UNIT 3: SOURCES OF FUNDS II (EXTERNAL SOURCES)

1. UNIT 3: SOURCES OF FUNDS II (EXTERNAL SOURCES)

2. Some External Sources of Funding for Devt at the National Level • Loans from International Institutions and Foreign Governments • Bonds sold on the International Financial Market: • A bond is certificate issued by government (or a company) promising to repay borrowed money at a fixed rate of interest at a specified time.) • Grants from various Foreign Sources • Debt Forgiveness (E.g. HIPC Proceeds) • Foreign Direct Investments, etc SOURCES OF FUNDS II: EXTERNAL SOURCES

3. Debt Forgiveness & the HIPC Initiative Discussion Questions: • What is ‘Debt Forgiveness’? • What makes it a source of funds for development? SOURCES OF FUNDS II: EXTERNAL SOURCES

4. Debt Forgiveness & the HIPC Initiative Discussion Questions: • What are some of the factors that lead to high levels of indebtedness in LDCs? • Unfavourable terms of trade • Weak economies & High levels of poverty: • Inability to stimulate growth (little multiplier effects) • Capital flight • Huge public bills on social programmes • Mismanagement, Corruption, etc SOURCES OF FUNDS II: EXTERNAL SOURCES

5. Debt Forgiveness & the HIPC Initiative What are some of the arguments in favour of Debt Forgiveness? 1. Imperfections of the global economy and failure of externally imposed policies 2. Debt is a symptom of underdevelopment 3. Burden of debt is on the innocent poor, not the elite…. 4. Debt is a threat to political stability 5. Debt forgiveness necessary for ‘New Beginnings’ 6. Current LDC leaders/generation not responsible SOURCES OF FUNDS II: EXTERNAL SOURCES

6. Debt Forgiveness & the HIPC Initiative • What about arguments against Debt Forgiveness? 1. The moral hazard argument (encouraging corruption and mismanagement in LDCs) 2. Debt forgiveness is based on bad economics and a narrow understanding of international capital markets 3. Poor nations have potentials, looting and mooching of taxpayers in MDC for LDCs unacceptable SOURCES OF FUNDS II: EXTERNAL SOURCES

7. Debt Forgiveness & the HIPC Initiative • What about arguments against Debt Forgiveness? 4. The shift to market economics in LDCs was only superficial window dressing 5. There are more fundamental problems, debt forgiveness is a cosmetic quick fix 6. Possible increase in the cost of future borrowing SOURCES OF FUNDS II: EXTERNAL SOURCES

8. Debt Forgiveness & the HIPC Initiative • What is HIPC Initiative? • Heavily Indebted Poor Countries (HIPC) Initiative • Now Enhanced HIPC Initiative) • Launched in 1996 • Goal: • To ensure deep, broad and fast debt relief and thereby contribute toward growth, poverty reduction, and debt sustainability in the poorest, most heavily indebted countries SOURCES OF FUNDS II: EXTERNAL SOURCES

9. Debt Forgiveness & the HIPC Initiative Key HIPC-Related Terms: • “Heavily Indebted” • Countries that are not likely to reduce their debt to a sustainable level through "traditional debt relief mechanisms“ • Debt Sustainability • Defined by PV of debt-to-export ratio of 150% (previously 200-250% ) SOURCES OF FUNDS II: EXTERNAL SOURCES

10. Debt Forgiveness & the HIPC Initiative Key HIPC-Related Terms: • “Poor” • those that rely on financial resources from the World bank’s International Devt Association (IDA) • IDA is the arm of the World Bank that supports the poorest countries SOURCES OF FUNDS II: EXTERNAL SOURCES

11. Debt Forgiveness & the HIPC Initiative Key HIPC-Related Terms: • Decision Point: • When a country is judged to have had a track record of macroeconomic stability, have prepared a Poverty Reduction Strategy through a participatory process, and have debt burden indicators above the HIPC initiative thresholds using the most recent data for the year immediately prior to the decision point. The amount of debt relief necessary to bring a country’s debt indicators to HIPC thresholds is calculated, and countries begin receiving interim debt relief on a provisional basis. SOURCES OF FUNDS II: EXTERNAL SOURCES

