FINANCE FOR DEVELOPMENT TERMED ON WRONG TRACK

FINANCE FOR DEVELOPMENT TERMED ON WRONG TRACK

Finance for development has been on the wrong track for most poor debtor countries ever since the international debt crisis began, according to the Organization for Economic Cooperation and Development.

The net financial transfer problem, where debtors pay more interest on external debt than they receive in new loans, has caused much alarm but little analysis, Louis Emmerij, president of the OECD Development Center, writes in a recent report.Such transfers should have improved debt indicators and facilitated the return to voluntary lending. These hopes remain unfilled, he says.

The report on developing country debt concludes these nations have been unable to regain their international creditworthiness partly because of major budgetary imbalances. The outcome is often high inflation, which Mr. Emmerij says is not a long-term option for servicing external debt. It fuels private capital flight, depresses domestic savings and leads to a crowding out of private investment, he adds.

By printing money, countries have widened the gap between yields to savers and costs to borrowers. As a result, the interest on savings is too low to mobilize adequate savings capital for the transfer, and the interest on loans is too high to finance even profitable investment, the report says.

Both the fiscal and foreign currency problems can be alleviated by export- led growth, it adds. But trade deficits have generally been reduced by sharp import cuts, which has reduced intra-regional trade, particularly in Latin America.