From Raj Nallari and Breda Griffith's lecture notes.
In this and future postings we will cover the problems caused by debt burdens that are unsustainably high. These include lower investment and growth, lower social spending, and negative social outcomes. Starting in the late 1980s, the international community recognized that low-income debt burdens would remain unsustainably high without deep debt relief. Thus began a host of debt relief initiatives, starting with Toronto terms debt relief (which provided debt relief of up to a third) and finishing most recently with the comprehensive Multilateral Debt Reduction Initiative (MDRI), which provided for the full cancellation of official debt to qualified low income countries.
External Indebtedness Measures
Conventional measures of a country’s debt burden include
- ratio of external debt to output (GDP); or to exports of goods and services, sometimes including workers remittances and other current account receipts. These measures point to a country’s ability to pay, particularly in terms of foreign exchange availability;
in an elaboration of the simple export ratio, sometimes the discounted present value of future debt service obligations is compared with the discounted present value of future export receipts. The discounted present value calculations take into account all future debt service obligations until full repayment of the debt and divides them by the appropriate discount factors. (This methodology takes into account loan concessionality).
ratio of scheduled debt service (interest payments and amortization) to government revenues. This measure provides an indication of the fiscal impact of external debt and the country’s capacity to repay;
External indebtedness is likely to affect poverty indirectly through its impact on economic growth and directly by reducing government resources that are available for poverty related spending.
Debt and Growth
Source: Pattilio, Poirson and Ricci, 2002.
Next week: External Indebtedness, Growth and Poverty
- Fridays Academy