Foreign debt, a global issue

Syed Tahir Rashdi
Foreign debt refers to the money that a government, an organization, or a household borrows from the government or private lenders of another country. The obligations to organizations such as the World Bank, International Monetary Fund (IMF) and the Asian Development Bank (ADB) are also categorized as foreign debt. The short-term debt can be used in combination with long-term debt to form foreign debts. The rapid growth in the external debt of developing countries first became a key issue in the early 1980s, and it persisted into the 21st century. Debt itself is not something that is unique to the developing world. Debt becomes a potential problem only when the borrower is unable to generate sufficient funds to meet the repayments. Many developing (and some developed) countries have encountered such difficulties, and often commentators use the term debt crisis to describe the situation. The issue among developing countries took prominence in August 1982 when Mexico declared that it could no longer meet the repayments on its external debt. In the following decades, many of the poorest countries in the world had to make sacrifices in key areas of public spending (sometimes called austerity measures) in order to service their debt. Foreign debt has gradually risen in recent decades, with unexpected side-effects for some borrowing countries. Including slower economic growth, especially in low-income countries, crippling debt problems, stock market instability, corruption and even secondary consequences such as rising human rights abuses. Foreign debt can also be referred to as external debt. Developing countries are hurt the most in the worldwide recession. The high cost of fuel, high interest rates, and declining exports made it increasingly difficult for them to repay their debts. Emerging markets and developing countries had about $11 trillion in external debt and about $3.9 trillion in debt service due by 2020. Of this, about $3.5 trillion was for principal repayments. Around $1 trillion was debt service due on medium- and long-term (MLT) debt, while the remainder was short-term debt, much of which was normal trade finance. For the poorest countries, 2020 MLT debt service wa about $36 billion, divided in roughly equal proportions between multilateral, bilateral and commercial creditors. All developing country regions are potentially seriously affected: Latin America has the highest debt service/exports ratio, Africa has the least diversified export mix, East Asia has the largest absolute amount of debt service. In normal circumstances, the principal amounts would simply be refinanced in global capital markets or offset by new disbursements from existing lenders. But circumstances are not normal. Credit markets have tightened, spreads have risen, and many countries are faced with very large reductions in foreign exchange revenues. In the face of huge global economic uncertainty, it is hard to predict which countries and regions will be most vulnerable, and not all the vulnerability has been caused by the pandemic. Already, Sri Lanka, Venezuela, Argentina, and Lebanon have defaulted and face lengthy and damaging legal proceedings with each creditor trying to negotiate individually, resulting in dead-weight losses for everyone until the situation is sorted out. Countries in debt distress such as Zambia and Sri Lanka turning to the International Monetary Fund (IMF) for financial help are facing unprecedented delays to secure bailouts. One indication that the problem is widespread is that already 90 countries have approached the IMF to access emergency financing instruments. It seems clear that this is not just a low-income or an African country problem.Pakistan is also facing the debt crisis. Ever since Pakistan’s economic crisis made headlines, questions are being raised as to whether the cash-strapped country will be able to repay its debts and loans. As of December 2022, the Pakistan government’s External Debt stood at PKR 17.87 trillion — down from PKR 18 trillion (1 INR = 3.18 PKR) in September 2022, according to the data shared by the State Bank of Pakistan (SBP). Pakistan’s net foreign exchange reserves (with SBP) hovers around $3.2 billion as of February 17.