DEBT ISSUES IN THE MIDDLE EAST AND SOUTH ASIA: TRENDS AND PROSPECTS

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• Document Creation Date: December 27, 2016
• Document Release Date: July 25, 2012
• Sequence Number: 1
• Publication Date: July 1, 1988
• Content Type: REPORT

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Debt Issues in
the Middle East and South Asia:
Trends and Prospects
An Intelligence Assessment
PROJDZT
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NESA 88-10043
July 1988
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Debt Issues in
the Middle East and South Asia:
Trends and Prospects
An Intelligence Assessment
This paper was prepared b3 Office
of Near Eastern and South Asian Analysis.
Comments and queries are welcome and may be
directed to the Chief, Issues and Applications
Division, NESA
Secret
NESA 88-10043
July 1988
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1
Key Judgments
Information available
as of] June 1988
was used in this report.
Reverse Blank
Debt Issues in
the Middle East and South Asia:
Trends and Prospects
The major countries of the Middle East and South Asia display broad differences
both in the magnitude of their external debt problems and their responses to
servicing this debt. Barring a precipitous decline in oil prices, the debt issue in
these regions is unlikely to attain the significance that the much higher Latin
American debt represents to US policy interests. Nevertheless, debt-related
difficulties will still present many governments in the Middle East and South Asia
with hard political and economic choices as they attempt to cope with the effects of
adjustment measures and the need for new sources of external financing.
Some countries?Egypt, Algeria, Iraq, and especially Sudan?will remain trouble-
some debtors over the next several years. Their financing requirements are likely
to require constant attention and, occasionally, special consideration from Western
creditors. The United States and other Western governments are likely to be
caught in the recurring dilemma of either insisting upon more rapid implementa-
tion of economic reform?to gain International Monetary Fund (IMF) and World
Bank support and funding for the debtor country?or agreeing to slower reforms
to avoid political unrest.
Other countries within the region, notably Morocco and Tunisia, probably will
continue to make significant strides in coming to grips with their debt problems. In
both cases, adherence to IMF-supported economic reform programs is paying
dividends in the form of increased multilateral financial assistance and significant
improvement in external payments balances.
Regionwide, the tendency to press Western creditors?both official and commer-
cial?for more generous debt rescheduling is likely to produce strains in important
bilateral and multilateral relationships in the years ahead. There are likely to be
more attempts by countries such as Algeria and Iraq to circumvent traditonal
IMF-supported adjustment programs or debt rescheduling under the auspices of
the Paris and London Clubs, the official and commercial creditors, respectively.
For the United States, the debt issue in the Middle East and South Asia is likely to
spill over into disputes with key clients?especially Egypt, and possibly Morocco or
Pakistan?over new aid commitments, the composition of programmed economic
assistance, and the rescheduling terms for military and civilian debts. More
generous aid and debt relief from other Western and Gulf Arab states could serve
to undermine US leverage with such clients and lead to some diminution of US in-
fluence regionwide
iii
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NESA 88-10043
July 1988
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Contents
Page
Key Judgments
iii
Scope Note
vii
Regional Overview
1
The Problem Debtors
3
Egypt
3
Algeria
4
Iraq
5
Sudan 7
Successful Adjusters 7
Morocco 7
Tunisia 9
Libya 10
Iran 10
Potential Problem Countries 10
India 10
Pakistan 11
Syria 12
Outlook 13
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Scope Note
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This study examines the economic problems of significant debtor countries
in the Middle East and South Asia, ranging from countries where the debt
issue clearly impacts on current political and economic affairs to others
that have managed to bring their debt problems under control or are
teetering on the brink of major credit problems. Saudi Arabia does not fit
any of the debtor categories. Its large external debt is mainly in the form of
short-term trade credits that?far from representing an inability to pay?
merely reflect the kingdom's large merchandise import bill and its heavy
use of credit lines
vii
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Debt Issues in
the Middle East and South Asia:
Trends and Prospects
Regional Overview
External debt-related economic problems in the coun-
tries of the Middle East and South Asia, as elsewhere
in the developing world, stem in large part from the
inability of many of these countries to reduce chronic
foreign payments deficits. A combination of soft
world oil prices, poor macroeconomic management,
and soaring population growth with its resulting de-
mand for food imports appear to be the main contrib-
utors to persistent payments disequilibrium. The US
dollar's relative decline against other major world
currencies over the past three years has also, in some
cases, added to debt burdens by appreciating the
nondollar-denominated portion of external debt.
