Is Foreign Debt a Problem for Bangladesh? Essay

3041 Words Apr 9th, 2013 13 Pages
Is Foreign Debt a Problem for Bangladesh?

Foreign debt in Bangladesh

External debt is one of the sources of financing capital formation in any economy. Developing countries like Bangladesh are characterized by inadequate internal capital formation due to the vicious circle of low productivity, low income, and low savings. Therefore, this situation calls for technical, managerial, and financial support from Western countries to bridge the resource gap. On the other hand, external debt acts as a major constraint to capital formation in developing nations. The burden and dynamics of external debt show that they do not contribute significantly to financing economic development in developing countries. In most
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If there is no lender of last resort (e.g. in the Euro) then markets have a greater fear of liquidity shortages and so are more reluctant to buy bonds. • Prospects for Economic Growth. If one country faces prospect of recession, then tax revenues will fall, the debt to GDP ratio will rise. Markets will be much more reluctant to buy bonds. If there is forecast for higher growth. This will make it much easier to reduce debt to GDP ratios. The irony is that cutting government spending to reduce deficits, can lead to lower economic growth and increase debt to GDP ratios. • Confidence and Security. Usually, governments are seen as a safe investment. Many governments have never defaulted on debt payments so people are willing to buy bonds because at least they are safe. However, if investors feel a government is too stretched and could default, then it will be more difficult to borrow. • Foreign Purchase. A country like the US attracts substantial foreign buyers for its debt (Japan, China, UK). This foreign demand makes it easier for government to borrow. However, if investors feared a country could experience inflation and a rapid devaluation, foreigners would not want to hold securities in that country. • Inflation. Financing the debt by increasing the money supply is risky because of the inflationary effect. Inflation reduces the real

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