Debt of developing countries
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The debt of developing countries usually refers to the external debt incurred by governments of developing countries.
There have been several historical episodes of governments of developing countries borrowing in quantities beyond their ability to repay. "Unpayable debt" is external debt with interest that exceeds what the country's politicians think they can collect from taxpayers, based on the nation's gross domestic product, thus preventing it from ever being repaid. The debt can result from many causes.
Some of the high levels of debt were amassed following the 1973 oil crisis. Increases in oil prices forced many poorer nations' governments to borrow heavily to purchase politically essential supplies. At the same time, OPEC funds deposited and "recycled" through western banks provided a ready source of funds for loans. While a portion of borrowed funds went towards infrastructure and economic development financed by central governments, a portion was lost to corruption and about one-fifth was spent on arms[citation needed].
Debt abolition
There is much debate about whether the richer countries should be asked for money which has to be repaid. The
A seventh reason for canceling out some debts is that the money loaned by banks is generally created out of thin air, sometimes subject to a small capital adequacy requirement imposed by such institutions as the Bank of International Settlements.
Consequences of debt abolition
Some people argue against forgiving debt on the basis that it would motivate countries to default on their debts, or to deliberately borrow more than they can afford, and that it would not prevent a recurrence of the problem. Economists refer to this as a moral hazard. It would also be difficult to determine which debt is odious. Moreover, investors could stop lending to developing countries entirely.
Debt as a mechanism in economic crisis
An example of debt playing a role in economic crisis was the
Argentina's debt grew continuously during the 1990s, increasing to above US$120 billion. As a structural budget deficit continued, the government kept borrowing more, creditors continued to lend money, while the IMF suggested less state spending to stop the government's ongoing need to keep borrowing more and more. As the debt pile grew, it became increasingly clear the government's structural budget deficit was not compatible with a low inflation fixed exchange rate – either the government had to start earning as much as it spent, or it had to start (inflationary) printing of money (and thus abandoning the fixed exchange rate as it would not be able to borrow the needed amounts of US dollars to keep the exchange rate stable). Investors started to speculate that the government would never stop spending more than it earned, and so there was only one option for the government – inflation and the abandonment of the fixed exchange rate. In a similar fashion to
The Argentine government met severe challenges trying to refinance the debt. Some creditors denounced the default as sheer robbery. Vulture funds who had acquired debt bonds during the crisis, at very low prices, asked to be repaid immediately. For four years, Argentina was effectively shut out of the international financial markets.
Argentina finally got a deal by which 77% of the defaulted bonds were exchanged by others, of a much lower nominal value and at longer terms. The exchange was not accepted by the rest of the private debt holders, who continue to challenge the government to repay them a greater percentage of the money which they originally loaned. The holdouts have formed groups such as American Task Force Argentina to lobby the Argentine government, in addition to seeking redress by attempting to seize Argentine foreign reserves.
In 2016, Argentina cancelled its debt with the holdout creditors, which received returns in the order of the hundreds of percentage points.
The determinants of external debt crises in developing countries
Some of the major risk factors which increase the probability of the external debt crises in developing countries include high level of inflation, relatively large share of short term debt in external debt, denomination of the debt in foreign currency, decrease of the terms of trade over time, unsustainable total debt service relative to GNI, high income inequality, and high share of agriculture in GDP. At the same time, holding foreign exchange reserves is a strong protective measure against an external debt crisis.[6]
Recent debt relief
37 impoverished countries have recently received partial or full cancellation of loans from foreign governments and international financial institutions, such as the IMF and World Bank under the Heavily Indebted Poor Countries (HIPC) Initiative, see table below. A further two countries, Eritrea and Sudan are in the process towards full debt relief, Zimbabwe has unsustainable debt but has not made the reforms necessary to participate in the program.[7][8]
Under the Jubilee 2000 banner, a coalition of groups joined together to demand debt cancellation at the G7 meeting in Cologne, Germany. As a result, finance ministers of the world's wealthiest nations agreed to debt relief on loans owed by qualifying countries.[9]
A 2004 World Bank/IMF study found that in countries receiving debt relief, poverty reduction initiatives doubled between 1999 and 2004. Tanzania used savings to eliminate school fees, hire more teachers, and build more schools. Burkina Faso drastically reduced the cost of life-saving drugs and increased access to clean water. Uganda more than doubled school enrollment.[10]
In 2005, the
The 2005 HIPC agreement did not wipe all debt from HIPC countries, as is stated in the article. The total debt has been reduced by two-thirds, so that their debt service obligations fall to less than 2 million in one year. While celebrating the successes of these individual countries, debt campaigners continue to advocate for the extension of the benefits of debt cancellation to all countries that require cancellation to meet basic human needs and as a matter of justice.
