Debt Relief. A country receives debt relief if all or part of its foreign debt is cancelled.
Benefits of Debt Relief
- Foreign currency. The country will have less debt to repay so it can use foreign currency to import. More consumer goods could be imported, so living standards rise and poverty may fall. More capital goods could be imported, especially capital goods that cannot be produced within domestic shores, so the economy becomes more productive and real GDP rises.
- Freed resources. More funds are freed up for the government because it does not have to repay the debt, so there is no opportunity cost of the debt. Funds could be diverted to spending on education and healthcare, so living standards rise and poverty may fall. The government could also decrease taxes because it requires less revenue, so disposable income rises, consumption rises and living standards rise.
- Self-sufficiency. The economy can focus resources on investing and increasing its own productive capacity rather than repaying debt. Economic growth rises in the long-run, the economy becomes more self-sufficient and less dependent on foreign aid and debt in the future.
- Infrastructure. Less debt to repay means the government can spend more on the domestic economy’s infrastructure, improve the economy’s productivity and attract MNCs.
Costs of Debt Relief
- Strings. Debt cancellation may come with ties and strings attached like trade liberalization.
- Corruption. Corruption could mean the funds freed up by debt cancellation are diverted to corrupt government officials instead of being spent to improve the economy’s productive capacity.
- Dependency. A country may run up large debts again in the future if it is confident that its debt will eventually be cancelled. A country could become dependent on debt cancellation.
- Time. Debt cancellation may take time to negotiate.