Poor countries can mobilize internal savings

Many developing countries need funds for their economic development. They issue bonds in US dollar in the international markets. When the US dollar rises, as has happened in 2022, the developing countries find it costly to repay the borrowings. Some have defaulted in the process.

Many developing countries have the means to mobilize their internal savings for their economic development, but failed to do so.

What happened?

In any developing country, there is a middle class that have personal savings. They put their savings in local banks at low interest rates. Part of the savings are invested in the international markets.

The wealthy in the poor countries put their savings in international banks and invest in overseas assets.

The money in the international financial markets return to the developing countries as loans that are denominated in a hard currency, mainly US dollar, at high interest rate.

In essence the international financial system uses the savings from developing countries to provide expensive loans in hard currencies.

It is probable that some development funds are taken from the excess savings of the developed countries. However, the domestic savings of the developing countries could be mobilized to reduce the dependence on foreign funds.

How can this be carried out?

1. The developing country can set up a development fund and issue equity and bonds
2. The bonds will carry an interest rate that is higher than the rate offered by the local banks.
3. The equity will earn the return from the productive assets.

If the development fund is managed professionally and ethically, it should attract the local investors, and maybe international investors.

The developing countries are now paying a high price for funds from international institutions. It will be less costly for them to tap their own development fund. They will reduce their borrowing cost by removing the excess profit margin earned by the international institutions.

While this approach may be difficult to implement, it is not impossible. I hope that the some of the developing countries can succeed with this approach.

Tan Kin Lian

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