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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.