Problem

External national budget deficit

Other Names:
Foreign debt
Dependence of countries on budget deficit financing through external borrowing
Nature:

Foreign debt is a problem which generates other problems. Thus internal debt (augmented by the transfer of resources to the export sectors, including subsidies and incentives for exports), inflation, economic stagnation, increasing levels of unemployment and underemployment, declining real salaries and levels of nutrition, health etc., can originate in the austerity imposed by the foreign debt.

Incidence:

[Industrialized countries] In the USA in the 1980, the total federal debt was $914 billion. In 1990 it is $3 trillion and rising. The annual net interest payments on that debt were $52 billion in 1980. In 1990 they are nearing $200 billion, accounting for 15% of the annual budget. A balanced budget according to the Gramm-Rudman balanced-budget law would limit the deficit to $64 billion. A succession of large trade deficits over the previous years, means that by 1994, the UK's net assets position, worth £110 billion in 1987, would be wiped out. It was predicted that the current account deficit would reach £25 billion by 1997.

 

[Former socialist countries] The combined debts of socialist countries to the West stood at over US$ 115,000 million in 1987. This was nearly 30% higher than three years before. The debts are principally to private commercial sources, to Western governments, and to the World Bank and the International Monetary Fund. They were largely incurred for the importation of food and agricultural products, and for Western technology, fuels and energy raw material. Consumer goods are also imported. The degree of indebtedness varies considerably from one socialist country to another. In 1983, the figures were: Albania $25 million; Bulgaria $3,300 million; Czechoslovakia $2,750 million; former GDR $10,750 million; Hungary $7,250 million; Poland $30,900 million; Yugoslavia $20,500 million, plus $3,400 million owed by Comecon banks. In 1990 Poland owed about $41 billion, Hungary $21 billion and Bulgaria $9 billion to foreign creditors.

[Developing countries] Budget deficits in the developing countries are steadily increasing, due to developmental and energy costs on the one hand, and their foreign trade vulnerability on the other. Many developing countries are running balance-of-payments deficits while carrying the burden of large foreign debt as well. The unwillingness or inability of the industrialized world to help has made more noticeable the inadequate levels of cooperation among the less developed countries and regions.

For example, nearly half of the national budget of the Philippines goes to debt payment. More than $20 billion was paid in debt servicing interest (60% of total export earnings) to international banks in the period 1987-1992. India foreign debt in 1989 was around $62 billion. Whilst the bulk of the borrowings are constituted by long term, concessional loans from the multilateral agencies, there is increasing reliance on short term commercial sources, with the amount of untied loans getting less at the same time as the terms for market related loans are becoming less favourable. Despite the fact that between 1972 and 1988, more than $176 billion was paid by Brazil in debt servicing, the country's total foreign debt in 1989 was $112.3 billion. Due to fluctuating interest rates imposed by international bankers, Brazil and other countries suffered enormous losses. Contracts that were signed in 1976 at 6.25% interest may have had their interest rates increased to 21.5% by 1981. During the period of 1973 to 1985, Brazil paid additional interest of $34.5 billion.

Related UN Sustainable Development Goals:
GOAL 16: Peace and Justice Strong Institutions
Problem Type:
D: Detailed problems
Date of last update
14.05.2019 – 16:56 CEST