What distinguishes the debt picture to some degree in
the Middle East and South Asia from other Third
World regions has been the relatively small proportion
of borrowing from commercial banks. According to
1986 yearend data, private lending in the Middle East
and South Asia accounted for only 39 percent of total
medium- and long-term borrowing. By contrast, com-
mercial lending in Latin America comprises 80 per-
cent of borrowing in the same category and is a far
larger figure in absolute terms as well: $274 billion in
Latin America versus only $64 billion in the Middle
East and South Asia.
The correspondingly larger role official lending plays
in the Middle East and South Asia has been a source
of both strength and weakness for many regional
borrowers. Their ability to gain access to official
funds from the wealthier oil-rich states or from
Western nations with strategic and economic interests
in the region has eased financing problems. The
relative accessibility of official grants, low-cost loans,
officially backed trade credits, and generous resche-
dulings of official debt has also made it easier for
some countries to ignore the need to adopt reforms
1
Figure 1
a
LDCs: Total Debt, 1986
Billion US $
East Asia
Latin America
Middle East and
South Asia'
Sub-Saharan Africa
ab Yearend data
Data include North Africa.
125
250
375
500
317900 7-88
and implement austerity programs. As official assis-
tance continues to level off in the wake of tightening
purse strings in the Gulf and among certain Western
creditor governments, these debtors are coming under
increasing pressure to accelerate politically sensitive
reform measures. Such measures include energy price
increases and reductions in consumer subsidies.
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Figure 2
Middle East and South Asia:
Aggregated External Debt, 1982-862
Short-term
I Medium /long-term private
Medium /long-term public
Billion US $
250
100
1982 83 84 85 86
a Yearend data include North Africa
31790 7-88
Figure 3
Selected Middle Eastern and South Asian
Countries: External Debt, 19868
Short-term
Medium /long-term private
Medium /long-term public
Billion US $
Algeria
Egypt
India
Iran
Iraq
Morocco
Pakistan
Tunisia
Saudi Arabia
a Yearend data.
Secret 2
10 20 30 40
317902 7-88
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The Problem Debtors
Egypt
Among major Middle Eastern countries, Egypt's debt
problems appear the most intractable and its struc-
tural adjustment prospects the most clouded by
political considerations. Even moderately optimistic
economic forecasts point toward the continuation of
large current account deficits in the years ahead.
With Western commercial lenders largely shunning
Egypt, except for short-term trade financing, Cairo's
deficits will continue to require constant injections of
bilateral and multilateral assistance from both West-
ern and Gulf creditors.
Cairo's May 1987 standby agreement with the Inter-
national Monetary Fund (IMF), along with favorable
trends in oil and tourist earnings, helped to temporar-
ily stabilize Egypt's foreign payments position. In
addition, with nearly 90 percent of its more than $30
billion in debt in the form of repayment obligations to
Western countries and multilateral institutions, Egypt
was favorably placed to take advantage of official
reschedulings. Import growth was checked by a par-
tial exchange rate devaluation of 63 percent, and
service payments declined as a result of continuing,
but slow, progress in rescheduling debt owed to 16
foreign governments.
Aside from the partial exchange rate devaluation and
limited price increases, most of the conditions of the
IMF agreement have not been met. Cairo has neither
followed through on its pledge to raise interest rates,
increase energy prices substantially, or unify the
commercial and official exchange rates, nor has it
made the cuts in budgetary growth that the IMF has
requested. Partially as a result of its noncompliance
with the terms of the standby agreement, Egypt has
not received the large increase in new financing from
Western countries that it had anticipated.
Significant improvement in Egypt's payments disequi-
librium is, in our view, unlikely, given Cairo's extreme
reluctance to engage more rapidly or more systemati-
cally in structural reform of the economy. The IMF,
deeply dissatisfied with Egypt's performance under
the standby, is calling for a more accelerated and
3
Figure 4 a
Egypt: Total Debt
1982-86
Short-term
Medium /long-term private
Medium /long-term public
Billion US $
35
1982
83
a Excludes military debt.
84
85
86
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317903 7-89 25X1
comprehensive reform effort. Exchange rate unifica-
tion and budgetary cuts would help reduce demand on
scarce foreign exchange reserves, while interest rate
reforms would serve to attract private capital into the
domestic banking system.
