Many developing countries are so indebted that their total annual repayments outstrip foreign exchange earnings up to 30 times over.

In 1994, the developing countries as a whole owed an estimated US$ 1 800 000 million to banks, governments and multilateral institutions in the industrialized countries-the equivalent of half their entire annual trade. Servicing these huge debts diverts funds from urgently needed social and economic development.

The debt crisis dates from the oil price rises of the early 1970s. Commercial banks, flooded with money from the oil-exporting nations, found eager borrowers in developing countries. A major attraction for many of them was the low, often negative, interest rates. In theory the loans were to fund projects which would generate enough money to repay them; in practice this often failed to happen. In April 1982, as interest rates soared, Mexico said that it could no longer pay even the interest on its debt. Other countries followed.

As the crisis grew in the 1980s, debtor nations turned to the IMF and World Bank for help. These institutions made their help conditional on stringent structural adjustment programmes, which often included devaluation and cuts in public spending. These hit the poorest hardest.

The world's largest debtor is the United States, but because of its developed economy and rich resources, it has little problem servicing its debt and continuing to attract investment. Developing countries are far less well placed, spending about one-fifth of all their export earnings for debt servicing. In 1994 the debt of sub-Saharan Africa (excluding South Africa) was 10 percent higher than its annual output. Every year the region spends four times more on servicing its debt than it does on health and education combined. Central and Eastern European countries face similar dilemmas.

Over the past ten years, about 80 percent of the debts owed by the developing countries to commercial banks have been renegotiated on more favourable terms. This restructuring and rescheduling (lowering debt service costs by spreading the debt over a longer period of time) has eased the burden of the most indebted continent, Latin America. Some countries have had part of their debt forgiven.

Debt swaps - by which foreign investors write off part of a country's debt in exchange for local currency which they invest within the debtor nation -provide another mechanism. A refinement - debt-for-nature swaps - allows international environmental groups to buy part of a developing country's debt in exchange for government investment in conservation: half of Madagascar's US$ 100 million commercial bank debt has been written off in this way. But with a value by 1995 of less than US$ 750 million, these are unlikely to relieve much of the developing world's debt burden.

External debt total as a percentage of foreign exchange earnings

Source: World Bank

Developing countries: external debt total

Source: World Bank

Debt service

Source: World Bank

Debt as percentage gross national product

Source: World Bank

Debt as percentage foreign exchange earnings

Source: World Bank

Per caput debt

Per caput external debt total
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Source: World Bank

Heavily indebted countries

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As external debt has to be paid in foreign exchange the relative difference between the present value of debt service (PV) and the export of goods and all services (XGS) is important. The World Bank regards a PV/XGS ratio in excess of 2.2:1 as one of the indicators of severe indebtedness.

All countries listed here have a PV/XGS ratio greater than 2.2:1. For example, Mozambique has a ratio of 11.1.

Source: World Bank