12. Debt Forgiveness & the HIPC Initiative Key HIPC-Related Terms: • Completion Point: • When a country maintains macroeconomic stability under an Extended Credit Facility (ECF)-supported program, carries out key structural and social reforms, and satisfactorily implements for a minimum of one year a Poverty Reduction Strategy. Debt relief is then provided irrevocably by the country’s creditors. SOURCES OF FUNDS II: EXTERNAL SOURCES

13. Foreign Direct Investments (FDIs) Discussion Questions: • Define the following: (a) Transnational Corporation (TNC) and (b) Foreign Direct Investment (FDI). • What is the link between TNCs and FDIs? 3. Why would you regard FDIs as a source of funds for development? SOURCES OF FUNDS II: EXTERNAL SOURCES

14. Some External Sources of Funding for Devt at the District Level • Foreign Direct Investments (FDIs) • Why would you consider FDIs as an external source of funding for development at the local (district, municipal, provincial, etc) level? SOURCES OF FUNDS II: EXTERNAL SOURCES

15. Some External Sources of Funding for Devt at the District Level • Grants (Donor Funds) from Donors and other Sources • E.g. bilateral organizations, NGOs, etc SOURCES OF FUNDS II: EXTERNAL SOURCES

16. Some External Sources of Funding for Devt at the District Level • Central Government Transfers (Grants) • What do you understand by ‘Central Government Transfers’ as a source of funding for development at the local level? SOURCES OF FUNDS II: EXTERNAL SOURCES

17. Some External Sources of Funding for Devt at the District Level • pecial Central Govt. Programmes/ Projects • E.g. SIF, Rural Enterprise Project, etc SOURCES OF FUNDS II: EXTERNAL SOURCES

18. Central Govt Grants to Local Govts • Purpose of Central Govt Grants: • What are some of the main reason why central governments send grants to local governments? SOURCES OF FUNDS II: EXTERNAL SOURCES

19. Central Govt Grants to Local Govts Purpose of Central Gov Grants: • Local govts financially under-resourced to carry out their functions • Encouraging local govts to undertake specific projects or expenditures SOURCES OF FUNDS II: EXTERNAL SOURCES

20. Central Govt Grants to Local Govts Purpose of Central Govt Grants: • As a ‘spatial targeting’ strategy—e.g. poor districts; devt nodes/growth poles; disaster mitigation • To encourage resource mobilization by local govts SOURCES OF FUNDS II: EXTERNAL SOURCES

21. Central Govt Grants to Local Govts Classification of Central Govt Grants (Kokor & Kroës, 2000): • General Grants: Substantial discretionary power regarding objectivities and activities to which grant is allocated. E.g. ceded revenue SOURCES OF FUNDS II: EXTERNAL SOURCES

22. Central Govt Grants to Local Govts Classification of Central Govt Grants (Kokor & Kroës, 2000): • Block Grants: ‘Unrestricted’ authority to allocate grant within ‘specified sector(s)’ based on guidelines broadly defined by central govt. E.g. DAC for ‘development projects’ in general SOURCES OF FUNDS II: EXTERNAL SOURCES

23. Central Govt Grants to Local Govts Classification of Central Govt Grants (Kokor & Kroës, 2000): • Specific (or Targeted) Grants: Provided for a specific project, activity or expenditure item. May be Matching Grant or Non-Matching Grant. What is a matching grant? SOURCES OF FUNDS II: EXTERNAL SOURCES

24. Central Govt Grants to Local Govts Limitations associated with Central Govt Grants: • What are the main limitations/challenges faced by local governments as far as their reliance on and use of central government grants are concerned? SOURCES OF FUNDS II: EXTERNAL SOURCES

25. Central Govt Grants to Local Govts Limitations associated with Central Govt Grants: • Limits on Discretionary Powers • Uncertainties Regarding Grant Flow • Uncertainties about Grant Size and Growth SOURCES OF FUNDS II: EXTERNAL SOURCES