Section D: Debt

http://www.linktv.org/third-world-debt

1. Identify 3 reasons why you might need to borrow money. To buy assets e.g. cars, houses etc. To buy capital To pay for losses made To pay for medical expenses To pay off debt at a lower interest rate To start a business To raise standard of living To feed some of poorer population

2. Explain what a loan is and how it works.

A loan = act of giving money, property or other material goods to another party in exchange for future repayment of the principal amount along with interest or other finance charges.

A loan may be for a specific, one-time amount or can be available as open-ended credit up to a specified ceiling amount.

3. Investigate rates on interest on loans in Hong Kong and another country e.g. use www.tradingeconomics.com.

4. Explain how changes in interest rates affect loan repayments and further borrowing.

http://www.africaw.com/7-cartoons/detail/130-africa-in-a-financial-trap

Changes in interest rates can increase the amount paid back to the lender because they have arranged the interest rate so it is advantageous to them.

5. Explain how changes in exchange rates may affect loan repayments.

Exchange rates can affect loan repayments…

Yes, currency exchange rates do affect the value of the loan repayments. Loans provided by you are ultimately provided to entrepreneurs in local currencies. Equally, repayments to you are translated back into GB pounds using the prevailing exchange rate. Exchange rates fluctuate over time so the monthly instalment you receive in GB Pounds will differ slightly to that forecast on the repayment schedule that is attached to each entrepreneur. Therefore, you will see fluctuations in repayment values; these will sometimes be less than the forecast repayment. If there is any exchange rate gain then this will be retained by CARE to help with our operational costs.

You, the lender, bear the exchange rate risk – due to fluctuations in exchange rates.

Case Study Jamaica

Jamaica – a middle-income developing country of 2.8 million people – has one of the worst debt burdens in the world, with a gross public debt of 123% of GDP.

Not surprisingly, a country that is paying so much interest on its debt does not have much room in its budget for other things. For the 2009/2010 fiscal year, Jamaica's interest payments on the public debt were 45% of its

government spending. This crowding out of public investment and social spending has hurt Jamaica's progress towards the Millennium development goals.

Jamaica's coverage rates for detection and treatment of tuberculosis declined from 79% in 1997 to 43% in 2006, the worst decline of 77 countries for which data was available. The net enrollment ratio in primary school declined from 97% in 1991 to 87% in 2006/2007.

Jamaica's long term development failure is striking, and has a lot to do with its debt burden. For the 20 years from 1988-2008, real income per person grew by just 14%, which is incredibly dismal. The the country was hit by the U.S. and global recession at the end of 2008, losing export revenue, remittances, and other sources of aggregate demand.

http://www.theguardian.com/commentisfree/cifamerica/2011/jul/22/jamaica-debt-crisis?guni=Article:in%20body%20link

Jamaica became independent from Britain in 1962, but it was only in the 1970s that the government of Michael Manley initiated policies to reduce dependency on foreign capital, improve living standards and fight inequality. He supported health and education, nationalised industries, increased taxation on foreign investment and encouraged agricultural self-sufficiency.

Jamaica has repaid more money ($19.8bn) than it has been lent ($18.5bn), yet the government still "owes" $7.8bn, as a result of huge interest payments. Government foreign debt payments ($1.2bn) are double the amount spent on education and health combined ($600m).

http://www.theguardian.com/global-development/poverty-matters/2013/apr/16/jamaica-decades-debt-damaging-future

Tasks

1. Using the information contained in the case study identify the disadvantages of being in debt.2. Find an image or several images that represent:

Positive outcomes of debtNegative outcomes of debt

Research TaskThe World Bank and the International Monetary Fund (IMF)In pairs, research the roles of the World Bank and the IMF in promoting economic development. What are the terms and conditions of the loans that they make to countries? How does the World Bank differ from the IMF? Be prepared to present your findings to the class.

Exam PracticeMake sure that you are able to discuss whether the benefits of international debt outweigh the costs of international debt.International Debt

Pros

Cons