After a pronounced slowdown in 1995, world economic growth accelerated in 1996 in both developed and developing countries. World economic activity is projected to gather strength in 1997 and remain vigorous in 1998 (Figure 1).3 At the same time, inflation rates remained moderate throughout 1996 and early 1997, falling in many cases to their lowest levels in decades, while efforts to reduce fiscal and external imbalances were intensified, with positive results in many countries. After having risen at a dramatic pace during the previous two years, in 1996 the rate of expansion of world trade slowed markedly, reflecting mainly sluggish import demand in some industrial countries and moderate growth in a number of Asian economies. Following are some regional highlights:4
Long-term interest rates continued a downward trend until early December 1996 to mid-February 1997 in most industrial countries, but increased significantly again during the first quarter of 1997, reflecting concerns about inflation risks and signs of stronger economic activity in several countries. By March 1997, nominal long-term interest rates were about 6 to 8 percent in the major industrial countries, except Japan (where they were about 2.3 percent), compared with a wider spread of 8 to 12 percent in the early 1990s. Such an overall decline in interest rates is of considerable importance, not only because of its direct effects on investment and economic activity but also, for the developing countries, because of its implications on capital flows and debt servicing.
Another factor of major importance for many developing countries is the behaviour of commodity prices. According to IMF, commodity prices in United States dollar terms rose overall by about 5 percent in 1996, with a 20 percent increase in the price of crude petroleum and a 1 percent decline in that of non-fuel primary commodities. The world index of prices for primary agricultural products5 fell from 110 in 1995 to 100 in 1996 (1990 = 100) in nominal terms.
Reflecting different weights in total exports, the index for the developed countries fell by 5 percent and that for the developing countries by 16 percent. The bulk of the latter reduction was in coffee (-25 percent) and sugar (-8 percent). Prices of natural rubber, hides and vegetables also fell considerably. Despite such declines in prices of major commodities exported by the developing countries, the overall index for these countries in 1996 was still 20 percent higher in real terms than the depressed levels of 1990-93. Moreover, prices of several commodities, including tropical beverages, tended to strengthen during the first quarter of 1997. As regards cereals, prices rose to very high levels during 1995 and 1996 but tended to weaken in the first half of 1997 (see Exhibit 6, p. 25).
Total outstanding external debt for all developing countries, according to preliminary estimates, reached $2 177 billion at the end of 1996. This represents an increase of $111 billion, or more than 5 percent in nominal terms, over the total debt at the end of 1995 ($2 066 billion).
The ratio of debt to export earnings, however, declined to 146 percent from more than 151 percent in 1995. All regions shared in the decline, except East Asia and the Pacific, which recorded an increase in the debt to export earnings ratio because of a sharp increase in private non-guaranteed debt. In sub-Saharan Africa, this ratio declined to 237 percent from 242 percent in 1995, reflecting debt-alleviation measures in favour of this region. Debt-service ratios, which express total debt-service payments as a percentage of total export earnings, also declined in all regions except Latin America owing to the prepayment of debt from the Mexico rescue package. The aggregate debt-service ratio for all countries in 1996 was slightly more than 16 percent, almost one point below the previous year. Sub-Saharan Africa recorded an estimated 12 percent debt-service ratio, against slightly more than 14 percent in 1995. In Latin America and the Caribbean the ratio stood at 30 percent in 1996 against 26 percent the previous year. To service their total outstanding debts, the developing countries paid a total of $245 billion in 1996, of which $101 billion were interest payments.
Negotiations between debtor countries and multilateral and bilateral creditors were actively pursued in 1996, giving rise to a number of encouraging developments in debt relief and debt reduction. The heavily indebted poor countries (HIPC) initiative, established in September 1995, was endorsed in 1996 by the World Bank, IMF, the Paris Club and bilateral creditors. Under this initiative, bilateral and multilateral creditors of poor, indebted countries provide debt relief in order to reduce the debt burden to sustainable levels over the medium term. Countries qualifying must be eligible to borrow from IDA and must have a good record of economic and social policy reform, including improvements in health care and education. The World Bank has established an HIPC Trust Fund, managed by IDA, and has set aside $500 million to cover its initial contribution. IMF is participating in the initiative through its enhanced structural adjustment facility (ESAF), a concessional financing facility that supports macroeconomic and structural reform in low-income countries. The first debt relief under the HIPC initiative was approved in April 1997 for Uganda which, through the operation, will reduce its multilateral and bilateral debt by about 20 percent or $700 million. Preliminary agreements have also been made with Bolivia, Côte dIvoire and Burkina Faso.
