Question

Fully explain two​ (2) specific ways in which international borrowing has contributed to crisis tendencies in developing countries.

Answer 1

According to the IMF, low-income developing countries ' median public debt in 2017 grew to 47% of GDP, up from 33% in 2013. During this time, only eight countries in this group did not see any increase. This increased borrowing comes from both domestic and foreign countries, with both external and domestic debt rising If used wisely, borrowing can make a significant contribution to sustainable economic development. Compared to high-income countries whose public debt rocked in response to the global financial crisis, this level of debt may seem relatively small, as well as low-income countries during the first decade of this century before debt relief initiatives kicked in.

The debt-level increase was followed by a change in the debt price, which has become much more expensive. Such patterns, taken together, are equivalent to a big warning sign. More costly debt means governments need to spend more on repaying it from their revenues. For other concerns such as nutrition, employment, or infrastructure, it means less. It also leads to an increased likelihood that debt will rise, as borrowing may be needed to plug holes in spending caused by revenue diversion to repay debt.

Being in debt distress means a country is experiencing a' distress case' like being unable to reach the repayments owed to its lenders, or is about to encounter it. Being at high risk of debt distress means that the country is likely to break key debt metrics even in a baseline scenario (without any external or other shocks) and potentially enter a debt distress situation.
Low-income countries have tried to protect themselves from such shocks by building reserves–in fact, lending money to rich countries to use a stock of hard currency assets in case of a crisis.

There is also a major problem of' hidden debt,' especially public guarantees and other liabilities, such as those associated with public private partnerships (PPPs), which in some cases will add to the country's debt pile. For example, in some countries, a shock associated with PPP might have a fiscal impact of more than 10% of GDP. Official figures are also likely to underestimate some creditors ' borrowing size, including China, which does not report to many multilateral bodies on its lending, and the private sector.