How unsolved problems are driving development countries into debt

Berensmann, Kathrin
External Publications (2018)

in: Diplomatisches Magazin 12/2018, 34-37


The International Monetary Fund (IWF) and the World Bank foresee a looming debt crisis in developing countries in the near future. According to the latest estimates, around 40 per cent of poor developing countries are heavily in debt again. This is in spite of the fact that the debt of many developing countries had already been substantially reduced through the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative.
Causes of debt
There are both internal and external causes behind this critical debt situation. The main internal causes are low government revenues due to inefficient tax policies and corruption. Weaknesses in the areas of Good Financial Governance and rule of law also play a role. Another internal cause is poor debt management. For one thing, loans are often used for the consumption of goods rather than for productive investment. For another, countries often fail to negotiate favourable terms of payment. To make matters worse, employees working at the ministries of finance often lack sufficient qualifications. Among the external causes of indebtedness are mainly exogenous shocks. 
The type of debt has also changed. First of all, developing countries have significantly increased their borrowing at market conditions. Secondly, the governments of developing countries have significantly increased their financing through private creditors, since funding from public bilateral and multilateral creditors was not sufficiently available. Thirdly, private actors from developing countries are also increasingly incurring foreign debt. 
Policy measures against over-indebtedness In order for the developing countries to be able to reach their Sustainable Development Goals and use their financial resources for investments rather than debt services, a range of measures is needed from developing countries and the international community. The developing countries themselves should reduce their debt levels through increased government revenues. This also includes the improvement of capacities for managing public debt and a suitable debt structure with regard to maturity and the composition of domestic and foreign currencies. To buffer against exogenous shocks, these countries should increase the diversity of their exports for the long term. To do so, they will need to change their long-term economic structure so as to be able to expand their range of goods for export.
Then there are measures that can be taken by the international community, in particular the expansion and improvement of debt management measures. The international community should also agree on a set of uniform principles for responsible lending and borrowing. Furthermore, the international collective clauses, which serve to facilitate the restructuring of government bonds. Over the long term, insolvency proceedings can also play an important role for states in managing debt crises, given that they are the only comprehensive instrument that all creditor groups can coordinate. An instrument on its own can neither prevent nor manage debt crises, which is why a combination of different instruments is needed.

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