Debt creating aspects of export credits

August 1, 1998

Export Credit Guarantees should, as a rule, only be extended for development purposes. However, increases in export credit guarantees seem to reflect an exporter-driven drive for business, rather than a borrower-driven need for funding.


A guaranteed export credit is a loan, usually made to a developing country, to allow that country to be able pay for an export contract. It will be usually made by the exporting company or a commercial bank. Part or all of the scheduled repayments are then guaranteed against the risk of non-payment by the government of the exporting country. These guarantees are issued by the national export credit agency, which will also supply insurance against political risk .

The rationale behind export credit guarantees is that economic and political uncertainties about developing countries are a disincentive for Foreign Direct Investment (FDI) and trade in general, and project finance in particular. Therefore, export guarantees and investment insurance should help to increase financial flows to developing countries.

However, export guarantees and investment insurance turn out to be primarily trade-promoting instruments for companies in the North rather than development-oriented instruments for the Third World. The economic, social and environmental consequences of the projects supported are dubious, and the ‘ambiguous’ character of export credits and guarantees only further aggravate the problem. Exporters enjoy the full yields if a project is successful but are also able to transfer the losses to the public sector when confronted with the risks of international finance. This is a clear case of moral hazard: exporters are incentivised to maximise their exports, in the knowledge that they will – at public expense – be bailed out of deals that go bad. This also distorts pricing: the financing terms of deals do not reflect the real level of risks, with the illusion of cheap financing encouraging unnecessary borrowing. Clearly, this leads to inefficient allocation of capital, corruption and waste.

As public entities, export credit agencies are supposed to help bear responsibility for promoting sustainable and equitable development in developing countries, but too often these agencies’ actions conflict with domestic priorities.

Recent developments

Export credits are one of the most important sources of financing for developing countries. Between 1990 and 1995, total export credits grew by 11 percent annually. This strong expansion was driven by more aggressive export promotion and the changing nature of international financing for developing countries, which has shifted to project finance and direct investment projects. About half of the new export credit commitments during this period were related to large infrastructure projects in power generation, telecommunications and transport. In 1996, the total exposure to developing countries amounted to US$463 billion, a two-percent decline compared with 1995 but about 40 percent higher than in 1990. The Japanese, American, German, French and Italian national export credit agencies in particular are large suppliers of guarantees and insurance (Gerster, 1997, pp. 124).

New export credit guarantee commitments have increased strongly during the 1990s, and also private investment insurance is quickly gaining importance. In the period 1990-1996 export agency commitments to developing countries averaged US$110 billion a year and in 1996 new commitments amounted to US$94 billion (World Bank, 1998, pp. 58). The decline in new export credit commitments in 1996 reflected partly growing concerns about the macroeconomic situation and financial sector fragility in emerging markets, especially in Asia. Following the economic collapse of Asia and the subsequent problems in Russia, South Africa and South America, new commitments are likely to fall further in 1997 and 1998.

Export credit agencies exposure is concentrated in only few countries; the ten main recipients accounted for 55 percent of agencies’ total exposure. Table 1 lists the ten largest recipients of export credits (Boote & Ross, 1998, pp. 12). This table clearly shows that only a small number of middle-income countries receive the bulk of new export credit commitments.

The multilateral institutions have expanded their guarantee activities during the 1990s. The World Bank Group covered private investment flows worth US$ 4.5 billion in 1997, compared with US$ 1.4 billion in 1991 (World Bank, 1998, pp. 60-61). Also a number of regional development banks, such as the Inter-American Development Bank, the Asian Development Bank and the European Bank for Reconstruction and Development increasingly provide guarantees. The development banks are however supposed to promote development in the Third World and thus have a very different core mission than export credit agencies. According to the World Bank their guarantee activities intend to serve as a catalyst for private sector activities in developing countries and increase their integration with the global economy. Reasonable as this may sound, World Bank – or other development bank – guarantees can be as disruptive as any guarantee issued by an export credit agency.

Debt creating aspects

If an export guarantee is activated the liability owed to the private sector passes to the public sector, and is added to the total stock of official bilateral debt. Export credits thus bear an ambiguous identity because a private claim can be turned into a public claim. Most national export credit agencies operate however in a secretive manner and on neither the creditor nor the debtor side is the public fully aware of the financial and qualitative consequences. Export guarantees create the illusion of cheaper capital by making funds available at rates below market. It is often claimed that less financing would be made available if official cover were not provided. This is probably true in the present system, as government guarantees are in effect creating subsidies, encouraging corporates to finance trade and exports that would otherwise be economically unviable. Not that less financing is necessarily a bad thing. The current system serves to encourage excessive lending: consistent year-on-year increases in export credit guarantees would seem to reflect an exporter-driven drive for business, rather than a borrower-driven need for funding.

A rethink of the current system would stem excess and unproductive lending, whilst maintaining an adequate flow of resources to developing countries. A reduction in the amount of government guarantees available would ensure that exporters price their lending to reflect risk levels, or insure themselves against those risks. Mechanisms exist that would enable them to do both of these things. Under the existing set-up, export credit guarantees are at risk of becoming tools to promote one country’s exporters at the expense of another’s. The original aim of financing important projects and key imports for developing countries risks becoming distorted. The lack of transparency and competition in the current system simply adds to these distortions.

