PROBLEM OF DEBT SERVICINGDEVELOPING COUNTRIES

POINTS TO BE DISCUSSEDWHAT IS DEBT-AN OVERVIEWDEBT CRISIS-REASONSDEBT SERVICINGDEBT PROBLEM WITH REFERENCE TO-

-DEVELOPING COUNTRIES - INDIA

DEBT

“DEBT IS THE SLAVERY FOR THE FREE”. -PUBLILIUS SYRUS A duty or obligation to pay money, deliver goods, or

render service under an express or implied agreement.

“DEBT IS AN AMOUNT OF MONEY BORROWED BY ONE PARTY FROM ANOTHER.”

INTERNATIONAL DEBT ? Can be named as “Foreign Debt” and “External Debt”.

The portion of a country's debt that was borrowed from foreign lenders including commercial banks, governments or international financial institutions.

These loans, including interest, must usually be paid in the currency in which the loan was made.

In order to earn the needed currency, the borrowing country may sell and export goods to the lender's country.

ROOT CAUSE OF DEBT CRISIS Rooted in economic policies and

development choices going back to 1970s and 1980s.

OIL CRISIS

INFLATION AT USA

IRRESPONSIBLE LENDING ON THE

PART OF CREDITORS

MISMANAGEMENT BY DEBTORS

WORLDWIDE RECESSION

Let’s take a look…FIRST PERIOD(1973-1978)

• Indebtedness rose significantly from US$ 130 billion in 1973 to US$336billion in 1978.

SECOND PERIOD(1979-1982)

• The corresponding outstanding debt increased from 336 billion US$ in 1978 to 662 billion US dollar in 1982.

• The price and volume of LDCs export fell and reduced their export earnings.

• Reduced LDCs export earnings.• Bankers were more willing to lend money to US than

LDCs .

DEBT SRVICING Debt service is the cash that is required for a particular time

period to cover the repayment of interest and principal on a debt.

DEBT SERVICE RATIO:- Ratio of debt service payments (principal + interest) of a

country to that country’s export earnings. A country's international finances are healthier when this

ratio is low. The ratio is between 0 and 20% for most countries.

INTERNATIONAL DEBT PROBLEM

GOVERNMENT

GOVERNMENT

SPONSORSHIP;BUSINESS

CONCERNS AND INTER

GOVERNMENTAL FINANCIAL

INSTITUTION .. FOREIGN BANKS/FOREIGN CAPITAL MARKET

DEBT SERVICING<=12-15%OF YEARLY EXPORT EARNINGS

DEBT SERVICING>12%-15% OF YEARLY EXPORT EARNINGS

AN OVERVIEW TO

FEW FACTS ABOUT DEVELOPING COUNTRIES

GDP

Losses of financial resources by developing countries have been almost double the inflows of new financial resources since the financial crisis.

Lost resources have been close to or above 10% of GDP for developing countries as a whole since 2008 – meaning that for every $100 the country makes, $10 are lost, flowing out of the country.

Domestic resources are far larger than all external financing sources for developing countries, with domestic investment reaching over 33% of GDP and government revenue over 18% in 2012.

DEBT PROBLEM OF DEVELOPING COUNTRIES

• Illiquidity and insolvency :-May vary from acute balance-of-payments difficulties requiring immediate action to longer-term situations relating to structural, financial and transfer-of-resources problems requiring appropriate longer-term measures.

DEDEBT OF DEVELOPIN

G COUNTRIES

MIDDLE INCOME

COUNTRIES

LOW INCOME

COUNTRIES

2016 INTERNATIONAL DEBT STASTICSNET

DEBT

LOW AND MIDDLEINCOME INCOME

CONT.

$464 billion in 2014 DECREASE OF

18% AS COMPARABLE TO 2013

Ratio of external debt to GNI averaged 22 percent in 2014, and the ratio of external debt to exports averaged 79 percent. International reserves stood at 114 percent of external debt stocks.

Net equity inflows, $668 billion, were 7 percent higher than the 2013 level propelled by a 4 percent increase in net foreign direct investment and robust portfolio equity flows, which were up 29 percent.

Something more….• Data in the World Bank's global development finance 2012 report shows

total external debt stocks owed by developing countries increased by $437bn over 12 months to stand at $4tn at the end of 2010, the latest period for which data is available.

• Many poor countries in Asia and Latin America (for example, Jamaica and El Salvador) did not have debts written off because their income per capita was too high to meet the IMF and World Bank criteria. Others, such as Bangladesh, did not qualify for cancellation because their debts were seen as sustainable.

• Ethiopia's public sector debt is almost back at pre-MDRI levels, with China becoming Ethiopia's third biggest lender (11% of new loans) behind the World Bank (34.3%) and IMF (11.5%), according to the AEO report.

• Ghana was also highlighted in the report. It used the space created by debt reductions to borrow more money on the international markets, at interest rates 10 times higher than institutions such as those imposed by the World Bank and African Development Bank.

• The IMF highlights 12 countries it says are at high risk of not being able to pay their debts: Afghanistan, Burkina Faso, Burundi, the Democratic Republic of the Congo, Djibouti, Gambia, Grenada, Haiti, Kiribati, Laos, Maldives, São Tomé and Príncipe, Tajikistan, Tonga and Yemen.

DEBT SERVICING PROBLEM IN INDIA

Unmanageable accumulation of debt

Decrease in volume of OIL imports Increase in trade credits

India’s external debt at end-March 2015 was placed at US$ 475.8 billion recording an increase of US$ 29.5 billion (6.6 per cent) over its level at end-March 2014.

Higher debt service payments during 2014-15 relative to the preceding year, were largely on account of higher repayments of ECBs during the year.

Rising interest rates in the domestic market are encouraging large firms in the Indian corporate sector to resort to foreign borrowing to finance domestic expenditures. Though still incipient, this is a tendency that should give cause for concern.

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