Problem

Burden of servicing foreign public debt

Other Names:
External debt-servicing difficulties
Inadequate public debt relief for developing countries
Unsustainable debt-servicing obligations
Acute debt-servicing problems
Foreign debt trap
Indebtedness of developing countries
Third world debt
Public debt overhang
Nature:

Countries may accumulate an external public debt with servicing obligations which cannot readily be met at the time when they fall due. Money may then be borrowed on less favourable terms just to pay the interest on prior debts. Under some circumstances, and there is no clear definition, the debt burden may be considered 'oppressive' and some form of debt relief is called for.

Large debt service obligations discourage foreign investment and divert budgetary allocations away from essential investments in health and education. They also yield most economic decision-making to the hands of international creditors, undermining fragile democratic processes.

Frequent rescheduling of debt over the years at commercial interest rates has led to a rapid and insupportable growth in some countries' debt problems. When interest rates rise relative to export prices, real debt burden will increase and import capacity will decrease. Rescheduling of debt service and debt principle payments is widely criticized as aggravating the public debt burden of these countries and drawing attention away from solutions to their economic problems. Few alternatives are forthcoming, however.

Incidence:

The negative impact of unsustainable external debt-servicing extends around the world. Total outstanding debts for developing countries soared from US$68.4 billion in 1970 to $835 billion in 1985, with interest payments alone totaling $60 billion annually (draining the bulk of economic surplus of many countries). In 1993, over 20 developing countries were in arrears with the registered international financial institutions and the regional development banks. In 1982 and 1983, official creditors and banks had to reschedule over $100 billion in loan repayments owed, while in 1983 alone, non-oil exporting countries paid $50 billion just for debt-servicing interest.

Since the early 1980s, sub-Saharan Africa's debt has tripled to $180 billion, and the annual cost of servicing it is $10 billion, draining the region's limited capital resources. Moreover, despite allocating almost a third of their foreign exchange earnings to debt repayments, most countries are building up arrears at a frightening rate. Collectively these amount to almost $11 billion, compare with $220 million in 1980. In 1992, the newly elected government in Zambia was faced a bill for $123 billion in IMF arrears, along with a list of conditions likely to hamper recovery efforts, leading the deputy finance minister to comment that "democracy is a damned expensive thing". Every Zambian citizen now owes the country's creditors $1,000 -- three times what they earn in a year.

The human costs of Africa's debt crisis have been immense, with governments squeezing public sector wages and health and education budgets to meat their financial obligations. Debt repayments are also undermining efforts to introduce successful market reforms. Cuts in spending have destroyed the infrastructures on which efficient market depend, deterring foreign investment in the process. At the same time, the squeeze on imports and high interest rates needed to maintain debt transfers has deprived potentially competitive industries of access to the capital equipment they need to expand their market, at home and overseas. Living standards, which fell by a third in the 1980s, investment is hovering around mid-1970s levels, infrastructure is collapsing, inflation is rampant and hunger a spreading threat.

A specific example is Mozambique. The World Bank claims that it is "sustainable" for countries like Mozambique to pay a quarter of their export earnings on debt service. Yet after World War II, Germany was not required to pay more than 3.5% of its export earnings on debt service. Poor countries today need a ceiling on debt service similar to the one Germany had. According to UN statistics, if Mozambique were allowed to spend half of the money on health care and education which it is now spending on debt service, it would save the lives of 100,000 children per year.

The pressure of debt servicing also manifests itself in relation to workers salaries. In Brazil, approximately 20 million of the 60 million economically active citizens receive up to the minimum wage -- roughly $50 a month. The consequences of this salary squeeze is a lowered life expectancy for non-specialized workers (on average 44 years in states like Paraiba compared with 60 for Brazil as a whole). The economy has been oriented toward exports as opposed to the internal market. One reason for salary reduction is that the prices of exported commodities were lowered in order to compete in international markets. Moreover, to diminish domestic consumption and generate an exportable surplus, it was necessary for domestic prices to rise. There is also threat to the protection and sustainable management of ecosystems due to the combination of pressure to increase exports, insufficient funding for environmental agencies, and the necessities of millions of people living in absolute poverty.

Taking exclusively into account the situation of the sub-Saharan African countries, the Secretary-General of the United Nations launched, on 15 March 1996, what is said to be an unprecedented programme to mobilize all the organizations of the United Nations system and funds in an amount of $25 billion to put the economies of these countries back on their feet. The resources will not be new ones but rather a reorientation of resources already existing at the national and international levels. The international financial institutions are considering a series of measures to lighten the burden on the most heavily indebted countries. According to the World Bank, it is impossible to break the vicious debt circle with the existing financial instruments and new ones will have to be created. The Bank proposes, in the first instance, to establish a ceiling for debt-servicing which should not exceed 20 to 25 per cent of the export earnings of the country concerned. As for the debt itself, its weight must not be greater than two and a half times the value of exports. In practice, these alleviating mechanisms would intervene only as a last resort, once all the present conventional remedies had been exhausted. In view of the fact that the multilateral debt cannot be rescheduled, still less cancelled, the measures proposed seem to be simple stopgap devices designed to ensure repayment of the debt. We all remember the promises made in the context of the structural adjustment programmes which very rapidly turned into a resounding failure in all the countries that applied them.

The manner in which the debt is managed at present also enables transnational corporations to frustrate any attempt by the developing countries to assert their sovereignty or chart the course of their own development. Because of the role it plays today, debt is a formidable instrument for domination which the transnational corporations wield effectively against the developing countries. Reference must be made here to the failure of the Bretton Woods institutions to carry out their primary mission - that of creating and maintaining a balance between the various actors of international economic life in the best interests of humanity. This failure, combined with the activities of the transnational corporations and the selfishness of the developed countries, has led to the establishment of two harmful and destructive practices in the form of structural adjustment programmes and, more recently, devaluation of the currencies of the developing countries.

Claim:

Developing countries are called upon to fulfill their debt service obligations to the international creditor community without consideration of their ability to do so. The burden of debt repayments makes real growth impossible and the poor even poorer. The only realistic way to deal with third world loans is to write them off.

Counter Claim:

A large number of countries have avoided debt-servicing difficulties. Some of them were highly successful in expanding exports and maintaining low rates of inflation by restraining growth in domestic absorption. Although most of these same countries financed a higher share of investment from domestic savings than did most of the counties that borrowed heavily, some heavy borrowers avoided debt-servicing difficulties by expanding exports (Republic of Korea, Thailand, Colombia). Other countries which have so far escaped debt-servicing difficulties are large countries (China, India) that maintained prudent borrowing policies, and oil exporters that, during much of the period of high international interest rates, enjoyed highly favourable terms of trade.

Related Problems:
Ecological debt
Problem Type:
D: Detailed problems
Related UN Sustainable Development Goals:
GOAL 1: No PovertyGOAL 2: Zero HungerGOAL 3: Good Health and Well-beingGOAL 4: Quality EducationGOAL 5: Gender EqualityGOAL 6: Clean Water and SanitationGOAL 7: Affordable and Clean EnergyGOAL 8: Decent Work and Economic GrowthGOAL 9: Industry, Innovation and InfrastructureGOAL 10: Reduced InequalityGOAL 11: Sustainable Cities and CommunitiesGOAL 12: Responsible Consumption and ProductionGOAL 13: Climate ActionGOAL 14: Life Below WaterGOAL 15: Life on LandGOAL 16: Peace and Justice Strong InstitutionsGOAL 17: Partnerships to achieve the Goal
Date of last update
22.05.2019 – 15:44 CEST