Financing the Transition to a Market Economy: External Borrowing in the Baltics and CIS Region
The external debt1 of many countries of the Baltics and Commonwealth of Independent States (CIS) region (hereafter BCIS)2 has been growing rapidly in recent years. Although not especially high by the standards of most developing countries, the current level of debt is nevertheless remarkable, given that it was zero or close to zero less than six years ago. This statement does not apply to Russia, which began with all the inherited debts of the USSR but subsequently experienced slower growth in debt. Given the different position of Russia, the focus of this chapter is on the other BCIS countries. This chapter discusses the role that external borrowing has played in the transition process and some of the risks it poses. On the one hand, it clearly makes sense to borrow abroad to help finance the difficult transition period. In a formal sense, this is justified by consumption-smoothing considerations and the need to supplement domestic savings to finance essential investments. The fact that most of these countries still have lower levels of debt than many developing countries supports this argument. Moreover, international capital markets are increasingly eager to lend to these and other economies in transition, and their financial terms are improving.
KeywordsCentral Bank Structural Reform External Debt International Capital Market Domestic Interest Rate
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