The Paris Club of creditors, through which the debt-relief operations for most official bilateral debt are negotiated, has continued to play a very important role. Between mid-1995 and end-1996, five stock-of-debt operations, which reschedule concessionally all stocks of debt, and nine flow reschedulings (which reschedule debt service falling due on eligible debt) were made on the so-called Naples terms, providing for a two-thirds reduction in present value terms on certain categories of official debt for the poorest countries. Since the introduction of the Naples terms in 1994, creditors have implemented six stock-of-debt operations or exit options, covering more than $2 billion, and 19 flow reschedulings, covering about $7 billion. In addition, seven agreements were made on non-concessional terms. The Russian Federation benefited from the largest ever restructuring package by the Paris Club, covering more than $40 billion in debt.
In 1996, seven agreements between debtor countries and commercial bank creditors were concluded, restructuring $17 billion in debt and reducing outstanding debt by more than $5 billion. Other debt conversion programmes, such as debt-for-equity, debt-for-development and debt-for-nature swaps, have increased rapidly. Between 1985, when these arrangements were first institutionalized, and 1995 such debt conversion has totalled $141 billion.
Capital flows to the developing countries, in particular private flows, reached record levels in 1996, reflecting relatively low interest rates in industrial countries, the continued development of capital markets in many emerging market economies, the investment opportunities created by privatization and, more generally, the climate of confidence created by successful stabilization and adjustment measures in many countries.
Aggregate net long-term external capital flows to developing countries reached an estimated $285 billion in 1996, an increase of 20 percent ($47 billion) over 1995. Net private capital flows, which account for 86 percent of total aggregate net long-term flows, continued to increase, reaching a record $244 billion, $60 billion above the figure for 1995. However, many of the worlds developing countries still do not share, to any significant extent, in the growth of private flows. East Asia and the Pacific, together with Latin America and the Caribbean, received the largest amounts of net private flows, $109 billion and $74 billion, respectively. Net private capital flows to sub-Saharan Africa, $11 billion in 1996, while still modest, were nevertheless ten times greater than at the beginning of the 1990s. China was the largest single recipient country, followed by Mexico. Private net flows recorded increases for all instruments, such as bonds, portfolio equity investments, foreign direct investment (FDI) and commercial bank lending. The latter, which had stagnated for many years, increased by $8 billion in 1996. Almost half of new bank lending was for project financing, especially for infrastructural development.
FDI flows to developing countries reached an estimated $110 billion in 1996, $14 billion more than in 1995, representing a fourfold increase since 1990. In 1996, East Asia and the Pacific and Latin America received the largest amounts of net FDI flows, with $61 billion and $26 billion, respectively, followed by Eastern Europe with $15 billion. FDI flows to sub-Saharan Africa, generally directed to the natural resource sectors of a rather limited number of countries, remained altogether low at $2.6 billion in 1996. China continued to be the largest individual recipient of FDI flows, accounting for more than $42 billion in 1996, a dramatic increase when compared with the $3.5 billion of 1990.
Net official development finance fell by $12 billion to an estimated $41 billion in 1996, the lowest level in more than a decade. Net official concessional flows, composed of ODA and other official aid flows to low- and middle-income countries, accounted for $44 billion in 1996, $0.8 billion lower than in the previous year. The decline was mainly attributable to a $1.3 billion fall in grants. Official concessional flows in 1996 remained concentrated in sub-Saharan Africa, with 34 percent of the total. However, the share of concessional flows to Europe and Central Asia rose from zero in 1990 to an estimated 20 percent in 1996. The decrease in long-term development assistance has been accompanied by a marked shift in fund allocation. An increasing amount of funds is indeed being directed towards emergencies such as refugee relief and other emergency aid. Altogether, an estimated 12 percent of all official development assistance is now devoted to emergency aid, compared with less than 2 percent in 1990.
