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Role of International Debt (Consequences of high levels of foreign debt…
Role of International Debt
Foreign Debt
Total amount of debt incurred by borrowing from foreign creditors
Why countries borrow from abroad
Abundance of loanable funds
Underdeveloped domestic financial markets
Foreign exchange needed to finance import purchases
serious problems in the BOP
Consequences of high levels of foreign debt
BOP problems
export growth is slower than debt servicing > depreciation of currency (Lower DD for currency)
Possibility of debt trap
borrowing to service debt
Opportunity costs & lower public investment
forgone imports from diverted export earnings
Lower private investment
Lower economic growth & development
Debt rescheduling and conditional assistance
Debt rescheduling w longer period/lower interest
Conditional loans from IMF (stabilisation policies)
Conditional loans from World Bank (economic & trade liberalisation policies)
Debt-for-equity swaps
Government loses control of some major assets to foreign-owned corporations at a price lower than market price
Foreign corporation takes responsibility for part of government's debt in exchange for ownership of state assets
Debt cancellation and HIPC initiatives
Rationale
Some countries cannot afford to repay without sacrificing the provision of basic needs (Kenya)
Odious debt to dictators/oppressive regimes, where a significant portion of loans were stolen through corruption
Debts taken on to finance projects that failed due to bad advice or incompetent leadership
Heavily Indebted Poor Countries (HIPC)
identified 39 countries eligible for debt relief and special assistance from the World Bank and IMF