Study Analyzes Role of External Borrowing Among Countries of Former Soviet Union

• Pages: 178-179

Page 178

An important concern is that the option to borrow abroad may weaken efforts to transform the region's economies and their institutions, including governments. A balance must therefore be struck between taking advantage of growing external borrowing opportunities and not allowing such borrowing to finance wasteful expenditures or delay the transition process. This is especially important, since the rising stock of external debt makes the borrowing countries increasingly vulnerable to changes in perceived creditworthiness. Accordingly, countries must adopt policies and press ahead with structural reforms, to ensure that the borrowing is used to promote sound growth.

Character of Region's Debt

Since the breakup of the Soviet Union in late 1991, virtually all of the new independent countries in the region have resorted to external borrowing from multilateral, official bilateral, and private creditors to meet their financing needs. For the region as a whole, total external finance is estimated at about $200 billion for 1993-97. Each country's stage of transition, success in achieving macroeconomic stabilization, medium-term growth prospects, endowments of natural resources, and perceived creditworthiness determined the character and amounts of such financing. In general, countries more advanced in the transition process were more successful in mobilizing private capital flows, while countries less advanced relied more on official disbursements.

By the end of 1993, the study finds, the median external debt/export ratio had reached 36 percent (see table, page 179), continued to rise to 59 percent at the end of 1996, and reached an estimated 70 percent at the end of 1997. The public sector or publicly guaranteed debtors undertook the overwhelming proportion of this borrowing, primarily to finance current, rather than capital, spending, including the settlement of wage and pension arrears. A number of countries also resorted to instruments that are not formally included in the definition of external debt but nevertheless create potential servicing liabilities, especially for the public sector. These include government guarantees of debt to government agencies, municipalities, and enterprises, and long-term lease agreements.

While most borrowers contracted funds on market terms, a number of low-income countries in the region-including...