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President Mubarak's regime is convinced that intro-
duction of such measures would be an invitation for 25X1
widespread political unrest. With inflation averaging
25 percent coupled with sporadic, severe shortages of
subsidized goods, public opinion in the country is
decidedly antireform, according to US Embassy
sources?strengthening the government's position
that it cannot afford politically to go ahead with
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additional reforms. Egyptian leaders cite the riots that
followed bread price increases in 1977 as an example
of what might happen if reform is pushed too rapidly.
Additional multilateral assistance in the form of
further IMF standby loans and World Bank grants
will probably remain contingent upon Cairo's willing-
ness to acclerate its reform efforts. But Egypt, in our
opinion, will continue to resist the type of comprehen-
sive reform these institutions advocate. Instead, Cairo
probably will continue to use whatever political lever-
age it possesses to exert pressure?via the United
States and other friendly governments?on the IMF
and World Rank to obTin financing on less stringent
terms.
If Egypt does exert such pressure, the United States
and other friendly Western governments will find
themselves in an uncomfortable position?either they
can press the IMF and World Bank to push ahead
with financing for Egypt regardless of Cairo's limited
'reform efforts or they can suggest to the IMF that it
withhold funds until Cairo strengthens its compliance
with the standby arrangement. In the first case
Western countries risk establishing questionable
precedents in dealing with Third World debtors. In
the second case they would confront Egypt with
potentially serious domestic unrest.
With Egypt's gradual reintegration into the Arab
world, expanded assistance from the Gulf Arab coun-
tries is another important potential source of external
financing. Direct Arab assistance appears to have
been sporadic over the past year
Egypt
is also trying to attract more direct investment from
the Gulf as an alternative to debt financing. This
effort, if it is to be successful, will require streamlin-
ing the country's cumbersome bureaucracy?an ex-
cruciatingly difficult task?in order to create a more
attractive investment environment.
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Algeria
Algeria's foreign debt position is precarious and will
depend heavily on hydrocarbon prices. A downward
movement in oil and natural gas prices could quickly
push the country's debt service ratio above an already
staggering 85 percent in 1987 and threaten reschedul-
ing and further austerity. The government is commit-
ted to handling its debt problem without a formal
Paris or London Club rescheduling and will probably
take whatever import contraction measures are need-
ed to reduce debt service requirements to more
sustainable levels.
The government has responded to mounting financial
problems by cutting imports while opposing an IMF
structural adjustment program. The deterioration in
Algeria's foreign payments position in recent years
stems largely from the decline in oil and natural gas
prices since the early 1980s. Algerian efforts to
control its trade deficit resulted in a 10.6-percent drop
in imports in 1986 and an additional 14-percent cut in
1987. These actions were an important factor leading
to the continuing flow of funds from Algeria's major
official creditors:
? In April 1987 France extended a three-year line of
credit for about $500 million to finance imports.
? The United States recently increased credit guaran-
tees to Algeria for the purchase of agricultural
commodities from $301 million in FY 1987 to $596
million in FY 1988.
Algeria's commercial debt situation will continue to
be watched closely, particularly by private bankers.
About 75 percent of Algeria's external debt of $25
billion at yearend 1986 consisted of commercial obli-
gations, primarily to Western banks.
' The Paris Club is the committee of creditors responsible for
negotiating the rescheduling terms for official debt and usually
consists of delegates from France, the United States, the United
Kingdom, West Germany, and Japan. The London Club negotiates
the rescheduling terms for commercial debt. Its membership varies
but usually consists of representatives from major international
banks with large loan exposure in the particular country undergoing
rescheduling.
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Figure 5
Algeria: Total Debta
1982-86
1
Short-term
Medium /long-term private
Medium / long-term public
Billion US $
30
25
20
15
10
5
1982
83
Excludes military debt.
84
85
86
317904 7-88
banks have become increasingly
cautious about medium-term lending because Algiers'
heavy short-term borrowing appears excessive and
could jeopardize servicing of medium- and long-term
debt.
President Bendjedid confirmed his government's com-
mitment to economic reform and liberalization as
recently as December 1987?a move that could spur
further growth and boost lender confidence?but he
will still face strong opposition from old line radicals
in the ruling party and an entrenched bureaucracy
opposed to liberalization. Lender confidence could
also be shaken by further crop failures, which could
result in large food import bills?pushing financing
requirements even higher. The government has been
5
fairly successful in restraining import growth, but
continued crop failures resulting from adverse
weather and locust infestation could strain import
policies and erode lender confidence in the regime's
ability to service debt.
