chapter  10
26 Pages

Public sector debt in developing countries


The past thirty years have been punctuated by debt crises across the world. Developing countries have been particularly prone and vulnerable to debt crises. The oil price shock of 1981 resulted in a hike in global interest rates which promoted developed economies to cut back on imports from developing countries, causing an increase in deficits for non-oil-exporting developing nations. During the 1980s the breakdown of the Bretton-Woods agreement, which had established an international system of fixed exchange rates in 1946, resulted in floating exchange rates for the major currencies whilst other currencies pegged themselves mainly to the US dollar but also to Sterling. The exchange rates of developing countries depreciated under this new regime and caused them problems of servicing debt denominated in foreign currencies. Interest costs on public sector debt are higher in developing compared to industrialized economies: an average of 17 per cent compared to 10 per cent. These interest charges also tend to be more volatile for developing nations.