debt cancelation Essay

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DEBT CANCELATION
Definition: When a creditor forgives a debt without requiring consideration in return. The amount of debt that is forgiven by cancellation of debt is considered income to the debtor and must be reported as a result.
The current near $5tn of external debts owed by developing countries costs them more than $1.5bn a day in repayments – and much of that comes from the poorest countries
Without conditional loans from the IMF, World Bank and others, they would have to pay interest rates many times higher on private sector loans.
Some developing countries have chosen to borrow from other emerging economies such as China or Brazil as a way of avoiding conditional loans from international institutions
Debt Relief - Debt Jubilee Campaign
To what extent should richer nations be prepared to write-off external debts of poor countries? The Jubilee Debt Campaign pushes for debt cancellation and debt relief avoiding where possible conditions built into debt reduction agreements that create further problems for vulnerable countries.
One option is to reschedule debt payments and change the nature of the interest rate paid on these loans. In July 2012 a United Nations report made the case for introduced indexed loan repayments where the interest rate is tied to a country’s rates of economic and/or export growth. This would help balance the risk of loans more equally between lender and borrower. In good years when growth of GDP is strong, the borrower country would repay more of their debts. During hard times (i.e. a recession caused by a fall in export revenues), the rate of interest on debt would fall.
Djibouti (East Africa)
The Djibouti government’s external debt has increased significantly over the last decade from 40 per cent of GDP in 2001 to 70 per cent in 2009, and now stands at $700 million. For 2012, the IMF predicts the government will spend 14 per cent of revenues on foreign debt payments. Since 2001, over 70 per cent of lending to the country has been from multilateral institutions such as the IMF, World Bank and African Development Bank. In May 2012 the IMF agreed to lend a further $10 million to help the country meet its debt and import payments. As part of the loan programme the Djibouti government has agreed to reform diesel fuel subsidies, freeze any hiring in the public sector, except for health and education and freeze public sector pay, except for the lowest salary band.
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