In our view, the regime is strong enough politically to
cope with its debt problems. Although popular resent-
ment against further austerity measures will probably
fuel more discontent, with or without a formal re- ,
scheduling, we detect no effective political opposition
that could deter the government over the next several
years from its hardline approach to reducing expendi-
tures by cutting imports. Moreover, the security
forces appear capable of suppressing any outbreak of
civil unrest.
Iraq
Iraq's intensive use of foreign loans since the begin-
ning of the war with Iran in 1980 has transformed
Baghdad into a major debtor. Approximately 50
percent of its commercial and military debt of $30
billion is owed to Western countries, another 20
percent to the Soviet bloc, and the remainder to
Third World countries. Higher oil revenues since
1987 and improved financial management are provid-
ing some relief, but debt servicing will remain oner-
ous for several years.' Serious arrearage problems
will probably persist but are unlikely to result, in our
opinion, in a further contraction of international
credit lines.
Iraqi debt repayment problems have persisted. As of
the first quarter of 1988, several countries had out-
standing claims that remain unsettled. Italy, West
Germany, Yugoslavia, and South Korea are among
the countries that have curtailed credit to Iraq be- 25X1
cause of payment arrearages. 25X1
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DA I
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A rebound in oil prices in 1987, increased oil exports,
and a hardline debt negotiating strategy have enabled
This debt estimate excludes at least $35 billion in "soft" loans
principally from Saudi Arabia and Kuwait, which are unlikely to be
repaic
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Figure 6
Iraq: Total Debta
1982-86
Short-term
Medium /long-term private
Medium /long-term public
Billion US $
15
1982
83
a Excludes military debt
84
85
86
317905 7.88
Iraq to avoid more serious credit contraction. Bagh-
dad has proved particularly adept at avoiding a
general rescheduling?the Iraqis are shrewd and per-
sitent negotiators. For example, in some deals Bagh-
dad has obtained favorable repayment terms from one
creditor by telling it that another creditor agreed to
the same terms.
Many lenders also are willing to grant generous
rescheduling of Iraqi debt because they fear exclusion
from Iraq's potentially lucrative postwar market.
Baghdad repeatedly reminds creditors that it will
remember who was accommodating and who was not.
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Western countries determined to support Iraq for
political as well as economic reasons have also helped
to stem credit problems. According to press reporting,
debts to official British lenders have been deferred
with minimum fuss, and officially backed credit facil-
ities from the United Kingdom continue to be made
available. The continued extension of official credit
lines by the United States will probably allow the
Iraqis to purchase at least $1 billion worth of US
agricultural commodities during 1988. France is also
providing a trade credit mechanism whereby each
Iraqi repayment is matched by the provision of
French credit worth twice the repayment.
We expect Iraq's debt burden to continue to grow
during the next several years despite projected higher
oil revenues. Given recent reschedulings with lenders,
we estimate that at least $5-6 billion in principal and
interest payments will still be due each year during
the period 1988-92. This amount is about 40 percent
of the $14 billion in annual oil revenues that we
project Iraq will earn during each of the next three
years, based on current oil prices. In addition, financ-
ing new projects?the oil export pipeline across Saudi
Arabia alone will cost upward of $1.5 billion over the
next three years?will intensify borrowing require-
ments.
Baghdad probably cannot start paring down its for-
eign debt until the early 1990s. Iraq's pipeline expan-
sion across Saudi Arabia probably will be fully opera-
tional in 1990. Iraqi oil exports thereafter could,
according to oil industry estimates, reach 3 million
barrels per day, generating roughly $20 billion in
revenues annually at current oil prices?as compared
to about $11 billion in 1987. By the early 1990s,
however, creditor claims for Iraqi revenues must
compete with pent-up domestic demands for acceler-
ated economic development and increased consump-
ng the Iran-Iraq war has ended by then.
