Foreign Debt and the Development Disaster

Does debt forgiveness make economic sense in the wake of the region's recent natural disaster? Honduras and Nicaragua are both severely indebted countries. Nicaragua's stock of foreign debt is more than three times its GNP and exceeds five times its total exports. The burden of external debt in Honduras is one hundred percent of GNP and nearly two times its total exports. Such excessive levels of foreign debt constitute a serious impediment to economic growth even under the best of economic conditions. In a study on "The External Debt Problem in Central America" written before the blight of Hurricane Mitch, Esquivel, Larraín, and Jeff Sachs, conclude, "Honduras and Nicaragua, the poorest countries of Central America,... require alleviation of their foreign debt as a prerequisite to sustained growth. If the burden of debt remains at current levels, it is unlikely that these countries will be able to grow at the rates necessary to increase the standards of living of their populations in the next decades."

In the aftermath of the natural destruction that has beset the region, the international community must call for plans to forgive the debts of these severely indebted countries, to substantially reduce the enormous total burden of external debt service, which runs nearly 14% of GNP. Unable to grow under the weight of such debt in normal times, there can certainly be no hope under present conditions with such heavy destruction of infrastructure. Former President Jimmy Carter and Cardinal Law of Massachusetts have indicated their support for debt forgiveness as part of the package for relief for reconstructing the region. Work must begin to design and implement such a plan so these countries may focus all available resources on the urgent tasks of human survival and rebuilding their battered economies.

IMF on Debt Aid (Nov 18, 1998)
BBC on Central America's Plea or Debt Relief

For an illuminating analysis of the seriousness of the debt overhang in Honduras and Nicaragua and its impact on economic development, see Esquivel, Larraín, and Sachs, "The External Debt Problem in Central America: Honduras, Nicaragua, and the HIPC Initiative," August 1998.
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