A debt trap is a situation in which a debt is difficult or impossible to repay along with interest and principal. As such, a borrower is led into a cycle of re-borrowing or rolling over the loan payments. Gradually, the borrower is unable to make the scheduled payments of the loan. Nowadays, debt is as rudimentary and prime for our lives as eating and breathing. Every human being in his life takes a debt, when required, whether it is a personal loan to meet the emergencies or credit card debt. We all have been dealing with debts in some form or the other.
External debts of Bangladesh increased to US $ 33.11 billion in 2018 from US $ 28.34 billion in 2017, reaching an all-time high. Five top debt-ridden countries are Angola ($25 billion), Ethiopia ($13.5 billion), Kenya ($7.9 billion), the Republic of Congo ($7.3 billion), and North Sudan ($6.4 billion). The total debt of Bangladesh is higher than any of those countries in the debt trap. But the per capita debt in Bangladesh is lower than any of those countries.
We all know that without debts economies and businesses cannot run properly because they thrive on it and depend on it for their daily activities. It is also a common practice for businesspersons to borrow money for investment in business and for governments to borrow for meeting expenses on development and other activities. Thus, we may say that without debts, we cannot function and carry on our daily lives.
As such, while a debt is manageable, it is effective. While the debt is too much, it raises problems like the Global Financial Crisis of 2008. In such a situation the entire nations are left on the brink of bankruptcy and established businesses are likewise left at the risk of shutting down.
Worldwide, most of the countries, businesses, and individuals are now perched on a volcano of debt. The mountain of debt that has been amassed can explode any time.
Already Southern European and African countries started to face off with their toxic and horrible debts. Some businesses and corporates across the Asian continent are facing the same. Moreover, worldwide personal debts have severe implications as individuals are taking more debts or credit cards than their capacities. For example, when the entire salary or at least a noteworthy part of it goes towards paying debt, how much can the individual get left over to consume and save? On the other hand, when governments, businesses and individuals spend a major part of their revenues or earnings or tax receipts for repaying existing debts, how much do they have left to allocate for productive and gainful activities such as investing in new projects, announcing new schemes, and setting aside some money as savings for the future?
Thus, the main implication of too much debt is that it constrains future prospects and makes us prisoners to the past and slaves to the present.
It matters little whether it is a corporate that wants debt for an investment purpose or a local government seeking to indulge in massive infrastructure capacity addition by borrowing heavily or individuals turning to mortgages to finance their luxurious homes, or students who incurred debts on their education.
Modern economies are built on the premise of debt. Banking and finance are all predicted based on the ability of such institutions to lend and borrow at the same time. Moreover, debt is intrinsic to capitalism and central to free market democracies.
Thus, we need a middle path to deal with the problems of debts without either drowning completely or draining the entire ocean looking for the shore.
Under the circumstances, some economists have suggested steps such as: responsible lending and society-oriented lending are required instead of imprisoning the debt recipients. Further, limiting debts to a certain percentage of our incomes, whether for countries, businesses or individuals, will help stop short of going bankrupt.
For example, it is common for governments across the world to set limits on their deficits. In some of the countries, this is known as the Fiscal Responsibility Debt Management wherein governments are mandated to stick to certain per cent of the Total GDP or Gross Domestic Product as the deficit that is allowed.
Indeed, unless governments and businesses act together, chances are that they would behave like maniac when the times are good and become imbeciles when they have to pay the same.
It is clear that what is needed is responsible borrowing from all entities and for those who are students pursuing graduation or undergraduate education. Our recommendation is that it must be realistic about chances to repay the debt and hence lead balanced lives without devouring debt and spending loans for fruitless purposes.
Debt is like an addiction that is healthy when pursued in moderation. But a debt is toxic and injurious to health, when done in excess. So, a better policy can help raise the efficiency of humans, earn more money, make financial inclusion and expense on development.