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Sudan
With $11 billion in external debt and arrears and
almost negligible repayment prospects, Sudan be-
longs in a special class of problem debtors. The usual
adjustment mechanisms?debt rescheduling and
IMF standby programs?have proved ineffective in
dealing with its problem. Extraordinary measures?
including some form of significant debt forgiveness
and major coordinated assistance from donors?
would probably be necessary to restore financial
order. Even then, with a government in Khartoum
incapable of managing the economy, such measures
might bring only limited but very costly relief
The prospects for multilateral aid are complicated by
Sudan's arrearage problem with the IMF. Arrears of
over $700 million owed to the Fund have resulted in
Khartoum's disqualification, since 1985, from IMF
financial assistance. Unless the arrearages issue is
resolved?currently a dim prospect given Sudan's
limited ability to attract donor support?Khartoum is
unlikely to qualify for assistance under the new
Enhanced Structural Adjustment Facility (ESAF).
The ESAF, created by the IMF in 1987, establishes a
special mechanism for dealing with low-income devel-
oping countries like Sudan. Even if the Sudanese
Government qualified for ESAF funding, US
Embassy sources calculate that Sudan would still
remain $200 million in arrears on IMF payments?
underscorin the need for additional bilateral assis-
tance.
Khartoum's abysmal economic management clouds
prospects for new bilateral aid. Donors are waiting for
indicators that Sudan intends to put its economic
house in order. With imports running two-and-a-half
times exports, an overvalued exchange rate, and inad-
equate fiscal controls, evidence of serious intent is
absent. Complicating US efforts to provide assistance
are Brooke Amendment sanctions that bar the dis-
persal of funds to any government that falls more than
one year behind in debt repayment. Chronic arrear-
ages on the US debt threaten to place the Sudanese
Government in recurring noncompliance with the
Brooke Amendment, thereby jeopardizing US eco-
nomic as well as military assistance programs.
7
We rate the prospects for a significant turnaround in
Sudan's economic outlook as very poor. The govern-
ment of Prime Minister Sadiq al-Mahdi demonstrates
little willingness or capability to grapple with its
economic problems. Its failure to build a workable
coalition within the Constituent Assembly, its distrac-
tion by the country's worsening civil war, and its fear
of provoking urban unrest effectively paralyze its
economic decision making capabilities.
Successful Adjusters
Morocco
Although Morocco has sizable repayment obligations
on over $15 billion in external debt, significant
improvements in economic performance and the
government's continued adherence to economic liber-
alization should enable it to maintain the support of
the IMF and World Bank, its major sources of
international credit. Nevertheless, we believe that
payments will remain a serious burden on the econo-
my for years to come?absorbing an estimated 50
percent of export earnings through the early 1990s.
Sharp devaluations in 1984 and 1985 helped lift
exports and restrain imports?by 1986 the Moroccan
trade deficit had declined to about $1 billion, its
lowest level in 10 years. For 1987, official figures
showed a 5.2-percent increase in exports through the
first 10 months, while imports were held to only a
0.2-percent growth rate. Moreover, exports grew de-
spite steadily declining revenues from phosphates, the
country's most important merchandise export.
The improvement in its foreign trade and payments
balance over the past several years has made Rabat's
creditors more flexible in negotiations to reschedule
and restructure the country's debt burden. Late last
year an agreement was signed that provided for the
rescheduling of about $1.8 billion owed to over 200
international banks. Despite its improved standing
with commercial banks, Morocco has not regained
access to private lines of credit and is heavily depen-
dent on official lending sources
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Figure 7
Seriousness of Debt Servicing Requirements?
CD Very serious (40% or higher) (---) Moderate to serious (15-39%) II. None to moderate (0-14%)
a Categories measured by the debt service ratio, the most
commonly used indicator of a country's ability to repay debt. It
measures principal plus interest payments as a share of exports
of goods and services.
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Figure 8
a
Morocco: Total Debt
1982-86
Short-term
Medium / long-term private
Medium /long-term public
Billion US $
20
10
5
982 83 84 85
Excludes military debt
86
317906 7-88
Over the medium term, Morocco's ability to maintain
the momentum of economic reform is crucial for
economic performance and financing prospects. The
government appears, in our view, to have realized
sufficient benefits from reform to continue economic
liberalization. Backed by a $240 million World Bank
adjustment loan, Rabat is proceeding, according to
US Embassy reporting, with plans for privatization of
as many as 600 state-owned companies. The goal is to
increase private savings?investors will, hopefully, be
more inclined to participate in private ventures?and
reduce the size of the budget deficit as well as
broaden the economic role of the private sector.
9
Diversification of Morocco's sources of foreign ex-
change is also proceeding steadily. Tourism replaced
phosphates as the largest source of hard currency
earnings during 1987, and merchandise exports are
growing as well.
