debts to GDP in every year is lower with the World Bank method than with the end-of-year exchange rates.

51 The figures in Table 4 refer to a consistent sub-sample of 22 of the 25 countries. The excluded countries are the Czech Republic, where the World Bank debt data begin in 1992, South Africa, where the World Bank’s debt data begin in 1994, and Russia, where no IFS data for GDP is available before 1993.