Debts in Third World Countries

Debts

Third world debt is defined as the debt that is owed by governments of developing or third world countries to international private organisations or foreign governments. The debts owed by these countries include debts that were accumulated during the 1960s, 1970s and 1980s, others were debts that were obtained prior to their independence. This debt burden is heavy for these countries as their budget for debt repayment gulps over 5% of their revenue, this burden does not show any indication of relaxing in the coming future.  The regions mostly affected  by this debt burden include: the Latin American region which is a region with the highest debt service/exports ratio, East Asia, is the region with the largest amount of debt required to be serviced and Africa has the least diversified export mix.

In ordinary situations, the primary sum loaned would have been gotten again in the global capital market, or new lenders would have been able to offset the loans by new spendings and disbursal, but the times are different, the global financial market is struggling and countries are trying to sort their own issues with their foreign exchange revenues and this situation as it stands makes it difficult to position what country is most likely going to be the worst hit, which becomes even more so due to the presence of the pandemic, (not all the financial crisis faced by the countries of the world is attributable to the pandemic.) Already some countries in the South American and Asian region have failed in their loan paying capacities and are now embroiled in legal proceedings that are not palatable, even at that, creditors are trying to negotiate individually to see how they can sort out the issue while incurring some losses.

The financial situation

The financial situation in the global community is becoming even more glaringly severe when the fact that well over 80 countries have already met with the International Monetary Fund to seek for financial aid, making us understand now that the issue is not just an something that is being dealt with by countries in particular region but by countries all over the world. 

The situation is such that an emergency in the global financial market may soon be on the way even as there is currently an emergency in the global health sector which could result in an adverse social and civil situation among the populace even as the pandemic is already kindling the fire for that. This situation has already given rise to urgent calls for an ease in debt burden facing nations especially third world nations. 

It is important that action be taken in this regard in a timely manner bearing in mind the urgency of the situation, there is need for a measure that has general application, otherwise individual negotiations would only be a time-wasting measure. This measure that must be taken must have the input and participation of all creditors, this is so otherwise the plan would fail just like the mid 80s debt crisis situation; in this case a plan was hatched that sought to help developing countries come out of their debt crisis situation, and this was that banks would give an extension of their loan repayment to developing countries, however this was not made mandatory as banks could decide to pull out if they wanted, this made the plan fail and the objective was not attained. Similar situation was also repeated when Russia was dealing with its debt crisis in 1998.

Another possible solution may be to introduce Market-based solutions but this would require coordination and comprehensiveness just like the Brady plan that was utilised in the 1980s allowing banks to take an haircut in return for enhanced credit on loans which were turned to bonds through a restructuring process and this has become a solution for many developing countries but this itself may also have some complications as was seen in the case of the bonds issued in New york to Argentina. A useful tool to surmount this problem may be obtained if a repeat of the U.N security council resolution 1483 is reintroduced or repeated, which assisted Iraq by giving them time to pay back the debt they owed using a variety of means. 

Finally, it becomes even more imperative that borrowing countries begin to make reforms that would enhance their financial capacity such as the Heavily indebted poor countries initiative and the Multilateral debt relief initiative, these initiatives created an intertwined operation between debt reliefs and public spending on services that are immensely  beneficial to the poor. These measures will ensure that debt ratios don’t give rise to other problems of solvency and also will give the creditors the confidence that the funds being loaned out are not wasted on irrelevant issues. The development plans of countries, especially those that are long term, designed to achieve the sustainable development goals must now be modified to catch up with the realities of sustainability and robustness and also to safeguard the most poor and vulnerable in their society. From this brief discourse, the key takeaway is the understanding that there is a need for a globally unified measure to tackle the impending debt crisis being faced by the nations. 

There are some reasons why the debt profile of nations increased and they include:

  • In the years preceding the world war, many countries began to step away from investment in agriculture and started towing the path of industrialization and this move required funding which was not readily available hence the need to resort to the obtaining of loans. The problem however was that when the loan was obtained, it was not particularly used for the reason it was sought, instead corruption ensured that a major part of the funds was syphoned. 
  • In the 70s there was the rush by banks to loan money to governments because there was the popular opinion that governments don’t default in their loans, and they began to give out “irresponsible loans” that were far from being realistic, and this resulted in huge loans given to the government that was largely defaulted leaving many developing countries in huge debts. 
  • Again in the 70s, there was a huge crisis that hit the oil industry majorly affecting the developing countries especially for the fact that they were majorly reliant on oil imports, and seeing as there was a high demand for industrialization, there was a huge need for oil and seeing as the oil price had increased, developing countries could not afford it, hence the need to take some loans to sustain their industrialization goal. This factor again increased greatly the loan burden being borne by these developing countries.
  • As a result of the increase in oil price, there was a subsequent increase in inflation and interest rates became higher as well meaning there were both higher debts and higher interest rates for debt payment. 
  • There was also a disappointing and slow growth in the 70s and 80s as the economic boom which was projected didn’t materialise. Industrialization didn’t result in the profit expected as there was not enough labor force and the expertise required was not previously available. These reduction in economic advancements caused a corresponding decline in revenue for the government and thus the inability to pay back the debt taken. 

It is really important for the world to come together to ensure that this debt crisis doesn’t escalate further than it already is because of the importance of these third world countries to the entire world.

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