Debt of developing countries

Debt as a mechanism in economic crisis

An example of debt playing a role in economic crisis was the 1998–2002 Argentine great depression. During the 1980s, Argentina, like many Latin American economies, experienced hyperinflation. As a part of the process put in place to bring inflation under control, a fixed exchange rate was put into place between Argentina's new currency and the US dollar. This guaranteed that inflation would not restart, since for every new unit of currency issued by the Argentine Central Bank, the Central Bank had to hold a US dollar against this – therefore in order to print more Argentine currency, the government required additional US dollars. Before this currency regime was in place, if the government had needed money to finance a budget deficit, it could simply print more money (thus creating inflation). Under the new system, if the government spent more than it earned through taxation in a given year, it needed to cover the gap with US dollars, rather than by simply printing more money. The only way the government could get these US dollars to finance the gap was through higher tax of exporters' earnings or through borrowing the needed US dollars. A fixed exchange rate was incompatible with a structural (i.e., recurrent) budget deficit, as the government needed to borrow more US Dollars every year to finance its budget deficit, eventually leading to an unsustainable amount of US dollar debt.

Argentina's debt grew continuously during the 1990s, increasing to above US$120 billion. As a structural budget deficit continued, the government kept borrowing more, creditors continued to lend money, while the IMF suggested less state spending to stop the government's ongoing need to keep borrowing more and more. As the debt pile grew, it became increasingly clear the government's structural budget deficit was not compatible with a low inflation fixed exchange rate – either the government had to start earning as much as it spent, or it had to start (inflationary) printing of money (and thus abandoning the fixed exchange rate as it would not be able to borrow the needed amounts of US dollars to keep the exchange rate stable). Investors started to speculate that the government would never stop spending more than it earned, and so there was only one option for the government – inflation and the abandonment of the fixed exchange rate. In a similar fashion to Black Wednesday, investors began to sell the Argentine currency, betting it would become worthless against the US dollar when the inevitable inflation started. This became a self-fulfilling prophecy, quickly leading to the government's US dollar reserves being exhausted. The crisis led to riots in December 2001. In 2002, a default on about $93 billion of the debt was declared. Investment fled the country, and capital flow towards Argentina ceased almost completely.

The Argentine government met severe challenges trying to refinance the debt. Some creditors denounced the default as sheer robbery. Vulture funds who had acquired debt bonds during the crisis, at very low prices, asked to be repaid immediately. For four years, Argentina was effectively shut out of the international financial markets.

Argentina finally got a deal by which 77% of the defaulted bonds were exchanged by others, of a much lower nominal value and at longer terms. The exchange was not accepted by the rest of the private debt holders, who continue to challenge the government to repay them a greater percentage of the money which they originally loaned. The holdouts have formed groups such as American Task Force Argentina to lobby the Argentine government, in addition to seeking redress by attempting to seize Argentine foreign reserves.

In 2016, Argentina cancelled its debt with the holdout creditors, which received returns in the order of the hundreds of percentage points.

The determinants of external debt crises in developing countries

Some of the major risk factors which increase the probability of the external debt crises in developing countries include high level of inflation, relatively large share of short term debt in external debt, denomination of the debt in foreign currency, decrease of the terms of trade over time, unsustainable total debt service relative to GNI, high income inequality, and high share of agriculture in GDP. At the same time, holding foreign exchange reserves is a strong protective measure against an external debt crisis.

Debt relief

37 impoverished countries have recently received partial or full cancellation of loans from foreign governments and international financial institutions, such as the IMF and World Bank under the Heavily Indebted Poor Countries (HIPC) Initiative, see table below. A further two countries, Eritrea and Sudan, are in the process towards full debt relief; Zimbabwe has unsustainable debt but has not made the reforms necessary to participate in the program.

Under the Jubilee 2000 banner, a coalition of groups joined together to demand debt cancellation at the G7 meeting in Cologne, Germany. As a result, finance ministers of the world's wealthiest nations agreed to debt relief on loans owed by qualifying countries.

A 2004 World Bank/IMF study found that in countries receiving debt relief, poverty reduction initiatives doubled between 1999 and 2004. Tanzania used savings to eliminate school fees, hire more teachers, and build more schools. Burkina Faso drastically reduced the cost of life-saving drugs and increased access to clean water. Uganda more than doubled school enrollment.

