A grace period refers to the provision in most loan and insurance contracts that allows borrowers (government and private), to continue repaying even after the actual due date of the loan. During the loan grace period, there are no late fees charged. The late payment does not attract default or cancellation. In certain countries, the grace period could be over 30 years, while most countries average about ten years on foreign loans.
Countries with the longest grace periods on foreign loans include Afghanistan, Romania, Colombia, Nicaragua, Grenada, Guinea-Bissau, Central African Republic, Tonga, Sao Tome and Principe, and Burundi. Most of them experience slow economic growth which warrants external borrowing to stimulate development.
Factors Contributing to Long Grace Periods
Long grace periods on foreign loans in some countries, mostly developing countries, is because of certain factors that come into play. The chief reasons for having such long periods to clear debts includes;
Investment In Infrastructure
Balanced economic growth calls for substantial investment in infrastructural facilities like roads, ports, means of transportation, electricity and power, water supply and all that hinges on prerequisites for further development. This kind of investment normally takes a lot of time which could extend up to 10 years to reflect. Investment in infrastructure requires a considerable amount of foreign exchange while they do not themselves contribute towards increasing export revenue. Therefore, a longer grace period is offered on such investments.
Increase In demand Of Imported Raw Materials
Most developing economies require a huge investment in raw materials, mechanical equipment, and replacement parts. These are not necessarily available locally, and most countries will prefer to import from more developed countries.
Long Execution Periods
Investment projects which may assist in raising the export capacity of developing countries frequently require a considerable period of execution. This creates the difficult task of attaining a level of efficiency that will enable them to compete in world markets.
The agricultural based economies of most developing countries afford little in raising their export earnings. This sector takes a lot of time to repay foreign loans since the income from agriculture is little and the overall process is time-consuming. The lender countries offer longer grace periods for clearing the loans.
Lack of Diverse Markets For Goods
A further limiting factor is the willingness of the developed countries to increase their imports from the less developed countries. The borrowing countries are reluctant to open their markets any wider for such imports and to adapt themselves to a rational, international distribution of labor based on the comparative-cost principle.
The longest grace periods are determined by economic growth rates of countries. Most developing countries could keep the pace with the rise in their external spending by increasing exports, or the substitution of imports by domestic production. This change will bring about satisfactory economic growth and investment to enable them to reduce foreign debts.
In the meantime, these countries have little investments and income that does not match their rapid spending and borrowing leading to long grace periods on foreign loans.