INTERNATIONAL DEBT PROBLEM
Between 1970 and 1980, the total external debt for developing countries increased eightfold from US$ 67.0 billion to 572.2. By 1990, the total debt was US$ 1,280.6 billion (Nafzigar 1993). The debt crisis reached alarming levels and attracted world attention in the early 1980’s when Poland in 1981 could not meet her obligations in the European Banks. Similarly, in 1982 Mexico was facing rapid falling oil prices and hence could not pay her external debt.
Most countries in Sub- Saharan Africa are characterised by a high ratio of debt payment to exports. After a number of years of negative growth, African countries could not adjust their consumption levels to facilitate the international debt payments.
These countries are characterised by two or less developed financial institutions. slow changes in response to export prices, and high import demand, all which have prevented quick adjustment.
High debt repayments to creditors have reduced domestic investment, had to balance of payment deficits, and decelerated growth.
Developing countries, Uganda inclusive, have in the past two decades witnessed increasing levels of poverty despite new foreign inflows and/or debt rescheduling measures that have been put in place. To day Uganda is ranked as one of the world’s poorest countries with a hunger burden of foreign debt amounting to a bout US $ 5 billions.
Origin of the present debt crisis.
The debt crisis in developing countries is a result of both external and domestic factors.
Among the external factors are:
1. The oil crisis of 1973 and 1979 due to production cut back by OPEC and the Iran - Iraq war. These events led to massive increases in oil prices such that countries dependent on oil imports suffered huge import bills, leading to current account deficits. Developing countries with low export earnings had to borrow to meet their oil import requirements.
2. the problem was also precipitated by increased lending by American and European Banks to developing countries from the “ petrodollars’’ deposited by the oil exporting countries.
Developing countries acquired loans at highly concessional terms leading them to embark on expenditure patterns well above their means. In Mexico, for example, 80 costs out of every dollar borrowed was being spent on consumption.
3. Decoration in world trade between 1981 and 1982 caused by a slump in world economic growth. This meant reduced demand for the products of developing countries and thus a fall in their foreign earnings.
4. Increase in world interest rates and reduced lending by American and European banks after the 1980s. This increased the debt service obligations for most debtor countries.
5. Fall in commodity prices on the international market. This meant that export earnings from primary products in most developing countries where too law to adequately service the accumulated debt.
The domestic factors that have led to the present debt problem in developing countries include:
Poor macroeconomic policies including fixed prices, fixed exchange and interest rates, in addition to inflationary tendencies all of which create disincentives to investment and increases economic activity.
Political instability and civil strife resulting into a poor environment for investment.
The combined effect of poor macro economic policies and political instability has resulted in massive capital flight from developing to developed countries. Residents prefer keeping their savings in foreign bonds and accounts so as to avoid loss due to inflation or political upheavals.
Written by A. B. Kintu.