Nature of Debt Problem :
International debt problem of developing countries received a world-wide attention 1980s onwards, after the Mexico crisis – the country’ inability to continue its payments 1982.
Developing countries have usually shortage of capital domestically. They traditionally acquire external capital through foreign borrowings – thus – debt to supplement any payment their investment activity. Untill 1982, there used to the accumulation of external debt as net new borrowings tended to exceed payments of interest and dividends on their outstanding liabilities.
The creditors or commercial lenders lost their confidence in the developing countries after the Mexican debt crisis of 1982.
The Baker Proposals :
To deal with the debt problem of the developing countries, the baker plan was initiated by here IMF/World Bank.
The Baker proposals laid down certain requirements:
1. Approvable domestic macro-economic and structural policies in the debtor countries. y Increased lending by multi-lateral development banks.
2. Increased lending by commercial banks.
3. Opening industrial countries markets to support developing countries’ exports. Saunders and Dean (1980) have identified the following debt groups:
Debt Ratios :
In a broad sense, the debt situation is evaluated by three major financial ratios:
1. Debt/Expense Ratio
2. Interest/Expense Ratio
3. Debt/GDP Ratio
Several factors contributed this problem of rising debt/export and debt/interest ratios, such as:
1. High interest rates
2. Dollar depreciation
3. Higher oil prices
4. Slower export growth
5. Slower GDP growth
6. Greater impart values
7. Increased current account deficits of the balance of payments.
A Comparison in the Asian Setting:
In the year 1996, Malaysia’s total external debt to export of goods and services (TED/XGS ratio) at 43.4 per cent was the lowest among the reported countries. Similarly, external debt to gross national product (TED/GNP ratio) at per cent was also the lowest: the country’s debt service ratio at 9.2 per cent was also the lowest.
Malaysia’s external debt amounted of USD 45.6 billion and the country had a second rank as the lowest indebted country, next to Singapore. In 2005, however, its external debt rose to USD 57.6 billion as against that of Thailand USD 52 billion. In 2007, however, the country again ranked second with USD 50.9 billion of debt external.
Indeed, external debt stock and its servicing burden has gone up very high in many cases of the indebted developing countries. It has aggregated to USD 127 billion, implying 76% of their combined gross domestic product, at the end of 1993.
The matter is serious and any stagnation in solving the debt problem would the determinately to the progress and stability of global economy.
Since the 1970s, there has been a trend of accumulation in international debt of developing countries, with the result that, it has been becoming difficult for them to serve debt – i.e., pay the interest and repay the principal. The problem is attributed to over-borrowals. When in 1982, Mexico failed to service it foreign debt, the world was eventually plunged into the phenomenon of ‘Debt Crisis’.
Data compiled from the World Development Report, suggest rising trend of external debt and servicing problem of the severely indebted countries.
In 1993, Brazil was the most heavily indebted country (USD 121 billion), followed by Indonesia, (USD 84 billion), India (USD 77 billion), Turkey (USD 55 billion), Thailand (USD 39 billion) and Nigeria (USD 31 billion), to cite a few examples.
Debt crisis occurs on account of an abrupt termination of access. to the liquidity and refusal to lend further by the creditor banks. In order to avoid frequent occurrence of debt crisis, the developing countries should focus more on the productive use of the external loans and acceleration of the growth rate with economic development.
To solve the debt problem, the following measures are required:
1. Debt restructuring
2. Debt cancellations
3. Foreign aids
4. Foreign direct investments
5. Export-led growth strategy.
6. Minimisation of current account deficits, by curtailing imports against the rising exports.
7. Increase in forex reserves.
It for been stressed that external debt problem needs comprehensive solution. The solution strategy should include:
1. Debt Reduction
3. Increased Financing
4. Development of LDCs.
There is a need for a comprehensive package deal to solve the external debt problem. A piecemeal approach can never the very effective.
Further, all problems associated with the development problem of LDCs cannot be just solved by a solution to the external debt crisis. A pragmatic developmental support programme is required. Macro-economic stabilisation should be on the top priority on economic reform programme along with, the adjustment programme for the indebted developing country.
Lenders from South Korea :
We may draw certain lessons from Korea’s experience, such as:
1. Coordinated trade, industrial and credit policies are cohereity required by a developing economy.
2. Maintain a competitive real exchange rate.
3. A sustainable filcal and monetary policy mix towards growth-orientation.
4. Need for long-term structural adjustment policy giving top priority to investments in expert sector.
5. Export-led economic growth implies increased GDP. Consequently, increased savings and expert earnings should be used to finance the external debt burden.
6. Monitoring economic performance in an effective manner.
IMF Strategy: Structural Adjustment Policy :
The International Monetary Fund (IMF) audit the debtor countries and prescribes certain policy adjustment to solve their debt problem. It acts as the lender of the last resort. When the IMF provides accommodating loans to a developing debtor country at the time of debt-crisis, it insists on the fulfillment of certain conditionalities on borrowing country.
The IMF conditionality package includes:
1. Approve fewer programmes.
2. Require more prior actions in cases where the efficacy of the conditionality is doubtful.
3. Encourage governments to enlist the necessary range of political support behind the terms of a high-conditionality programme before the programme is made final.
4. Approve programe which allow a buildup of arrears to private creditors in cases where the private creditors (a) fail to grant debt relief and (b) fail to provide sufficient amounts of new financing.
5. Encourage the use of debt relief schemes as a way to chance the likely adherence to conditionality terms.
6. Narrow the goals of conditionality: Make macro-economic stabilisation the prominent aim, with structural reform to be implemented only as macroeconomic stability is restored. (Sach, 1989, p. 284)
However, Korea’s adjustment to the 1979-82 debt crisis has been extraordinarily remarkable. It controlled its inflation rate by 1986 and reduced the debt burden substantially. Its exports increased by 15%.
Korea’s direction of monetary and fiscal policies were alternated its exchange rate was devalued. Expansionary policy was initiated to stimulate growth. Korea eventually could reduce her debt stock by USD 2.25 billion in 1986.