Why it’s a bad idea to borrow money from other countries?

One of the irony for majority of economists and policy makers around the World is this, how can most financially supported countries be more poor with time. Funnier enough, at the end of the year, when big banks close financial books much, more, money seem to go back from where it’s originated i.e. developed countries. Trust me in one way or another that’s really bother countries decision makers for both developed and developing countries. Just for reference, based on financial report of June 2019 National external debt kicked to 49,681,840,000,000 TSH in simple terms almost every Tanzanian owe more than 800,000 TSH. Well that’s huge and it keep increasing, but first, how did we get here?

Imagine the scenario:  You have become the prime minister and sit on the table with Chinese leader. Then in the middle of conversation he decided to offer 10,000,000 $ as low interest loan from China to Tanzania.

Will you accept or deny?

Here is the catch, what seems to be a common sense between two friends when they borrow money between each other does not apply when one country borrow money from other country.

Here is why:

1. Tanzania economy uses only Tanzanian Shilling therefore it’s never possible to use any currency like Dollar, Yen or Euro to run internal economy. 🚫

2. Since you can’t borrow money from other economic system to run your internal economy this implies All Borrowed money since Tanzania get independence till now never entered to our economy

That’s weird!!!

QN: Then Where did they go?

3. The Answer is: They stayed within their respective economy. Seems confusing. But that’s it. All US dollars remained in US economy, all Euros remained at Europe and all Yen remained in Japan economy.

Here is the funny part,

When loan issued from other country and arrive at Central or Commercial Banks example, BOT, what do they do? They again have to issue another loan in TSH so that it can be again valid in our economy. However, they can literally do this without borrowing from other countries, in fact it’s much better because if BOT and other banks only issue loans to fuel the economy since they can control interest rates.

The really stupid downside of loans from other nations is this: We will have to pay interest for the currency we can’t use in our economy.

Just ask yourself, how many time you use dollar for consumption or production It’s obvious very few time.

Then if clause 1, 2 and 3 are valid, the leader should immediately say NO! Very Big No!

During negotiation the best we can have as nation is Assured markets or Investments which clearly offers Bilateral Mutual Benefits.

But as a leader you must fight against your ordinary perspectives of what money is and focus on big picture. Otherwise, it’s really easy to fall under trap since your understanding of what money is incredible limited.

One must ask so all foreign reserves are useless? Nop! In fact, they help us just in case we have to interact with other economic system but they don’t offer any value more than that. And based on statistics they tend to weaken economy if not well managed. And last but not least, Regardless of other factors contributed to Evolution of China and Japan, their progress has a lot to do with Public and Leaders understanding of monetary systems.

So what all this implies? :

As a leader or who offer advice to policy maker you can make or advise them to make a reasonably better decision in negotiations.

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