US interest rate rise could deepen debt crisis in developing countries

15 December 2015 by Jubilee Debt Campaign

CC- photo by John Atherton

Commenting ahead of the anticipated rise in US interest rates on Wednesday, Sarah-Jayne Clifton, Director of the Jubilee Debt Campaign said:
“Many developing countries are already suffering from a fall in prices of their commodity exports. An increase in US interest rates will compound this further, further weakening exchange rates and increasing debt payments.
Some of the most impoverished countries in the world, such as Mozambique, Zambia and Ghana, are seeing their debt payments soar, after a boom in lending since 2008. Despite the previous Third World Debt crisis of the 1980s and 1990s and the Eurozone debt crisis, the world still has no way of resolving government debt crises and making reckless lenders share in the costs of loans when they go wrong.”

Between 2007 and 2013, loans to low income countries tripled due to more ‘aid’ being given as loans through multilateral institutions, new lenders such as China, and an increase in private lending due to low interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
in the US, EU and Japan. Of these loans:
• 60% were from multilateral institutions (including half from the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

• 30% from foreign governments
• 10% from the private sector

The IMF now says Ghana will be spending 34% of government revenue on foreign debt payments in 2015, and is at high risk of not being able to pay, after its currency the Cedi has fallen 40% against the dollar since the start of 2014. Yetin 2011, the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
was encouraging lending to Ghana, saying foreign debt payments would be just 5.1% of government revenue in 2015, with a moderate risk of the government not being able to pay.

The IMF also encouraged lending to Zambia, saying in 2012 that the country was at low risk of not being able to pay its debts, and that foreign debt payments would peak at 3.5% of government revenue in 2016. The IMF now says Zambia is at moderate risk of not being able to pay debts, and that government foreign debt payments will reach 10.4% of government revenue in 2016. The Zambian Kwacha has fallen 50% against the dollar since the start of 2014.

The Third World Debt crisis of the 1980s and 1990s began when commodity prices fell and US interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates increased. It led to two lost decades of development, where economies stagnated and poverty increased. In sub-Saharan Africa in the 1980s and 1990s, economies shrank by 19% per person, whilst the number of people living on less than $1.25 a day increased from 205 million to 330 million.


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