These criticisms are backed up in a study that analyses export credit guarantees and identifiea five main problems: excess flows, inappropriate projects, design weaknesses, overpriced goods and corruption.

The importance of export credits as a debt-creating vehicle for developing countries is clearly reflected in statistics on the indebtedness of developing countries. Export credit agencies are the largest official creditors of developing countries. The debts related to export credits account for 24 percent of total indebtedness of these countries and for 56 percent of their indebtedness to official creditors in 1996 (Boote & Ross, 1998, pp. 11). A few countries such as Gabon, Algeria, and Nigeria owe more than 50 percent of their total debt to export credit agencies (see table 2).

Although low-income countries (LICs) are not major recipients of export credits, these flows do represent a significant part of the debt stock for a number of LICs. For instance Lesotho, Congo DR, Cameroon and Congo have a relatively large portion of export credit related debt (see table 2). Since export credit related loans are usually less concessional than other official loans, they also figure disproportionately in a country’s debt service profile.

Restructuring of export credit debts

The overall debt problem of LICs in particular is very apparent and the export credit related debts constitute a major drain on developing country foreign exchange earnings. Many countries have been unable to fulfil their debt obligations in the past and were forced to enter the seemingly endless cycle of subsequent debt restructurings.

The Paris Club is the key forum for rescheduling guaranteed export credits. The Paris Club distinguishes two groups of debtors according to income and indebtedness. The severely indebted low-income countries can qualify for a debt service or debt stock reduction of 67 percent (Naples terms) provided that the country can boast a satisfactory track record of IMF reform programmes over the past 3 years and has cleared its arrears with the Paris Club. This reduction is also applied to the export credit debt. It is however important to note that the reduction is only applied to eligible debt, i.e. all debt incurred before the country’s first visit to the Paris Club. Debts contracted after this so-called cut-off date are excluded. Needless to say this significantly reduces the scope of the reduction, especially if the country has an early cut-off date. For instance, in 1995 Uganda (cut-off date 1982) received a 67% percent reduction of its eligible bilateral debt stock. This represented only a 2 percent reduction of its total debt (see for more details Eurodad, 1995). Since 1996 a small group of countries is eligible for an 80 percent reduction under the Highly Indebted Poor Countries Initiative . Lower-middle income countries that do not qualify for Naples terms can qualify for a restructuring of their export credit debts at less generous terms . Other middle-income countries cannot reschedule their export credit debts although some exceptions have been made in the past. Egypt, Poland and Russia have for instance benefited from exceptional relief measures (Martin, 1994, pp. 25).

Finally, because of the preferred creditor status of multilateral institutions all debts owed to these institutions need to be repaid in full . This also applies to export guarantee related debts.


Export credits can be an important source of finance for developing countries. When applied in a more development-oriented way, export credits and guarantees can act as a catalyst for private sector activities and promote sustainable development in developing countries. However, it is too often the case that exporters’ self-interest prevail over developing countries’ needs. Protection of Western export sectors or political interest are factors that significantly influence the allocation of these flows. The secretiveness that shrouds the process creates an obstacle for efficient market behaviour and the overall costs are high. Too many projects covered by export credits and guarantees do not perform and while exporters are using public funds to cover their losses, developing countries are facing the consequences. A quarter of total external debt is owed to export credit agencies and this represents an enormous drain on these countries’ scarce resources. Moreover, the social and environmental cost of projects covered by export credits and guarantees are often high.

Export Credit Guarantees should, as a rule, only be extended for development purposes. Commercial companies and banks are capable of assessing risks by themselves and using the appropriate tools to mitigate those risks. Moreover guarantees should only be extended where there is a specific need for the financing. In the current system, Western governments are creating moral hazard by underwriting private risk using public funds, which is leading to unnecessary and ill-judged lending and ultimately increasing developing countries’ indebtedness.

In view of their development mission, multilateral institutions have in this respect large responsibilities and should set the example. The World Bank, and other development banks, should apply high standards regarding economic feasibility, social impact and environmental impact of projects that are being considered for a guarantee. Furthermore, much more coherence between export promoting policies and development policies in the North is needed. In different international fora, governments have been encouraged to sustainable and equitable development by taking into account human development and environmental factors for all financial assistance to developing countries. The time has come to put these intentions into practice.


Boote, A.R. & Ross, D.C. (Eds.) (1998). Official financing for developing countries. Washington: IMF

Eurodad (1995). The Naples Terms; not what they appear to be. Briefing Paper

Chote, R. (1998). Export credit agencies give pledge. In: Financial Times 23 February 1998

Fues, T. (1994). Reforming export guarantee systems: challenges ahead for Northern NGOs. Study commissioned by Eurodad, August 1994

Gerster, R. (1997). Official export credits and development: international harmonisation as a challenge to NGO advocacy. In: Journal of World Trade Vol. 31 No. 6, pp. 123-135

Martin, M. (1994). Official Bilateral debt: new directions for action. Eurodad Policy Paper.

World Bank (1998). Global Development Finance Vol 1; Analyses and summary tables. Washington: World Bank |Articles | Background Documents | Featu

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