Daily Current Affairs : 23-December-2023

Debt is a financial obligation that one party owes to another, often taking the form of borrowed funds that must be repaid over time, usually with interest. In the context of countries, it can be a combination of domestic and external debt, impacting their financial health.

India’s Debt Composition

India’s total debt stands at approximately 81%, with a significant portion being domestic debt. However, external debt constitutes around 18.6%, amounting to approximately USD 624 billion as of March 2023, according to data from the Reserve Bank of India (RBI).

Global Debt Scenario

The International Debt Report (IDR) by the World Bank sheds light on the global debt scenario. Public and publicly guaranteed (PPG) debt service payments by Low and Middle-Income Countries (LMICs) surpassed US$443 billion in 2022, posing a substantial risk to their financial sustainability.

Challenges Faced by LMICs

Several challenges add to the complexity of managing external debt for LMICs:

  • Rising Interest Rates and Exchange Rate Risks: Unfavorable movements in interest rates and exchange rates could make servicing external debt burdensome for these countries.
  • India’s Debt Service Burden: In 2022, India’s debt service accounted for 2% of its Gross National Income (GNI), indicating a noteworthy financial commitment.
Impact on Development Priorities

The debt servicing obligations faced by LMICs, including India, may lead to a potential crowding out effect. This means that funds allocated for debt repayment might limit spending on crucial development priorities.

Global Economic Trends

Due to a tighter monetary policy in advanced economies, there was a net outflow of over US$127 billion from LMICs as investors sought more attractive returns in the US and European bond markets.

Recommendations from the IDR

The report proposes strategic measures to address the debt challenges:

  • Debt Buybacks and Exchanges: Recommends exploring options for debt buybacks and exchanges to ease the burden on LMICs.
  • Debt-for-Nature Swaps: Suggests considering debt-for-nature swaps as a way to combine debt relief with funding for environmentally friendly projects.
Important Points:
  • Understanding Debts:
    • Debt is a financial obligation that involves borrowed funds.
    • Repayment is typically over time, often with interest.
  • India’s Debt Composition:
    • India’s total debt is approximately 81% of its GDP.
    • Domestic debt constitutes the majority, with external debt at around 18.6% (USD 624 billion).
  • Global Debt Scenario:
    • LMICs faced over US$443 billion in PPG debt service payments in 2022.
    • Rising interest rates and exchange rate risks pose challenges to debt servicing.
  • Challenges Faced by LMICs:
    • Unfavorable interest rate and exchange rate movements can make external debt servicing burdensome.
    • India’s debt service accounted for 2% of GNI in 2022.
  • Impact on Development Priorities:
    • Debt servicing obligations may lead to a crowding out effect, limiting funds for development priorities.
  • Global Economic Trends:
    • A net outflow of over US$127 billion from LMICs due to a tighter monetary policy in advanced economies.
  • Recommendations from the IDR:
    • Debt buybacks and exchanges are proposed to ease LMICs’ debt burden.
    • Exploring debt-for-nature swaps is recommended to combine debt relief with funding for green projects.
Why In News

The World Bank released the highly anticipated International Debt Report (IDR), shedding light on global economic trends and offering insightful analysis on the challenges and opportunities facing countries in managing their debt, as the report seeks to inform policymakers and stakeholders worldwide.

MCQs about Debts

  1. What is the primary form of debt ?
    A. Domestic debt
    B. External debt
    C. Public debt
    D. Corporate debt
    Correct Answer: A. Domestic debt
    Explanation: India’s total debt is primarily composed of domestic debt, constituting a significant portion.
  2. What is the key recommendation from the International Debt Report to address debt challenges?
    A. Increase interest rates
    B. Implement austerity measures
    C. Explore debt buybacks and exchanges
    D. Encourage more external borrowing
    Correct Answer: C. Explore debt buybacks and exchanges
    Explanation: These strategies as a means to ease the burden on Low and Middle-Income Countries (LMICs).
  3. What potential risk does the essay identify for LMICs in servicing their external debt?
    A. Favorable exchange rate movements
    B. Declining interest rates
    C. Unfavorable exchange rate movements
    D. Limited global capital flows
    Correct Answer: C. Unfavorable exchange rate movements
    Explanation: Such movements could make servicing external debt burdensome for LMICs.

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