External debt crisis

Governments may borrow funds on foreign money markets to finance developments within their country. Foreign-held debt gives a claim by foreigners against national output in the sense that payment of interest and principal by the capital-poor nations requires export of goods to earn national income. To the extent that foreign debt continues to rise, taxation may rise, and economy in terms of public services and the standard of living in general tend to fall. Increasing foreign debt may open the way to greater transnational corporation ownership of production facilities or greater penetration of the financial infra-structure. Excessive foreign debt leads to impoverishment until obligations are paid or until they are defaulted upon or until they are repudiated. Unpaid debt leads to being barred from the world capital markets, and can lead to peaceful or violent change in government or to war.

The external public debts of developing countries arise as a result of funds borrowed under a variety of conditions in order to finance different aspects of the development process within the country. In the general case, the problems of large development debts are of a structural origin. When service on foreign debt grows faster than export earnings, foreign exchange budgets become constricted and vulnerable. New aid relieves the burden only partially, for debt service is payable in untied and convertible foreign exchange, whereas aid is usually tied. Moreover, the stimulation of the export earnings needed to meet foreign debt is not helped by the protectionism of creditors. Where there are also structural limits to the rate at which exports can grow, very large-scale lending may create unmanageable debt situations. Current high rates of interest tend to make the problem even more difficult.

There is a widespread impression that the problem of indebtedness is highly concentrated in relatively few developing countries, facing difficulties either because of an excessive accumulation of debt (particularly short-term debt on hard terms) or because of a sudden reduction in the capacity to service debt due to unfavourable developments in foreign exchange receipts. However, there is growing evidence that experience to date can serve only as a warning of a much broader and more widely diffused problem resulting from the inappropriateness of the terms of aid, and from the pressure upon developing countries to seek suppliers' credits to make up for the shortfall in the volume of aid.

Because of the large current account deficits of many developing countries in the early 1980s, substantial adjustments have been required to cover interest obligations. The best way to have adjusted would have been to combine cuts in spending with policies to switch production into exports and into efficient import substitution, which usually requires a real depreciation in the exchange rate. The process is less costly if it does not occur too swiftly, if a large proportion of domestic output is easily traded and if it is easy to expand exports rather than necessary to compress imports. Unfortunately, many of the principal debtor countries got into difficulties just because these conditions did not exist: their exchange rates had become seriously overhauled; their producers were heavily protected, often by import controls that reduced the incentive to sell abroad; export industries were relatively underdeveloped and, in addition, faced growing restraints in foreign markets.

The world debt crisis, caused both by the oil price shocks of 1974 and 1980-81 and by domestic policies which advocated high levels of spending, expansion and borrowing, has reached the point where many debtor nations are unable to pay even the interest rates on their loans and are threatening non-payment if their loans are not re-structured by the IMF and other banks.

[Developing countries]

In 1993, the World Bank listed 51 low- and middle-income countries as having encountered severe debt servicing difficulties (based on 1989-91 data for those economies reporting detailed debt data, where severely indebted meaning either the present value of debt service to GNP is above 80 percent or the present value of debt service to exports is above 220 percent) "Severely indebted low-income countries" were: Afghanistan, Burundi, Cambodia, Egypt, Equatorial Guinea, Ethiopia, Ghana, Guinea-Bissau, Guyana, Honduras, Kenya, Liberia, Lao PDR, Madagascar, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Nigeria, São Tomé and Principe, Sierra Leone, Somalia, Sudan, Tanzania, Uganda, Viet Nam, Zaire, Zambia. 21 "middle-income" developing countries also severely indebted were: Albania, Algeria, Angola, Argentina, Bolivia, Brazil, Bulgaria, Congo, Côte d'Ivoire, Cuba, Ecuador, Iraq, Jamaica, Jordan, Mexico, Mongolia, Morocco, Panama, Peru, Poland and Syrian Arab Republic.

In 1986 debt service payments of all developing countries reached $101 billion. At the end of 1983, the major Latin American debtor countries had interest payments which alone consumed 40% of all their export revenues (every percentage point of USA interest rates costs Latin American countries around $3 billion); it exceeded 50% in four of them. In Turkey and the Philippines it is also about 50%.

In 1990 it was estimated that 16 of the largest debtor countries alone owed $22 billion at the end of August, more than triple the amount they owed in early 1989. The total debt of all developing countries at the end of 1992 was estimated at $1,662 billion, a 3.5% decrease on the previous year, but with a predicted rise of 6.5% to $1,770 billion by the end of 1993. In 1994 it was estimated that Zambia owed foreign creditors about £515 for every Zambian citizen, namely more than double the average Zambian annual wage of £220. Similarly Jamaica owed £1,095, namely well above the average earnings of every individual on the island.

Statistics from the United Nations Development Programme (UNDP, reported to Rio+5 conference in 1997, are that the debt burden on the developing world continues to mount, now reaching US$2.1 trillion. Sub-Saharan Africa's debt payments are larger than its expenditures on health and education.

[Small island developing states]

The 20 countries for which information is available increased their total outstanding debt at the same rapid rate as did developing countries in general over the period 1975-1982. However, over the period 1979-1982 the acceleration was significantly greater for all island developing countries than the average for all developing countries, and in particular for smaller island developing countries. Total outstanding debt grew by less than the average for all developing countries during these four years in only five island developing countries for which information is available; three of these have populations of over 2 million and the fourth is Bahrain, for which no external debt is recorded for the whole period 1975-82.

[Former socialist countries]

The debt inherited by Russia ($78 billion, the third largest among non-OECD countries) represents a heavy burden on its economy. Over half this debt is owed to official bilateral creditors. The Paris Club has shown considerable flexibility in rescheduling it, but if agreements continue to deal only with debt service falling due each year, rather than with the stock of debt, arrears might keep emerging, damaging the confidence of foreign investors and lenders and fuelling capital flight.