Macromodeling Debt and Twin Deficits

Presenting the Instruments to Reduce Them

Debt is an important form of financing economic development, especially external debt is in the form of foreign exchange inflows. Exports may not bring in the necessary amount of foreign exchange needed for more imports, or foreign direct investment may not be sufficient for rapid economic development. Debt may bring in benefits/profits or may become a problem of liquidity or solvency. Debt is profitable when its usage brings in discounted streams of rates of return greater than its discounted streams of costs. Illiquidity is a short-run inadequacy of foreign exchange whereas solvency is a long-run problem in the same respect. Debt crisis - a long run solvency problem - refers to a situation where a country or a region undergo rescheduling; i.e. postponement of interest and principal repayments as a result of inability to repay debt. Rescheduling occurs often through the process of negotiations between debtors and creditors. A country can also declare a moratorium which is more severe because it means repayments of interest or both interest and principal are stopped temporarily until creditors agree to negotiate. The 1980s marked a decade where there were developing country-wide debt problem. The nature of debt problem broadly differ among regions. The Latin American countries went into debt crisis due to excessive borrowings in the international credit markets including the Euro-currency market. The debt crisis in the African region predates that of the Latin Americans due to scarcity of foreign exchange earnings via exports. The ASEAN region has lesser debt problems of illiquidity in nature, thus perceived as creditworthy by over-viewers, facilitating more capital inflows in either the form of foreign investment or foreign debt.