Underdeveloped Countries SERVICE CHARGES ON DEBTS NEEDING URGENT ATTENTION

Press, Volume CV, Issue 30959, 15 January 1966, Page 12

Underdeveloped Countries SERVICE CHARGES ON DEBTS NEEDING URGENT ATTENTION

IBU “LOMBARD” of the "Financial Times '] (Reprinted from the "Financial Times” t»V arrangement) If there is one aspect of the world problem °f from getting poorer that stands in more urgent need of gio a a and treatment than any other it is that concerned with the « pressure that is being imposed on the enfeebled payments stiuctu e under-developed countries by foreign debt service charges, oi , advanced countries arrange to provide them with massive relief • commitments, they will in many cases soon have to choose betwee ing on the grand scale and cutting imports to an extent that will* e " dei their hopes of rising living standards to an adequate level within a ie<uo able period of time even more slender than they are alreaaj.

The great bulk of the loans that foreign aid programmes have P"t at the disposal of the under-developed countries since the end of the war are on terms which were worked out on the assumption that the money would be so used as greatly to strengthen either directly or indirectly the payments positions of the recipients—to such an extent indeed that there would be no difficulty in providing for repayment within a reasonably short period of time. Unhappily, things have not worked out in this way. Partly because of the rapid increase in the number of mouths to be fed, partly because foreign aid has often not been used to best advantage and partly because under-developed countries have had the worst of the weather in the terms of trade sense, the basic payments circumstances of many of them are less favourable now than at almost any previous time in the post-war period. But the debt repayment obligations are inevitably beginning to mature on a big scale just in the same. With the interest bill on foreign borrowing also rising higher and higher, it is hardly surprising that United Nations calculations have revealed that between 1959 and 1963 alone the proportion of export earn-

ings which under-developed countries had to set aside for covering foreign debt service charges rose from 3j to 8! per cent.

Moreover. as things stand, the situation is bound to get very much worse during the course of tlie next few years. This is because between now and the early 1970's the underdeveloped countries as a whole are due to repay from a quarter to a half of their foreign debt. And, as this is estimated to be in the region of 24.000 million dollars, it is not diffito imagine what this is going to mean for countries earning about 33,000 million dollars.

It is, of course, the case that many of the advanced countries are showing a growing willingness to lighten the interest charges burden on under-developed countries that are borrowing money from them —sometimes in respect of loans granted in the past as well as new ones. And there is a hope that those who have so far refused to make this concession will eventually be shamed into doing so by the lead set by the more generous.

It is also the case that, when it becomes evident that the strain imposed by meeting repayment commitments is likely to prove intolerable,

the creditor countries operating individually, or in concert, more often than not show themselves prepared to work out a rephasing of maturity dates that will have the effect of postponing the day of reckoning for a few years at least. Such arrangements have extricated a number of Latin American countries during the last year or so from potentially disastrous payments situations in which they had been landed by the need to find money for discharging debt obligations on a scale that was completely beyond them. It can be argued that, through continued piecemeal treatment of this kind, the problem presented by the mounting debt burdens of the under-developed countries could be contained to a sufficient extent to prevent it assuming an explosive character. But this would not represent a satisfactory answer. Far from it. For one thing, there is no certainty that explosions will be avoided if all the advanced countries are prepared to rephase all repayment commitments which seem likely to impose intolerable pressures on the countries concerned. Thus, some under-developed countries may decide that it would be preferable to default on their obligations rather than accept the conditions for postponement laid down by their creditors. For another, some advanced countries may on occasion take the view that their payments circumstances are such that they cannot afford to forgo debt repayments to which they are entitled even if they are due to come from those in even poorer circumstances than themselves.

But even more important is the fact that many of the more conscientious underdeveloped countries will see themselves as being under the necessity to do their utmost to meet their repayment obligations, especially as there will often be doubts until the last moment as to whether they can count upon a waiver. For this is bound to have a cramping effect on their economic policies—and thence on the economic development that is so essential to the raising of their living standards, seeing that in most cases great difficulty is already being experienced in finding foreign exchange to pay for capital goods and other imports needed for supporting development.

Concerted Attack

What is required, therefore, is a concerted attack on the whole problem before it becomes acute by the-cceditor and debtor nations. Broadly speaking, the advanced countries will have to recognise that there is a strong case for not allowing the flow of aid to developing countries to be whittled down by the increasing reverse flow of money in respect of the repayment of previous assistance. For whereas most of them stand in no need of net relief from their aid burdens, any effective drop in the assistance received by the under - developed countries would be a serious thing for them. This principle having been established, a mechanism for applying it will have to be worked out. An article in the latest issue of the Bankers’ Magazine by Mr D. R. Khatkhate puts forward one proposal for dealing with this part of the problem which may be found well worth considering when the first big hurdle has been surmounted.