Debt problems of LDCs

Explain the evolution and characteristics of the debt problems of LDCs. In the light of the various steps taken by the international community, has the problem been overcome? If not suggest possible solutions. According to Joint BIS-IMF-OECD-World Bank Statistics on External Debt, the total amount of money owed by LDCs and countries in transition was US$2,444,838 million at the end of December 2002, and it has grown steadily each year since the borrowing trend first started after the second world war. This huge figure represents an average of 57% of each country's GDP, although it varies greatly by country and region.

For instance, the lowest income countries owe on average 90% of their GDP and are often obliged to try to make huge repayments on interest and capital1. This crippling debt burden is described by many as the biggest single barrier to the development process, as governments neglect service provision and development projects in order to make repayments. In addition, because debt is mainly held in US Dollars, LDCs have to find foreign currency to make repayments. If we understand the nature of and the reasons behind the build-up of debt, not only can we assess initiatives to overcome it, we can also formulate future strategies to solve this problem.

This essay discusses debt in the less developed countries. It first outlines the nature and pattern of debts currently owed by LDCs to the industrialised countries. It goes on to examine the various reasons for the build up of debt and discusses the relative importance of this range of factors in contributing to the 'debt crisis' that was first identified by the international community in August 1982, when Mexico announced a moratorium on its debt repayments. It then details the interventions by a range of international players, focussing on the role of the IMF and World Bank in reacting to the debt crisis.

The relative merits and demerits of initiatives put in place by the international community are examined, including Structural Adjustment Plans, Poverty Reduction Strategy Papers, and the Highly Indebted Poor Countries initiative. As possible solutions to the debt problem, this essay lastly briefly discusses the movement lobbying for the cancellation of debt in LDCs, in conjunction with the responses of some industrialised countries to LDC debt and the most recent positions by the IMF in relation to debt management. Conclusions are then made about the future of the debt problem and how it may be resolved.

Loans were originally made to LDCs for two reasons: firstly, in order for governments to overcome budget deficits; when LDC governments could not raise enough money to finance their spending plans through taxation, they had to borrow to continue spending at the same level. Secondly, they were granted to address balance of payments deficits. More recently, and certainly once lending became more widespread in the 1970's, many loans were granted to finance development projects. Since LDCs lack domestic savings, money cannot be channelled into development through domestic banks, and so they have traditionally relied on incoming funds through loans, aid or foreign direct investment.

It is somewhat ironic that funds originally designed to improve the development process in LDCs, have in the end contributed to its neglect, as the LDCs have become net funders of the industrialised countries through loan repayments. This is despite new loans from the international community, the cancellation of some debts by individual governments and commercial banks3, and aid donated to LDCs.

Debt takes a number of different forms. Before the 1980's, much of the borrowing by LDCs, especially in Latin America, was in the form of bank loans from commercial banks, lent at commercial rates over 5-7 years. This private borrowing was attractive to governments and individual businesses while interest rates were low, but rising interest rates are undoubtedly partially to blame for the development of the debt crisis at the beginning of the 1980's, as is discussed later.

Private debt from commercial banks has tended to become public debt owed by the government over time, as governments provided guarantees for loans that debtors became unable to repay, and as industrialised country governments and international institutions such as the IMF have intervened to bail out banks and take on debts. Developing countries have also borrowed directly from industrial country governments – bilateral debt – and increasingly from regional and international bodies – the World Bank, IMF, and Asian, African and Latin American Development Banks – which have also stepped in when countries can no longer afford to repay commercial and bilateral debts. Debts owed to international agencies are known as multilateral debts.