November 24, 2022
  • November 24, 2022

External loans: winners and losers

By on October 17, 2021 0

Global debt issues will remain at the forefront of economic discussions as long as there are lenders and borrowers as individuals or as nations. Private debtors committed suicide when it became evident that it would be impossible to repay the debt; some fled and changed identities while others remained shamelessly unmoved, challenging their creditors to do the worst. While individuals can do this, a nation remains a nation. No suicide and nowhere to go. For individuals, too, it is easy to identify winners and losers, but not for nations.

The belief in economics is that countries need external loans to fill the gap created by low domestic savings. Developing countries suffer from low savings due to their low income, but that does not mean that there are few funds in the economies. In many African countries, for example, we can find huge funds stolen illegally that will never end up in national banks. Thus, the problem of limited savings in many African countries may not translate into a lack of funds. And the fund is not only in national currency but also in foreign currency, so that what their countries are looking for abroad can be provided locally. We have found many warehouses or warehouses converted into foreign currency in Nigeria and another African country.

External loans are of various types and structures. Overall, we can divide them into institutional and private loans. Institutions provide structured and specific loans for projects or programs that cannot be easily diverted. Indeed, institutions, like the World Bank and the African Development Bank, were created to finance development projects of member countries at very low interest rates and long repayment periods. Countries that opt ​​for loans ultimately benefit because the control that follows source funding could be extended. The country and the institutions are winners. There are no losers. There are also loans or credits under bilateral and multilateral agreements between and among countries. Like institutional loans, loans and credits are allocated to specific projects, programs or services. These credits are largely of mutual benefit to the countries concerned.

Private loan sources are free of charges that prevent borrowers from misusing funds and this is where the winners and losers are apparent. The game begins with favorable credit ratings and the economic outlook for countries by certain institutional financial institutions, such as the World Bank and the International Monetary Fund, and private institutions such as Fitch Rating Inc., Moody’s, and Standard & Poor’s. Many potential borrowers try to keep their records healthy for credit rating. For example, a recent World Bank report showed that Nigeria, like other countries, is trying to avoid a moratorium on existing loans for good ratings so that it is possible for them to get more loans on. the international market. Sometimes ratings are more political than economic considerations. Banks can do anything to attract borrowers because that is where they make their money. Once a country is truly able to negotiate good ratings, the creditors market is open.

In most cases, for developing countries, foreign loans or credits will hardly reach their economies directly. They buy or import machinery, equipment, chemicals, bitumen and other materials that they need for development that they invariably do not produce. Loans are applied to pay for those materials which may be the latest technology or obsolete technology. In addition, the transaction fees are part of the payment to be made on the loan to a foreign company. The equipment or materials are then transported to the borrowing country for a further fee in foreign currency. In some cases, this may not involve the transfer of development material but the payment of certain services performed on behalf of the country. Thus, all payments are made in foreign currency to foreign companies. In the case of Nigeria where states can borrow from foreign sources, the entry will simply be that the creditor credits the account of the central bank which in turn credits the account of the state, where the latter does not purchase any money. materials.

Since loans come from private sources such as commercial and business banks overseas, it is not necessary to learn much about the rationale for the loans. These banks have excess funds and they are looking for customers. They even encourage countries to avail themselves of incentive credits for the civil servants of the country which make possible the loan application. These incentives are legally percentages of the amount involved and paid in foreign currency. You can be sure that this kind of inducement would be recursive, but to the detriment of the debtor country. Most officials in African countries are somewhat selfish, and they don’t care about their country but about growing their foreign accounts through these transactions.

It is important to note that the possibility of obtaining foreign loans frees up funds in the country, which creates what economists call the money illusion. It gives the impression that the country has a lot of money to play with. Therefore, all kinds of genuine and frivolous contracts are awarded locally in the name of development, just as all kinds of economic intervention programs are undertaken without resorting to the ethics of professionalism, transparency and accountability. These are topics that I have covered before and will probably cover in the future. Consider the winners and losers of offshore lending.

The above should show that the winners in the foreign lending business are the creditor banks and their owners who will earn interest and returns on their investment; companies involved in providing equipment and materials for the opportunity to sell their products and earn income; and the countries where the purchases are made, as this creates an employment opportunity for their citizens. Of course, the debtor also benefits from obtaining loans to purchase the equipment or materials needed for development and in doing so increase the country’s capital stock and use the same materials to create jobs. This implies that the citizens of the debtor country are also winners. Key government officials involved in helping banks get clients and loan negotiators are also major winners with their growing foreign accounts.

The losers are few. The big losers are the debtor country and its citizens who must find foreign currency to pay the loans and the interest on them, especially if the loan has not been properly applied. Since a large part of the imported materials is intended for the supply of development projects such as roads, transport, education, health facilities which may not be able to repay loans, it becomes imperative for the country to export products and earn foreign currency to repay. the debt. When the debts become colossal, as is the case in many African countries like Nigeria, it will become evident that all the foreign currency earned will have to be used to pay off debts and repay loans, leaving nothing to maintain what they are. have built or developed new projects.

The possible implications are the increasing degradation of existing infrastructure and poverty among citizens. Nigeria is fortunate to have sporadic episodes of the oil boom that earns foreign currency to offset debt from time to time. Many African countries are not so blessed, and they remain perpetual debtors and losers.

It is an illusion to believe that you can borrow to get out of recession when your country’s economy is not diversified, exports are also not diversified, the economy is not industrialized, and consumption and production are dependent on imports. This is the thinking of the Nigerian government, in particular of the regime of Major General Muhammadu Buhari (retired) as he was married by the former and current Minister of Finance. We have taken our path to poverty because we are now the “poverty capital of the world”. The best way is to rethink how to get our economy out of recession and poverty. Now is the time to do it, because no developing country can find its way out of the recession. The government should give us an example, if applicable.

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