In the absence of unforeseen shocks, most analysts foresee a continuing world economic expansion into the medium term. For many developing countries, success in curbing inflation, liberalizing their economies and opening to international trade should enhance their prospects for continued or even accelerating growth. The developing countries should also benefit from the expected continued economic expansion, accompanied by moderate inflation in industrial countries, significantly lower real interest rates than during the 1980s, continued trade liberalization and a strong increase in private capital flows. However, this overall optimistic outlook masks widely diverging expectations for specific countries and regions. Much of the economic improvement in developing countries is expected in the already fast-growing East and South Asia regions, as well as in other countries in Asia and Latin America and the Caribbean that are better integrated in world financial and trade flows. For the least-developed countries in Africa, on the other hand, even an annual growth rate of about 4.5 percent 6 would be inadequate to raise their per caput incomes to any significant extent, let alone close the gap vis-à-vis other regions. Prospects appear particularly gloomy for many agriculture-based economies where social problems pose obstacles to the pursuance of reform policies to the extent necessary for building growth momentum and investor credibility, and these economies are therefore unable to mobilize flows of finance for economic diversification. They must also face the prospects of reduced aid and intensified competition in international markets.
For countries depending on primary product exports, a crucial determinant of their economic performance will be the evolution of commodity prices. According to World Bank forecasts, the decline in non-oil commodity prices over 1996-97 would return about two-thirds of the price gains seen in 1994-95, but a broad flattening of these prices should subsequently occur, contrasting with the major declines of the past 15 years. Moderately optimistic expectations for commodity prices overall constitute one of the basic assumptions of the agricultural projections reviewed below.
Mid-term forecasts of economic and agricultural output growth in the developing countries, as elaborated by Project LINK, include the following noteworthy features:
Mid-term prospects for economies highly dependent on agricultural exports (EHDAEs)1 appear generally favourable in relation to past trends. The forecast growth of their agricultural export value (5 to 6 percent yearly during 1998-2001) would more than offset the projected deterioration in agricultural terms of trade, thus enabling some improvement in the purchasing power of their agricultural exports. The outlook appears more promising for the Latin American and Caribbean countries than for the African countries of this group, reflecting in particular the commodity composition of these regions exports. Indeed, market prospects appear to be more favourable for a number of export commodities of Latin America and the Caribbean in particular cereals, livestock products, soybeans and fruits than for the less diversified range of commodities that constitute the bulk of Africas agricultural exports chiefly coffee, cotton and cocoa.
The generally favourable prospects for the EHDAEs agricultural exports are expected to contribute to an improvement in their overall economic outlook. IMF has prepared for FAO some short-term (1997-98) forecasts of economic performance in these countries:
1 This group comprises 47 countries (24 in sub-Saharan Africa, 18 in Latin America and the Caribbean and five in the Near East and North Africa) for which agricultural, fishery and forestry exports are equivalent to at least 20 percent of their total exports, or 20 percent of their total imports.
3 Unless otherwise indicated, economic estimates and short-term forecasts in this section are from IMF. 1997. World Economic Outlook 1997. Washington, DC.
4 A more detailed account of economic developments in the developing country regions and economies in transition can be found in Part II, Regional review.
5 Computed using the 1980 weights, as used by United States Monthly Bulletin of Statistics, and on the basis of world market prices compiled by FAO.
6 This rate is projected by Project LINK for the period 1998-2001 (see Agricultural outlook for the developing countries, p. 46).
7 As reviewed above, developing countries GDP rose by more than 6 percent yearly during 1992-96. IMF projects GDP growth rates of 6.6 and 6.7 percent for these countries in 1997 and 1998, respectively, in line with Project LINK forecasts for this period. Crops and livestock production in the developing countries rose by 4 percent in 1993, 5 percent in 1994, 5.2 percent in 1995 and 2.9 percent in 1996.
8 A large number of analyses and projections have been made of Chinas future food needs and the resulting trade implications. These vary widely on the sides of domestic production and demand. A recent review (by Ke Bingsheng, Vice President and Professor at China Agricultural University) reveals that the gap between the most pessimistic and optimistic estimates of Chinas future cereal import needs in the various studies are almost 80 million tonnes for the year 2000, 111 million tonnes for 2010 and more than 300 million tonnes for 2030.