We believe Morocco's political system does not pre-
sent significant problems to maintaining economic
momentum. King Hassan faces no major challenge to
his power, and we believe his personal commitment to
the reform program will help liberalization proceed.
Rapid population growth?nearly 3 percent per
year?and the heavy concentration of youth in the
population-56 percent is under 20?will make job
creation an increasingly vital national goal, however,
if discontent is to be controlled over the longer term.
Tunisia
Tunisia, even more than Morocco, has made impres-
sive strides in improving its foreign payments position
over the past year. The painless transition to the
government of President Ben Ali and the regime's
evident commitment to economic reform have also
served to bolster investor and lender confidence in the
economy. The country still faces the difficult task of
reducing many politically sensitive consumer subsi-
dies.
Tunisia's faithful adherence to an IMF structural
adjustment program negotiated late in 1986 has
brought about an impressive economic turnaround.
Devaluation of the dinar stimulated merchandise ex-
ports, tourist earnings, and remittances from Tuni-
sians working abroad. The current account deficit
dropped to only about $375 million in 1987 or about
half the 1986 figure.
Refinancing short-term obligations dominates the
government's debt strategy. About 40 percent of its
total debt of $7.1 billion is short term. According to
Tunisian economic officials, they hope to reduce this
share to 25 percent by 1991
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Figure 9
a
Tunisia: Total Debt
1982-86
Short-term
Medium / long-term private
Medium / long-term public
Billion US $
8
4
2
a
1982 83 84
a
Excludes military debt
85 86
317907 7.88
Tunisia's excellent relations with the IMF and World
Bank provide it with ready access to multilateral,
concessionary loans. According to the World Bank, its
lending to Tunis is the highest in the Middle East on a
per capita basis, and the regime will be permitted to
borrow an additional $1.5 billion over the next four
years.
The government very prudently prepared the country
for austerity with forthright explanations of its ac-
tions, but discontent may yet boil over?as in the riots
of 1984?if tangible social benefits do not soon begin
to accrue. Growing expectations among the urban
middle class for political liberalization measures that
would contest the ruling party's stranglehold on the
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political system are also likely to lead to further
dissent and criticism, according to the US Embassy in
Tunis
Libya and Iran
Libya and Iran represent another breed of adjuster,
whose response to payments disequilibrium entails an
almost exclusive resort to domestic austerity and
lower consumption to avoid debt. Both governments,
largely for political reasons, have deliberately de-
cided to refrain from utilizing Western credits, aside
from short-term trade financing. In both cases the
decision, in our view, stems from a desire to insulate
themselves from the coercive use of financial power
from the West.
We believe that both governments, given their harshly
repressive nature, can hold down consumer imports to
near current levels without generating adverse public
reaction. Given the current limited potential for ap-
preciably expanding oil revenues in either country,
however, autarkic policies may require substantial
revision if either chooses to reverse economic policy
and pursue growth strategies dependent on large new
doses of capital spending. In Iran's case, several
strategic oil pipeline projects?which would lead to a
substantial increase in export capacity even if the war
with Iraq continues?probably face significant delays
without greater recourse to foreign borrowing.
Potential Problem Countries
India
India's large foreign debt of $45 billion in 1988 and
its debt service ratio of 30 percent remain manage-
able, according to international bankers. The fact
that over 70 percent of foreign debt is in the form of
official obligations to Western countries and multi-
lateral institutions helps ease the impact of debt
servicing?official debt is frequently offered at more
attractive terms to borrowers. Indian officials also
appear willing to sacrifice economic growth to main-
tain debt servicing well within acceptable limits.
International bankers are concerned, however, that
such conservatism may throttle future export growth
and, ironically, lead to debt servicin problems within
the next several years.
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Figure 10
India: Total Debta
1982-86
1111111111
Short-term
Medium /long-term private
Medium / long-term public
Billion US $
35
30
25
20
15
10
n
I
I
r
1982
83
a
Excludes military debt
84
85
86
317908 7.88
New Delhi emerged from the disastrous drought of
1987 in far better shape than most observers predict-
ed. The current account deficit increased slightly,
mainly because exports rose 20 percent to $12 billion.
World Bank officials assessing the Indian economy
note that, with its $6 billion in foreign reserves and $5
billion in official gold, New Delhi maintains a com-
fortable cushion against external financing require-
ments estimated at $4.8 billion in fiscal year 1988-89,
which began 1 April.
