Download 4.7 the role of international debt

LEARNING OBJECTIVES
1. Outline the meaning of foreign debt and explain why
countries borrow from foreign creditors.
2. Explain negative consequences for those LDCs that
have become heavily indebted.
3. Explain the impact on BoP and opportunity cost in
terms of foregone spending on development.
4. Explain why the burden of debt has led to cancel the
debt of heavily indebted countries.
THE MEANING OF FOREIGN DEBT AND WHY
COUNTRIES BORROW FROM FOREIGN CREDITORS.
Foreign debt occurs when a government owes money to
another country or financial institution in another
country as a result from loans.
Debt servicing is a term used for the obligation of
making regular payments of debt (loans + interest).
LDCs have to borrow money from other countries or
commercial institutions because…
NEGATIVE CONSEQUENCES FOR THOSE LDCS
THAT HAVE BECOME HEAVILY INDEBTED
When governments have to use their tax revenue to
service their debts, there are opportunity costs
involved.
This can be shown by a government spending possibility
line: if less money is spent on servicing debt, then
more money can be spent on health care, education
or infrastructure.
Debt relief/cancellation would free up money so that
governments can finance development objectives.
ILLUSTRATION OF DEBT VS. SPENDING
WHY DOES DEBT SERVICING CAUSE ‘PROBLEMS’
ON THE BALANCE OF PAYMENTS?
DEBT RELIEF (= REDUCTION IN DEBT) OR DEBT
CANCELLATION (= NOT HAVING TO PAY THE DEBT)
In some cases countries have become heavily indebted
and require “rescheduling of the debt payments and/or
conditional assistance from international organizations”,
including the IMF and the World Bank.
What does rescheduling of the debt mean?
What is the conditional assistance (from the IMF)?
WHY THE BURDEN OF DEBT HAS LED TO CANCEL THE
DEBT OF HEAVILY INDEBTED COUNTRIES.
Odious debt is debt that is incurred by political rulers who have
not used the money in the best interest of the people; much
of the debt in ELDC could be classified as such. Some
economists argue that therefore debt relief should take place.
Debt relief may lead to increased economic growth, which would
have a positive impact on employment, the environment,
government revenue and possibly investments.
Debt relief will likely not be enough on its own and several
policies need to work at the same time to create economic
growth.