Transition Economies Need a Prudent Debt-Management Strategy

• Pages: 326-328

Page 326

As the 15 transition economies comprising the Baltics, Russia, and the other countries of the former Soviet Union move toward integration with the global economy, their external financing-and, in particular, their increasing recourse to international capital markets- has taken on considerable importance. In an IMF Working Paper, Ishan Kapur and Emmanuel van der Mensbrugghe of the IMF's European II Department acknowledge the benefits that transition economies can realize from foreign borrowing. At the same time, they caution that the recent rapid increase in external debt among these countries calls for an awareness of the risks that can accompany an inappropriately high dependence on foreign saving, including the risk of postponing needed structural reforms.

Debt Profile Determined by Economic Progress

The 15 transition economies under review have all made considerable-but varying degrees of-progress toward macroeconomic stabilization. The different stages of transition they have reached and their relative success in achieving stabilization have largely determined the nature and amount of external financing they have received in the past five years to meet their external financing requirements. Substantial private capital inflows have gravitated toward those countries most advanced in the transition process, reflecting consistent and credible progress toward financial stabilization and the introduction of structural reforms. Countries less advanced in the transition process continue to rely much more heavily on official disbursements and grants.

Following the adoption by the Baltics and the countries of the former Soviet Union in 1992-93 of the "zero-option" agreement, under which Russia assumed the external assets and liabilities of the Soviet Union, most of the 15 countries were left with little or no external debt (except Russia, which inherited the external debt obligations of the Soviet Union). During 1993-96, these countries obtained an estimated $163 billion in total external financing, with Russia accountingPage 327 for three-quarters of the total. Largely owing to the substantial debt relief obtained by Russia (and Ukraine), debt rescheduling accounted for about 40 percent of the total, and official disbursements (excluding from the IMF) and grants accounted for an estimated 21 percent. With net disbursements of $16 billion, the IMF has been the single largest provider of new funds, representing 10 percent of total external financing received over the four-year period. Private capital, which has increased...