Problem of debt servicing
- 1. PROBLEM OF DEBT SERVICING DEVELOPING COUNTRIES
- 2. POINTS TO BE DISCUSSED WHAT IS DEBT-AN OVERVIEW DEBT CRISIS-REASONS DEBT SERVICING DEBT PROBLEM WITH REFERENCE TO- -DEVELOPING COUNTRIES - INDIA
- 3. DEBT “DEBT IS THE SLAVERY FOR THE FREE”. -PUBLILIUS SYRUS A duty or obligation to pay money, deliver goods, or render service under an express or implied agreement. “DEBT IS AN AMOUNT OF MONEY BORROWED BY ONE PARTY FROM ANOTHER.”
- 4. INTERNATIONAL DEBT ? Can be named as “Foreign Debt” and “External Debt”. The portion of a country's debt that was borrowed from foreign lenders including commercial banks, governments or international financial institutions. These loans, including interest, must usually be paid in the currency in which the loan was made. In order to earn the needed currency, the borrowing country may sell and export goods to the lender's country.
- 5. ROOT CAUSE OF DEBT CRISIS Rootedin economic policies anddevelopment choices going back to 1970s and 1980s.
- 6. Let’s take a look… FIRST PERIOD(1973-1978) • Indebtedness rose significantly from US$ 130 billion in 1973 to US$336billion in 1978. SECOND PERIOD(1979-1982) • The corresponding outstanding debt increased from 336 billion US$ in 1978 to 662 billion US dollar in 1982. • The price and volume of LDCs export fell and reduced their export earnings. • Reduced LDCs export earnings. • Bankers were more willing to lend money to US than LDCs .
- 7. DEBT SRVICING Debt service is the cash that is required for a particular time period to cover the repayment of interest and principal on a debt. DEBT SERVICE RATIO:- Ratio of debt service payments (principal + interest) of a country to that country’s export earnings. A country's international finances are healthier when this ratio is low. The ratio is between 0 and 20% for most countries.
- 8. INTERNATIONAL DEBT PROBLEM GOVERNMENT GOVERNMENT SPONSORSHIP; BUSINESS CONCERNS AND INTER GOVERNMENTAL FINANCIAL INSTITUTION .. FOREIGN BANKS/FOREIGN CAPITAL MARKET DEBT SERVICING<=12- 15%OF YEARLY EXPORT EARNINGS DEBT SERVICING>12%- 15% OF YEARLY EXPORT EARNINGS
- 10. Losses of financial resources by developing countries have been almost double the inflows of new financial resources since the financial crisis. Lost resources have been close to or above 10% of GDP for developing countries as a whole since 2008 – meaning that for every $100 the country makes, $10 are lost, flowing out of the country. Domestic resources are far larger than all external financing sources for developing countries, with domestic investment reaching over 33% of GDP and government revenue over 18% in 2012.
- 11. DEBT PROBLEM OF DEVELOPING COUNTRIES • Illiquidity and insolvency :-May vary from acute balance-of- payments difficulties requiring immediate action to longer- term situations relating to structural, financial and transfer-of- resources problems requiring appropriate longer-term measures. DEDEBT OF DEVELOPING COUNTRIES MIDDLE INCOME COUNTRIES LOW INCOME COUNTRIES
- 12. 2016 INTERNATIONAL DEBT STASTICS NET DEBT LOW AND MIDDLE INCOME INCOME CONT. $464 billion in 2014 DECREASE OF 18% AS COMPARABLE TO 2013 Ratio of external debt to GNI averaged 22 percent in 2014, and the ratio of external debt to exports averaged 79 percent. International reserves stood at 114 percent of external debt stocks. Net equity inflows, $668 billion, were 7 percent higher than the 2013 level propelled by a 4 percent increase in net foreign direct investment and robust portfolio equity flows, which were up 29 percent.
- 13. Something more…. • Data in the World Bank's global development finance 2012 report shows total external debt stocks owed by developing countries increased by $437bn over 12 months to stand at $4tn at the end of 2010, the latest period for which data is available. • Many poor countries in Asia and Latin America (for example, Jamaica and El Salvador) did not have debts written off because their income per capita was too high to meet the IMF and World Bank criteria. Others, such as Bangladesh, did not qualify for cancellation because their debts were seen as sustainable. • Ethiopia's public sector debt is almost back at pre-MDRI levels, with China becoming Ethiopia's third biggest lender (11% of new loans) behind the World Bank (34.3%) and IMF (11.5%), according to the AEO report.
- 14. • Ghana was also highlighted in the report. It used the space created by debt reductions to borrow more money on the international markets, at interest rates 10 times higher than institutions such as those imposed by the World Bank and African Development Bank. • The IMF highlights 12 countries it says are at high risk of not being able to pay their debts: Afghanistan, Burkina Faso, Burundi, the Democratic Republic of the Congo, Djibouti, Gambia, Grenada, Haiti, Kiribati, Laos, Maldives, São Tomé and Príncipe, Tajikistan, Tonga and Yemen.
- 15. DEBT SERVICING PROBLEM IN INDIA Unmanageable accumulation of debt Decrease in volume of OIL imports Increase in trade credits
- 16. India’s external debt at end-March 2015 was placed at US$ 475.8 billion recording an increase of US$ 29.5 billion (6.6 per cent) over its level at end-March 2014. Higher debt service payments during 2014-15 relative to the preceding year, were largely on account of higher repayments of ECBs during the year.
- 17. Rising interest rates in the domestic market are encouraging large firms in the Indian corporate sector to resort to foreign borrowing to finance domestic expenditures. Though still incipient, this is a tendency that should give cause for concern.
- 18. THANK YOU