157. Telegram From the Department of State to the Mission to the Organization for Economic Cooperation and Development0
412. Consider following principles on terms of aid as basic to meeting development needs of developing countries and achieving greater equity in aid contributions of DAC members. Believe they represent significant step forward but are sufficiently moderate to permit agreement [Page 342] by DAC members. Request you make text available to Secretariat and delegations promptly and urge most serious consideration by capitals with view to incorporation in recommendations of WP on terms. London should provide copy informally to Pliatzky,1WP Chairman. Assume text will be on agenda January meeting of WP. Statement of principles below does not represent or imply any change in existing US lending policies.
"I. Introduction
The major OECD/DAC objective of furthering the growth of developing countries requires recognition of the long-term need of most of these countries for net capital inflows over a period of years. Apart from a few developing countries with exceptional foreign exchange earning capacity and prospects, the present and prospective debt-servicing capacity for some years to come of these countries is not adequate to permit the whole or major part of capital inflows commensurate with their development needs and self-help efforts to be provided on commercial credit terms. If development needs are financed mainly or largely on commercial or other insufficiently liberal terms, therefore, many developing countries will assume debt burdens that are excessive and others will add further to debt burdens that are already too great.
The consequences of excessive debt burden are: creditors are periodically required to roll over or consolidate debt as emergency meas-ures; reasonable and desirable development objectives may have to be abandoned; developing countries are encouraged to adopt lax attitudes towards debt repayment obligations; business confidence may be impaired with a possible resultant decline in private foreign investment; where creditors do not supplement debt rollovers with adequate aid on liberal terms, other donors of grant aid or loans on terms comparable to IDA terms are placed in the politically awkward and economically unjustifiable position of servicing, in effect, the credits on short term, with high interest or insufficient grace periods of the original lenders.
Accordingly, in recognition of these problems, several principles and specific actions are proposed below for DAC consideration and adoption.
II. General principles
- 1.
- Terms of governmental aid (including grants and loans) should take account of the limited debt-servicing capacity of the developing country, including its present and expected future capacity for effectively using domestic and external capital and the importance of its having available an adequate share of its current and prospective foreign exchange earnings for critical imports.
- 2.
- In the case of loans to borrowing enterprises, members should recognize the proper role of interest rates in the allocation of resources within the developing country and provide for interest rates (as well as repayment periods) to the ultimate domestic borrowing enterprise appropriate for the nature of that enterprise. Where the appropriate repayment terms to the lending country, as indicated by recipient country’s debt-servicing capacity, differ from the appropriate terms for the enterprise, the donor should make an arrangement to provide for meeting both criteria. (A two-step loan procedure is one way; another which has been suggested by some governments would be to accompany loans on terms appropriate to the project with grant aid to permit debt-service by the government without excessive burden.)
- 3.
- Terms of aid should be sufficiently liberal as to allow the needed margin of debt-servicing capacity of the developing country for accepting financing from foreign private sources and international institutions.
- 4.
- Terms of aid of each donor should be sufficiently liberal to ensure normally a continuing net positive flow of capital from all external sources combined into individual developing countries.
- 5.
- Donors should pay special attention to the heavy debt burden effect of short term exporter credits and avoid overloading recipient countries. In particular, in order to diminish the likelihood of payments crises in receiving countries, donors extending official or guarantied private short term exporter credits should not reduce the level of such credits outstanding without replacement by at least a balancing amount of aid on liberal terms; and in recognition of the need for capital on liberal terms within limited availabilities of external financing, any increases in amounts of such export credits which a donor may provide above present levels outstanding should normally be accompanied by at least a balancing amount of new aid on very liberal terms.
- 6.
- The IDA, the U.S., and some other countries have made significant progress toward achieving the above goals. Other countries in order to make their capital assistance program compatible with an equitable sharing of the costs of development aid among all DAC members should move rapidly in this direction.
III. Specific actions
- 1.
- Terms of aid of members of consortia, coordinating groups, and consultative groups should be discussed in these groupings with a view to achieving consistency with the foregoing principles as measured by effective repayment terms, taking into account loans, grants, and exporter credits.
- 2.
- The amounts and debt-servicing burden of exporter credits should also be discussed in consortia, coordinating groups and consultative groups.
- 3.
- The OECD Secretariat should make arrangements for continuing review of debt servicing burdens of developing countries and report periodically to DAC on specific countries that are approaching or already beyond a limit of debt that is reasonable in view of all relevant considerations. The cooperation of the IBRD should be invited.
- 4.
- DAC members should agree to discuss the debt-servicing problem of any developing country reported by this review as approaching a reasonable limit, and recommend course of action for donors.
- 5.
- Every donor should seek funding authority for significant proportion of its aid effort to be on very liberal terms consistent with the foregoing principles (including provision for grants or loans on terms comparable to IDA terms).
- 6.
- DAC should ask Secretariat, in collaboration, as appropriate, with IBRD, or other institution to undertake study of relevant indicators of debt-servicing capacity with view to recommending debt-burden measurement indicators.”