Finance

The Problem Faced By Latin American Countries In Serving Their International Indebtednes

International trade is one of the most important factors in the solution of Third World Debt Crisis. The steps taken by the IMF (International Monetary Fund)   and IBRD (International Bank for Reconstruction and Development) in resolving the Third World debt crisis are discussed below.

International Indebtedness of Latin American Countries. The debt problems of Latin-American countries erupted into the open in 1982 when Mexico found itself unable to service its obligations. The origin of the crisis can, however, be traced to the oil crisis of 1973-74. The huge surplus generated by the oil exporting countries found their way into international markets.

The international banks which were hitherto following a cautious policy with regard to lending to the developing countries had to change their approach and lend on a larger scale to these countries. The second oil crisis in 1979 caused a retaliatory reaction from the industrial countries which adopted restrictive fiscal and monetary policies to control inflation caused by the steep rise in oil prices.

The serious effects of such policies were felt by the developing countries which found their terms of trade deteriorating fast. Large-scale borrowings coupled with restricted export potential due to protectionism and slackened growth in the world trade had placed these countries in a situation where they had to borrow even to repay their interest obligations.

The situation worsened over the years and with further borrowings becoming difficult these countries had to announce moratonum on external obligations The extent of borrowings by these countries can be judged from the fact that the total external debt of Latin-American and Canbbean countries stood at US S 399.4 billion as at the end of 1980.

Brazil and Mexico continue to be the highest debtor countries with debt stock of USD 132.4 billion and USD 118.03 billion respectively by March 1995.

The following were the salient features of the problems being faced by the Latin-American countries with regard to their servicing of external debt:

(i) Since the creditworthiness of these countries remained very low, new finance was difficult to come by.

(ii) The level of domestic investment remained dismally low and economic growth has remained almost stagnant.

(iii) Efforts at rescheduling of loans and reduction of debts did not receive the expected response from the lending countries.

(iv) The continued protectionism and restrictive policies adopted by the industrialised countries were acting as stumbling block in their efforts at increas-ing exports.

Proposals for Debt Reduction

Various proposals have been made and experimented in order to resolve the debt crisis of the developing countries. Initially, the attempts were in tune with the traditional IMF approach to solving balance of payments deficits. IMF lendings are tagged with conditionalities on the borrowing country to observe austerity in expenditure, to control domestic consumption to increase domestic savings and generate export surpluses. These conditionalities are accepted generally with a measure of reluctance, and even those countries which endeavoured to implement the conditionalities were unable to comply with them fully.

In some cases, the extreme step of repudiation was resorted to, but it should be accepted that such a measure is not in the long-term interest of the country concerned.

In 1985 Mr. James Baker, the US Treasury Secretary, proposed to improve the economic growth rate in the borrowing countries through larger external loans from multilateral sources and commercial banks. It was thought that the faster economic growth would have enabled creation of current account surpluses without affecting the standard of living and consumption levels. The Baker proposal, however, received only a lukewarm response because of the reluctance of the lending countries to place additional funds at the disposal of the borrowing countries.

Debt re-scheduling and debt-swaps are some of the methods adopted in dealing with the situation. However, it should be recognised that these are only short-term measures and in the long run, the borrowing countries have necessarily to acquire sufficient foreign exchange to service their debts.

Reduction in debts and write-offs are practised in selected cases, and mostly by private lenders. This cannot be a solution to the entire problem. The latest pro-posal by Mr. Vicholas Brady, the US Treasury Secretary, in March, 1989 also places emphasis on voluntary debt reduction. The Brady’s plan calls for reduction in both the debt and debts service charges on a case-to-case basis and increased lending by IMF and IBRD, including some funds to pay the banks and provide some collateral to them. Brady’s proposal has evoked mixed response from the debtor countries and commercial banks.

Role of IMF and IBRD

Both the institutions play a central role in the resolution of debt crisis of the developing countries. Principally the strategies are:

(i) helping deb-burdened countries to formulate strong programmes of micro economic and structural reforms;

(ii) making available their own resources;

(iii) helping to mobilise financing from other sources to meet the debt burden; and

(iv) through surveillance work ensuring that the countries that do not need the institutional resources live up to their responsibilities.

It should, however, be recognised that the key responsibility for resolving debt difficulties lies with the indebted countries themselves and the creditors. With the limited resources and without any piogramme for a large-scale increase of their resources in the near future, the world bodies may not contribute much in providing additional funds to the debtor countries.

Although the IMF and IBRD can act as a crystallising agent, it is time that creditors come out with adequate flows of financial support on realistic terms to the debtor countries. The industrial coun-tries must also sustain the growth of their economy and enlarge the access of the indebted countries to their markets.

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