DEVELOPMENT FINANCE

Development Finance

Development Finance

Introduction

Poor countries owe huge amount of money to rich including World Bank, IMF and other international financial institutions (IFIs).There are various factors which contribute to poverty such as corruption, war, and economic management can be considered as the more pervasive(Craig and Porter, 2003; IMF, 2013). Yet, other factors only make poverty's impact more severe. This means the most important factors which contribute to poverty must be considered first in order to alleviate the poverty. However, mostly in least developed countries the factors which only worsen the poverty condition are taken in consideration as a short term goal to reduce poverty. So, as it is clear that poverty reduction can only be possible if the debt problems of the least developed countries (LDCs) are solved. Various donors' agencies have started significant initiatives in terms of project such as Heavily Indebted Poor Countries (HIPC). The joint International Monetary Fund and World Bank's initiative to date (IMF, 2013) have approved 36 countries under HIPC initiative. Out of 36 countries 30 countries belong to Africa, approximately around $75 billion have been provided to these countries as relief in debt-service (IMF, 2013). However, the problem still persist over the debt issues in the poor countries. This paper attempts to discuss these problems and the role of HIPC initiative to alleviate the debt problems in the Least Developed Countries (LDCs).

Discussion

Before discussing the role of HIPC initiative in reducing the debt issue of least developed countries it is necessary to discuss the relationship of debt and growth rate of the country. According to Gautam (2003), it is preferred and mandatory to go for debt relief rather to give provision to more new loans especially in cases where debt accumulated has went beyond the critical point as shown in the figure below on point A. If the debt has gone beyond the critical point it will then chock the development, growth and the private investment (Burnside and Dollar, 2000). This is the case with most of the least developed countries, which are trapped with the debt overhang problem.

So, keeping in view the above development phenomenon it is clear that development in the least developed countries cannot take place only if the new loans are provided to improve their social structure. However, the need is to lower the burden of LDCs in term of debt. By doing so, these countries can utilize the freed up funds in the social and economic development of the country. This is the reason; HIPC initiative was started due to international pressure on the developed countries which run the IFCs, World Bank, IMF etc (Dooley, 2000; Daalgard & Hansen, 2001).

What is Debt Crisis?

In 1980, the global trend toward financial liberalization has led to diversified financing measures for developing countries. However, the redemption and/or principal and interest repayments have not always taken place on schedule. As a result of endogenous problems such as the vulnerable tax base, or exogenous shocks such as falling prices for foreign-currency earning products, natural disasters and ...