Foreign Debt Not as Bad as Legend Has It

EghtesadOnline: Following the January 2016 implementation of the nuclear deal Iran signed with world powers in 2015, foreign financiers have been stepping in to fund domestic projects in Iran by opening lines of credit.

News ID: ۷۷۹۰۳۹

06 September 2017

Notably, Iran signed its biggest credit line deal in recent years with South Korea’s Eximbank last month. The deal envisages as much as €8 billion in loans provided by South Korean companies to finance various projects in Iran.

Owing money to foreign countries might not be a bad thing, as foreign finance contracts have unalloyed benefits if the inflow is put to productive use, reads an editorial recently published by the Persian economic daily Donya-e-Eqtesad. According to Financial Tribune, excerpts follow:

Some might see a country’s finance contract with a foreign country as an indication of its troubled economy.

What justifies an oil-rich country’s move to borrow from other countries and make interest payments? Why a country that used to make financial donation to other states (Europeans included) in the past has to ask for loans from different countries, even Asians, they ask.

Another group argues that accumulation of foreign debts is equal to selling out the country’s future and that foreigners would not offer loans if such contracts were to the benefit of the borrower.

The fact of the matter is that such criticisms are based on poor grounds and misconceptions. Foreign financing is definitely not a sign of economic weakness.

A look at the foreign debts of many countries, particularly developed states, shows they accumulated considerable amounts of foreign debts. Foreign financing is a great advantage, if used correctly for economic projects.

A comparison between Iran’s foreign debts and those of developed countries will show that Iran’s debts are insignificant compared to those of developed countries.

Although Iran has a huge capacity for development projects, it lacks financial resources to carry out these projects. The financial crunch is the main challenge facing Iran’s development projects, including those in oil and gas industries, government officials say.

Therefore, absorption of foreign financing could unlock manufacturing potential and add jobs to the economy.

Limiting capital flows seems like a good idea, so Iran’s budget of the current fiscal year (March 2017-18) has set the country’s debt ceiling at $50 billion.

Loans can untie the knots in Iran’s economy if used for income-generating projects, similar to a household that takes out a loan to buy a home instead of consumer products.

In addition, long-term loans offered to a country suggest that creditors have confidence in the financial and banking system of the borrowing country. Underdeveloped, poor countries have unsubstantial foreign debts, meaning other countries are not ready to risk their resources on them.

On the other hand, both the lender and the borrower will benefit from finance contracts. Foreign countries usually condition their financing on the borrower agreeing to procure a part of the project’s know-how and equipment from them. In doing so, both countries will benefit from the contract.

It is of utmost importance that the borrowed capital from foreign sources goes to development and manufacturing projects, which are capable of generating earnings for the country to pay back the loans.

The Central Bank of Iran, the Ministry of Economic Affairs and Finance and the Planning and Budget Organization should prioritize projects in need of foreign resources and put such inflows to productive use.

Banks, as the signatories of financing projects, must have enough supervision over the project and ensure the precise implementation of contracts.