Countries that are not able to raise enough money internally through taxes, other revenue sources, and internal borrowing to promote their economic growth and development projects may opt for external borrowing. Institutions such as the World Bank, International Monetary Fund, regional development banks, and bilateral loans offered by governments of other countries provide credit lines to countries in need of such financial assistance. These loans come with repayment terms and utilization conditions. The terms of payment include the amount of interest the credit will attract and the repayment period. The interest rates vary from one type of loan to another the purpose for which the credit is given. Some of the countries with the highest interest rates on official foreign credit lines are briefly looked at below.
Zambia is one of the countries that has been further impoverished by its large debt repayments. The uncontrolled lending by the western banks has led to stagnation and decades of debts. Zambia’s debt currently stands at 24% of its Gross Domestic Product (GDP). The figure is a significant increase compared to the 15% of GDP in 2011. The country’s total external debt amounts to over $7 billion. The increase has been particularly caused by the issuance of Eurobond in 2012 and 2014. The high inflation rate, the slow GDP growth and the high borrowing rate in Zambia have pushed the interest rate significantly high. Currently, the country borrows external funds at an average interest rate of 6.4%, two percentage points more than the next high interest rate.
Most of the Belarusian economy is financed by the loan agreements between its government and the country's foreign shareholders. Obtaining loans from international lenders are considered a capital operation. The banks in Belarus play a critical role in the external loan application and processing. The banks also play an important role in determining the interest rate for the loans offered. The government of Belarus prefers interstate loans which attract a fair interest rate of between 7% and 8%. However, the average interest rate on a new external credit line in Belarus is 4.8%. The high local bank interest rates on foreign deposits have played a significant role in the high interest rates.
Cape Verde operates a fixed exchange regime which hinges the value of its own national currency upon that of the European Union's euro, resulting in high interest rates. The high interest rate on foreign borrowing is meant to attract foreign loans necessary for economic growth and development. The constant appreciation of the euro has put the interest rate under constant strains thus the cost of borrowing has significantly increased. Currently, the interest rate on Cape Verde’s foreign credit lines stands at 4.2%. The challenge facing the country is how to reduce the high cost of borrowing without interfering with the fixed exchange regime. Any cuts in refinancing rates are likely to discourage external capital inflow into the country. The high interest rates are also partly influenced by the Cape Verde’s banking structural deficiencies.
Implications Of High Interest Rates
High interest rates have a negative effect on the borrowing country because it increases the overall cost of borrowing. However, high interest rates can also act as bait for countries looking to get foreign credit. High interest rates are mainly common in developing countries.