In 2005, the Make Poverty History campaign, mounted in the run-up to the G8 Summit in Scotland, brought the issue of debt once again to the attention of the media and world leaders. Some have claimed that it was the Live 8 concerts which were instrumental in raising the profile of the debt issue at the G8, but these were announced after the Summit pre-negotiations had essentially agreed the terms of the debt announcement made at the Summit, and so can only have been of marginal utility. Make Poverty History, in contrast, had been running for five months prior to the Live 8 announcement and, in form of the Jubilee 2000 campaign (of which Make Poverty History was essentially a re-branding) for ten years. Debt cancellation for the 18 countries qualifying under this new initiative has also brought impressive results on paper. For example, it has been reported that Zambia used savings to significantly increase its investment in health, education, and rural infrastructure. The fungibility of savings from debt service makes such claims difficult to establish. Under the terms of the G8 debt proposal, the funding sources available to Heavily Indebted Poor Countries (HIPC) are also curtailed; some researchers have argued that the net financial benefit of the G8 proposals is negligible, even though on paper the debt burden seems temporarily alleviated.

The 2005 HIPC agreement did not wipe all debt from HIPC countries, as is stated in the article. The total debt has been reduced by two-thirds, so that their debt service obligations fall to less than 2 million in one year. While celebrating the successes of these individual countries, debt campaigners continue to advocate for the extension of the benefits of debt cancellation to all countries that require cancellation to meet basic human needs and as a matter of justice.

To assist in the reinvestment of released capital, most international financial institutions provide guidelines indicating probable shocks, programs to reduce a country's vulnerability through export diversification, food buffer stocks, enhanced climate prediction methods, more flexible and reliable aid disbursement mechanisms by donors, and much higher and more rapid contingency financing. Sometimes outside experts are brought to control the country's financial institutions.

List of heavily indebted poor countries

2004 Indian Ocean earthquake

When the 2004 Indian Ocean earthquake and tsunami hit, the G7 announced a moratorium on debts of twelve affected nations and the Paris Club suspended loan payments of three more. By the time the Paris Club met in January 2005, its 19 member-countries had pledged $3.4 billion in aid to the countries affected by the tsunami.

The debt relief for tsunami-affected nations was not universal. Sri Lanka was left with a debt of more than $8 billion and an annual debt service bill of $493 million. Indonesia retained a foreign debt of more than $132 billion and debt service payments to the World Bank amounted to $1.9 billion in 2006. In 2015 the total debt of Sri Lanka is $55 billion. Some of this is due to borrowing to help with infrastructure and some of it is due to corruption. The last time they sought help from the IMF was 2009, they received a $2.6 billion loan. They have yet to recover from the tsunami.

G8 Summit 2005: aid to Africa and debt cancellation

The traditional meeting of G8 finance ministers before the summit took place in London on 10 and 11 June 2005, hosted by then-Chancellor Gordon Brown. On 11 June, agreement was reached to write off the entire US$40 billion debt owed by 18 Heavily Indebted Poor Countries (HIPC) to the World Bank, the International Monetary Fund and the African Development Fund. The annual saving in debt payments amounts to just over US$1 billion. War on Want estimates that US$45.7 billion would be required for 62 countries to meet the Millennium Development Goals. The ministers stated that twenty more countries, with an additional US$15 billion in debt, would be eligible for debt relief if they met targets on fighting corruption and continue to fulfill structural adjustment conditionalities that eliminate impediments to investment and calls for countries to privatize industries, liberalize their economies, eliminate subsidies, and reduce budgetary expenditures. The agreement came into force in July 2006 and has been called the "Multilateral Debt Reduction Initiative", MDRI. It can be thought of as an extension of the HIPC initiative. This decision was heavily influenced and applauded by international development organizations like Jubilee 2000 and the ONE Campaign.

Opponents of debt cancellation suggested that structural adjustment policies should be continued. Structural adjustments had been criticized for years for devastating poor countries. For example, in Zambia, structural adjustment reforms of the 1980s and early 1990s included massive cuts to health and education budgets, the introduction of user fees for many basic health services and for primary education, and the cutting of crucial programs such as child immunization initiatives.

Criticism of G8 debt exceptions

Countries that qualify for the HIPC process will only have debts to the World Bank, IMF and African Development Bank canceled. Criticism was raised over the exceptions to this agreement as Asian countries will still have to repay debt to the Asian Development Bank and Latin American countries will still have to repay debt to the Inter-American Development Bank. Between 2006 and 2010 this amounts to US$1.4 billion for the qualifying Latin American countries of Bolivia, Guyana, Honduras and Nicaragua.

Getting Africa out of the debt spiral

African leaders, finance ministers, and experts were to meet in Lomé, Togo, on May 14, 2025. Their final declarations call for structural reforms, particularly those of national institutions, which must be led by African countries. Effectively combat illicit financial flows, with losses estimated at nearly $90 billion per year, and greater international cooperation.