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Home  Field Trips Trade Tour The Central Bank of ZambiaThe Central Bank of ZambiaOrigins of Commercial DebtBack to field trips home page >> A relatively small part of Zambia's debt has been has been with foreign commercial banks. Nevertheless, it is worth considering the causes of the indebtedness with foreign commercial banks during the 1970s and 1980s that many LDCs faced, in what became known as the World Debt Crisis. Not only did Zambia experience the burden from this type of hard loan itself but Sub Saharan Africa experienced its impact as 7 countries from the region were identified by the World Bank as being Severely Indebted Countries and thus vulnerable to defaulting on repayment. To understand the cause of the world debt crisis of the 1980s it is necessary to look at the world crude oil market in the previous decade. In 1974 and 1979 the Organisation of Petroleum Exporting Countries, OPEC, dominated by the countries of the Middle East reduced the world supply of oil and hence forced up the world price by several hundred percent. The oil producing nations saw their revenues increase considerably. Much of this was saved in commercial banks abroad. The world financial system was awash with these petrodollars. During this time many LDCs had experienced rapid economic growth during the late 1960s and early 1970s. The drive for industrialisation and modernisation led to increased imports of capital and oil. The rising world oil prices caused firms' production costs to increase and contributed to world recession accompanied by inflation. This phenomenon of inflation and recession was called stagflation. As a consequence the demand for commodities from the MDCs slowed down. The LDCs economies saw the demand for their exports to slow down too and rising prices of imports caused their balance of payments to go into deficit. These deficits were partly financed by lending from official sources at non-concessional rates. Some countries looked to alternative sources of credit especially as IMF lending was usually accompanied by strict and painful conditions such as structural adjustment. Foreign commercial banks, having large deposits of petro-dollars at their disposal saw the need for lending from the LDCs as an opportunity for profit. They lend out to the LDCs on favourable terms albeit at the market rate of interest. Between 1975 and 1979 the total external debt of LDCs increased from $180bn to $406bn.
During the period of the 1970s most of the LDCs were able to sustain the repayment of this non-concessional debt due to the low real interest rates. The oil price rise of 1979 and the accompanying inflation forced the industrialised countries to push up interest rates as a deflationary measure. The LDCs were now faced with deteriorating balance of payments and the need to finance their deficits, a substantial amount of accumulated debt in a climate where the cost of borrowing was increasing. The debt crisis had arrived. Faced with having to either reduce their balance of payments deficits through deflationary or protectionist policies and adversely affect economic development or borrow more, many LDCs resorted to the latter. This of course increased the burden of debt, which was so large for many countries such as Mexico and Peru, that simply repaying interest payments was almost impossible. Eventually Mexico defaulted on its debt repayments in 1982 and the pressure was on to find ways to solve the crisis. Back to field trips home page >>
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