To assist in the reinvestment of released capital, most
List of heavily indebted poor countries
36 post-completion-point HIPC[7] | ||||
---|---|---|---|---|
Afghanistan | Comoros | Guinea | Malawi | São Tomé and Príncipe |
Benin | DR Congo | Guinea-Bissau | Mali | Senegal |
Bolivia | Rep. of Congo | Guyana | Mauritania | Sierra Leone |
Burkina Faso | Côte d'Ivoire | Haiti | Mozambique | Tanzania |
Burundi | Ethiopia | Honduras | Nicaragua | Togo |
Cameroon | The Gambia | Liberia | Niger | Uganda |
Central African Republic | Ghana | Madagascar | Rwanda | Zambia |
Chad | ||||
2 post-decision-point HIPC[7] | ||||
Eritrea | Sudan |
2004 Indian Ocean earthquake
When the
The debt relief for tsunami-affected nations was not universal. Sri Lanka was left with a debt of more than $8 billion and an annual debt service bill of $493 million. Indonesia retained a foreign debt of more than $132 billion[13] and debt service payments to the World Bank amounted to $1.9 billion in 2006. In 2015 the total debt of Sri Lanka is $55 billion.[14] Some of this is due to borrowing to help with infrastructure and some of it is due to corruption. The last time they sought help from the IMF was 2009, they received a $2.6 billion loan. They have yet to recover from the tsunami.[15]
G8 Summit 2005: aid to Africa and debt cancellation
The traditional meeting of G8 finance ministers before the summit took place in
Opponents of debt cancellation suggested that structural adjustment policies should be continued. Structural adjustments had been criticized for years for devastating poor countries.[16] For example, in Zambia, structural adjustment reforms of the 1980s and early 1990s included massive cuts to health and education budgets, the introduction of user fees for many basic health services and for primary education, and the cutting of crucial programs such as child immunization initiatives.
Criticism of G8 debt exceptions
Countries that qualify for the HIPC process will only have debts to the World Bank, IMF and African Development Bank canceled. Criticism was raised over the exceptions to this agreement as Asian countries will still have to repay debt to the Asian Development Bank and Latin American countries will still have to repay debt to the Inter-American Development Bank. Between 2006 and 2010 this amounts to US$1.4 billion for the qualifying Latin American countries of Bolivia, Guyana, Honduras and Nicaragua.[17]
See also
- Committee for the Abolition of the Third World Debt
- Domestic Liability Dollarization
- Eurodad (European Network on Debt and Development)
- Haiti's external debt
- Jubilee USA Network
- List of countries by public debt
- List of countries by household debt
- List of countries by corporate debt
- List of countries by external debt
- Odious debt
- Original Sin (economics)
- Sovereign debt
- World debt
References
- ^ Rubin, Jeff (April 1997). "Challenging apartheid's foreign debt" (PDF). Archived from the original (PDF) on 16 May 2017. Retrieved 18 January 2017.
- ^ Brand, Robert; Cohen, Mike. "South Africa's Post-Apartheid Failure in Shantytowns". Bloomberg News.
- ^ "A Guide To South Africa's Economic Bubble And Coming Crisis". Forbes. Retrieved 7 April 2015.
- ^ "Jubilee Campaign". jubileedebtcampaign.org.uk. Archived from the original on 28 April 2010.
- ^ The Chicago plan & New Deal banking reform By Ronnie J. Phillips, 1995, M.E. Sharpe Inc.
- ^ "Determinants of External-Debt Crises. A Probit Model.", Magomedova, Medeya, 2017.
- ^ a b c "Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative". International Monetary Fund. 23 March 2021. Retrieved 29 May 2021.
- ^ "Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI), Statistical Update" (PDF). World Bank. 26 July 2019. Retrieved 26 July 2019.
- ^ "jubileeresearch.org". Archived from the original on 7 September 2006. Retrieved 28 July 2006.
- ^ "jubileeusa.org". Archived from the original on 9 October 2006. Retrieved 21 July 2019.
- ^ "undp-povertycentre.org" (PDF). Archived from the original (PDF) on 22 July 2007. Retrieved 24 March 2008.
- ^ guardian.co.uk
- ^ "Odious Debt Case Studies Series" (PDF). Jubilee USA Network. Archived from the original (PDF) on 22 December 2005.
- ^ Chaudhury, Dipanjan Roy (3 September 2018). "New Chinese loan may further plunge Sri Lanka into debt trap". The Economic Times. Retrieved 9 December 2019.
- ^ Sirimanne, Asantha; Ondaatjie, Anusha. "Sri Lanka Looks to IMF for Help as Debt Burden Climbs". Bloomberg News. Retrieved 6 April 2015.
- ^ Shah, Anup (July 2007). "Structural Adjustment—a Major Cause of Poverty". Global Issues. Retrieved 13 August 2007.
- ^ "Latin America's Debt and the Inter-American Development Bank" (PDF). Jubilee USA Network. 2006. Archived from the original (PDF) on 10 November 2006.