Beyond the current fiscal year, optimism is clouded by
doubts among financial observers over India's export
outlook. The government's capability to finance the
current five-year development plan is suffering from a
major shortfall in domestic savings. This, together
11
with the costs of subsidies and interest payments, is
constraining the capital investment India must gener-
ate if it is to remain competitive in world export
markets
Western financial observers are also concerned that
New Delhi will not pursue economic liberalization
aggressively enough?to the detriment of future ex-
port capabilities. According to them, the economy
urgently needs to maintain the momentum of private-
sector industrial change and competition. But Prime
Minister Gandhi may not, according to knowledge-
able observers, have the political strength to give
industry what it needs the most?the freedom to shut
down unprofitable enterprises and lay off workers.
Pakistan
IMF officials are concerned that Pakistan will have
debt management and foreign payments problems
soon unless strong fiscal measures are taken to
reduce large budgetary deficits, according to the US
Embassy in Islamabad. Larger deficit spending could
accelerate domestic inflation and erode the competi-
tiveness of Pakistani exports.
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As of June 1988, the IMF and Pakistan were continu-
ing intermittent discussions on the terms of a $900
million structural adjustment program. Islamabad's
willingness to consider seriously the conditions of the 25X1
program?including tax reforms, trade liberalization,
and deregulation of prices and markets?indicates the
government's growing awareness of its financial prob-
lems 25X1
Pakistan's access to short-term commercial credit
facilities is adequate for the time being
Lending is profitable
for banks because the Pakistanis are willing to accept
interest rates two or three percentage points higher
than the banks' cost of deposit. But political tensions
in the region and uncertainty over ramifications of the
Geneva Accord on Afghanistan may adversely affect
the country's future borrowing prospects.
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Figure 11
Pakistan: Total Debt a
1982-86
MSS
Short-term
Medium /long-term private
Medium /long-term public
Billion US $
15
1982
83
a Excludes military debt
84
85
86
317909 7.88
Syria
With its economy in disarray and traditional sources
of aid becoming more problematic, Syria appears
headed for serious financing difficulties. Lenders
have noted the economic mismanagement that has
left the economy in poor shape, with the value of real
gross domestic product in 1987 below that of 1981.
Basic weaknesses?a heavy military burden, a nar-
row export base, overvalued exchange rates, human
and capital flight, and poor fiscal performance?
persist and have forestalled recovery.
Secret
Despite the benefits of new oil production, Syria's
foreign payments situation will probably remain
weak. Additional oil revenues?perhaps as much as
$600 million more annually by 1990?may be negat-
ed by the loss of much of Syria's traditional cash
assistance from Arab donors. Such aid may increas-
ingly depend on how well Damascus mends its rela-
tions with Iraq and other moderate Arab states. The
prospects for such reconciliation are clouded by mutu-
al enmity and mistrust between Syria and Iraq. Soviet
aid has also been curtailed, and Soviet demands for
repayment of debt have become more strident
Attempts to introduce reforms to the economy are
stymied by the opposition of powerful elements within
the government, including the military and security
services. Their control over large-scale smuggling
operations would be jeopardized by economic and
administrative restructuring. For example, rigorous
enforcement of customs and import regulations at the
Lebanese-Syrian border would deprive high-level offi-
cers of lucrative black-marketeering profits.
Syria's poor creditworthiness and economic perfor-
mance under the Assad regime makes increased
access to commercial lending sources extremely diffi-
cult. Only a very few Western banks are presently
providing credit
These credits are almost exclu-
sively short term and in the form of highly secure,
fully collateralized letters of credit.
Damascus
would like to increase trade credits from Western
banks, but the response so far has been tepid
Syria has only limited access to multilateral funds,
and its shaky international financial standing could
deteriorate even further if it defaults on over $100
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Figure 12
a
Syria: Total Debt
1982-86
Short-term
Medium /long-term private
Medium /long-term public
Billion US $
5
3
0
1982 83 84 85 86
a Excludes military debt
317910 7-88
million in arrearages to the World Bank. Under an
agreement concluded in March, Syria has pledged to
make a phased series of payments on these obligations
beginning in August, according to US Embassy re-
porting. The Embassy, however, is skeptical?noting
that the Syrians have not even made a token payment
in the last 18 months. If the August deadline passes
without action by the Syrians, it will jeopardize the
chances for other financing from Western multilateral
sources.
