Part II

Appendixes

Appendix 1
Debt burden indicators and country classifications

Country classifications for 1997
Classification of low-income countries
Classification of middle-income countries

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The 138 countries that report debt data to the World Bank's Debtor Reporting System (DRS) are classified by degree of indebtedness, which is measured using debt and debt service data from the DRS and GNP and export data from World Bank files, as shown in the Country Tables volume of Global Development Finance. Export figures are earnings from goods and services, including worker remittances. Data on official grants are not included, although they may be a stable source of foreign exchange in some countries.

Country classifications for 1997

Global Development Finance 1997 classified indebtedness based on two ratios: the ratio of the present value of total debt service to GNP and the ratio of the present value of total debt service to exports. These ratios cast a country’s indebtedness in terms of two important aspects of its potential capacity to service the debt: exports (because they provide foreign exchange to service debt) and GNP (because it is the broadest measure of income generation in an economy). This methodology was applied by calculating the average of the ratios for 1993, 1994, and 1995.

This approach does not, however, fully capture the debt position of reporting countries. For instance, the resulting classification based on this methodology does not reflect the current position of countries that benefited from debt relief in 1996–97. To reflect such instances of a permanent reduction in debt, this year’s Global Development Finance makes a slight change in the classification methodology, calculating the two indebtedness ratios as follows:

• The ratio of the present value of total debt service in 1996 to average GNP in 1994, 1995, and 1996. (In cases where a joint debt sustainability analysis has been undertaken in the context of the Highly Indebted Poor Countries Debt Initiative, countries are classified based on the ratio of the present value of public and publicly guaranteed debt to exports of goods and services, excluding worker remittances.)

• The ratio of the present value of total debt service in 1996 to average exports in 1994, 1995, and 1996.

If either ratio exceeds a critical value—80 percent for debt service to GNP ratio and 220 percent for the debt service to exports ratio—the country is classified as severely indebted. If the critical value is not exceeded but either ratio is three-fifths or more of the critical value (that is, 48 percent for the present value of debt service to GNP and 132 percent for the present value of debt service to exports), the country is classified as moderately indebted. If both ratios are less than three-fifths of the critical value, the country is classified as less indebted. Countries are further classified as low income if 1996 GNP per capita was $785 or less and as middle income if 1996 GNP per capita was more than $785 but less than $9,636. Combining these criteria leads to the identification of severely indebted low-income countries (SILICs), severely indebted middle-income countries (SIMICs), moderately indebted low-income countries (MILICs), moderately indebted middle-income countries (MIMICs), less-indebted low-income countries (LILICs), and less-indebted middle-income countries (LIMICs; table A1.1).

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The use of critical values to define the boundaries between indebtedness categories means that changes in country classifications should be interpreted with caution. If a country has an indicator that is close to the critical value, a small change in the indicator may trigger a change in indebtedness classification even if economic fundamentals have not changed significantly. Accordingly, the use of critical values implies a greater degree of precision in the exercise than is warranted by their capacity to signal discrete changes in country indebtedness.

Moreover, these indicators do not represent an exhaustive set of useful indicators of external debt. They may not, for example, adequately capture the debt servicing capacity of countries in which government budget constraints are key to debt service difficulties. Countries (such as the franc zone countries in Africa) that allow the use or free conversion of a foreign currency can face government budget difficulties that are related to servicing external public debt but that are not necessarily reflected in balance of payments data. In other countries the servicing of domestic public debt may be a source of fiscal strain that is not reflected in balance of payments data. But rising external debt may not necessarily imply payment difficulties, especially if there is a commensurate increase in the country’s debt servicing capacity. Thus these indicators should be used in the broader context of a country-specific analysis of debt sustainability.

The discount rates used to calculate present value are interest rates charged by Organisation for Economic Co-operation and Development (OECD) countries for officially supported export credits. They represent, on average, the most favorable terms for fixed-rate nonconcessional debt that countries are able to contract in international loan markets. The rates are specified for 19 currencies, including G-7 currencies—British pounds, Canadian dollars, French francs, German marks, Italian lire, Japanese yen, and U.S. dollars. International Bank for Reconstruction and Development (IBRD) currency-pool loans, International Development Association (IDA) credits, and International Monetary Fund (IMF) loans are discounted at the Special Drawing Rights (SDR) lending rate. For debt denominated in other currencies, discount rates are the average of interest rates on export credits charged by other OECD countries.

In present value calculations, debt service on fixed-rate loans is determined and each payment discounted to compute its present value. For variable-rate loans, for which the future debt service payment cannot be precisely determined, debt service is calculated using the rate at the end of 1996 for the base specified for the loan.

Classification of low-income countries

Applying the present value methodology to 1994–96 data, 36 countries are classified as SILICs, 13 as MILICs, and 12 as LILICs (table A1.2). There are five changes from last year in the indebtedness classification of low-income countries: Cambodia, Kenya, and Togo joined the moderately indebted group because of a decrease in the debt to GNP ratio (Kenya) and decreases in debt to export ratios (Cambodia and Togo). Burkina Faso and Haiti became severely indebted because of increases in debt to export ratios.

Classification of middle-income countries

In the middle-income group, 12 countries are classified as SIMICs, 16 as MIMICs, and 47 as LIMICs. There were 13 changes in the indebtedness classification since last year. Algeria and Indonesia became severely indebted (because of increases in the present value of debt to exports ratios). Five countries joined the moderately indebted group: Georgia (because of an increase in the debt to exports ratio), Malaysia, Panama, and Thailand (because of increases in debt to GNP ratios), and Mexico (because of an increase in exports). Six other countries joined the less-indebted group: Egypt (because of improvements in both the debt to exports and debt to GNP ratios), Poland and Russia (because of an improvement in debt to exports ratio), and Papua New Guinea, Samoa, and Trinidad and Tobago (because of improvements in debt to GNP ratios).

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