Foreign Debt

By: EconomyWatch Content   Date: 17 November 2009

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Foreign debt is the money owed by one country to another, which may be as an outcome of loans or a negative trade balance. A high level of foreign debt is burdensome on a country’s economic resources, leading to stagnation or even decline of economic growth. That is why nations that have high foreign debt levels often resort to various debt relief programs.

Before understanding foreign debt relief programs, one must understand the concept of ‘sustainable foreign debt.’ This is a level of debt that enables a debtor country to meet its full debt obligations, current and future, while maintaining a satisfactory level of economic development. When the foreign debt is at a sustainable level, arrears are not accumulated, and thereby, the need for recourse to debt relief is eliminated altogether.

Foreign Debt: Relief through Creditor Forgiveness

Debt forgiveness is an act by the creditors of releasing the borrowers’ repayment obligations under extraordinary circumstances. A creditor forgives in case foreign debts are used for providing relief to developing countries that are heavily indebted.

The IMF and the World Bank consider a nation's debt unsustainable when:

  • The amount of the nation's foreign debt exceeds its net exports value by 150%; or

  • The nation’s debt-to-government-revenues ratio is more than 250%.

To boost the economic growth of developing countries amidst heavy foreign debt, the IMF and World Bank launched the Heavily Indebted Poor Countries (HIPC) initiative in 1996. Countries that qualify for this initiative have their foreign debt reduced to sustainable levels.

Foreign Debt Repudiation

This is a stricter form of foreign debt relief, which involves auditing a nation’s debt status to identify illegitimate debts. Such debts are immediately repudiated from the relief cover. Odious debt is the most common form of illegitimate foreign debts. This primarily includes ‘hostile debts’ and ‘war debts.’ Such debts are essentially built up by dictators or tyrants that curb a nation’s economic progress and prospects to pursue purely personal ambitions.

Besides, foreign debt repudiation also encompasses penalties and excessive interest rates. Foreign debt builds up due to late or non-payment. The interest charged on foreign debt arrears is exorbitant. The burden is greater for developing countries as they are required to pay-off debt in a stronger currency. However, foreign debt repudiation does not take this into consideration and exempts such charges from the relief program.   

 


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