ecr et
Marketing Middle Eastern Debt
Despite the trading of about $250 million in Middle
Eastern debt obligations during 1987?mostly in the
form of debt swaps between banks in world secondary
debt markets?recourse to debt-equity conversions
remains a limited option for regional debtors. Asset
traders in the world secondary debt market maintain
that Middle Eastern debt represents too small a
portion of total world debt to be effected by the debt-
equity instruments being devised for countries such
as Brazil and Chile. Moreover, most Middle Eastern
debt is official, bilateral debt that is not tradable. A
further problem is the lack of viable investment
options in the region.
most Arab states have not reached
the stage of devising debt for equity programs. Mo-
rocco appears closest to formulating such a program,
but Rabat is unwilling to offer much in the way of
discounts to provide incentives for investors to buy
debt. Moreover, the lack of investment prospects in
Morocco will limit the scope of debt-equity swaps.
Outlook
For many of the oil-exporting problem countries debt
servicing will probably remain a constraint over the
next several years. World oil market trends indicate
continued weakness with little chance for much of an
increase in prices, in our analysis:
? Iraq, with large export capacity growth projected
over the next several years, probably is in the best
position to manage debt servicing among the prob-
lem debtors.
? Algeria, with little or no projected increase in
capacity, will be much more vulnerable to oil and
gas price fluctuations and a more likely candidate
for rescheduling.
? Egypt and Syria, more modest oil exporters, will 25X1
also feel financial pressure if oil prices decline.
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Some Middle Eastern and South Asian countries
stand to gain from weakened oil prices. Pakistan,
India, Morocco, and Sudan, all oil importers, fit into
this category.'
For borrowers with the economic clout that results
from large oil and gas reserves, such as Iraq and
Algeria, the tendency to pursue more independent
debt negotiating strategies probably will persist.
Iraq's ability to abstain from dealing through the
Paris Club or the IMF and its success in playing one
lender against another will be strengthened by its
strong oil export outlook. Algeria will also probably
continue to resist a structural adjustment program
and Paris Club rescheduling. With austerity straining
the political system as well as a limited capacity to
expand hydrocarbon earnings, however, Algiers may
be forced to accept some form of debt rescheduling in
cooperation with its international creditors.
Egypt's strategic importance to Western allies, partic-
ularly the United States, should help ensure financial
support, despite continuing large foreign payments
deficits. President Mubarak almost certainly will take
advantage of Western interest in maintaining a mod-
erate and stable pro-Western government in Cairo.
Nevertheless, most Western creditors are likely to
push for compliance with IMF-supported structural
adjustment measures. Such pressure, in our opinion,
will strain relations between Cairo and its creditors.
' Not all the consequences of a weakening oil market are positive
for oil importers. Many countries?including Pakistan, Jordan, and
Sudan as well as Egypt among oil exporters?are heavily dependent
on remittance earnings from Arab Gulf countries. Further contrac-
tion in the expatriate worker forces in the Gulf that resulted from
lower oil prices would erode, to some degree, the positive impact of
lower import bills.
Secret
The United States could find itself in the awkward
position of arguing for less rigorous criteria for dis-
bursing multilateral aid to Egypt?a move likely to be
resisted by both the IMF and World Bank, concerned
as ever about establishing precedents for other debtor
countries. The generous terms of the 1987 Egyptian
standby arrangement and Egypt's subsequent lax
compliance with even these measures may have en-
couraged the belief, at least in Cairo, that when push
comes to shove, Western creditors will offer softer
terms.
Regionwide, the tendency to challenge current as-
sumptions about debt management and to press West-
ern creditors?both official and commercial?for
more generous debt rescheduling is likely to dominate
financial relations in the years ahead and produce
further strains in important strategic political rela-
tionships. For the United States, this will probably
result in disputes over new aid commitments, the
composition of current economic assistance, and the
rescheduling of military and civilian debts with im-
portant client states such as Morocco, Egypt, and
possibly Pakistan. Military debt, however, is likely to
become a less contentious issue following recent Con-
gressional approval of refinancing of Foreign Military
Sales debt at more favorable interest rates. More
generous aid and debt rescheduling from other West-
ern and Gulf Arab states could still lead to some
undermining of US influence, particularly within the
Middle Eastern region.
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