Jump to content
Sign in to follow this  

Question about foreign debt

Recommended Posts

Guest

Explain why the servicing of international debt causes balance of payments problems and has an opportunity cost in terms of foregone spending on development objectives. 

I am not sure about the balance of payment part. So, when a country borrows from other countries, it will increase the current account credits. However, debt, in the long run, is a debit of the current account right? And debt comes with interest rate, so in the long run, the country is gradually increasing its current account deficit by borrowing more from other countries? Is that the case. I don't even know I am saying...

help :(

Share this post


Link to post
Share on other sites

When a current account is in deficit, it usually means that a country is investing more abroad than it is saving at home. Often, the logic dictating a country's investment decisions is that it takes money to make money. In order to try and boost its GDP and future growth, a country may go into debt, taking on liabilities to other countries. A current account deficit implies that a country's economy is functioning on borrowed means. In other words, other countries are essentially financing the economy, and hence sustaining the deficit. 

So the opportunity cost of forgone spending because of debts will be the money lost through extra interest rate that can be used as development objectives. 

 

I hope this helps you to answer. 

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Sign in to follow this  

×
×
  • Create New...