COMMERCIAL BORROWING

Commercial borrowing refers to the loans that a country’s government or corporations obtain from foreign commercial banks and financial institutions. Unlike concessional loans from international organizations or governments, commercial loans are typically provided at market interest rates and have shorter repayment periods. These borrowings are recorded in the capital and financial account of the Balance of Payments (BOP).

Types of Commercial Borrowing

1. Syndicated Loans:
   • Loans provided by a group of banks (syndicate) to spread the risk associated with lending large amounts of money.
   • Example: A corporation in Country X borrows $500 million from a syndicate of international banks to expand its operations.
2. Bonds and Debentures:
   • Debt securities issued by governments or corporations to raise funds from foreign investors. These instruments pay periodic interest and return the principal at maturity.
   • Example: Country Y issues $1 billion worth of government bonds to foreign investors to finance infrastructure projects.
3. Trade Credit:
   • Short-term financing provided by suppliers allowing the importing company to pay for goods and services at a later date.
   • Example: A company in Country Z imports machinery from a foreign supplier with an agreement to pay for it in 90 days.

Commercial Borrowing in the BOP

Commercial borrowing is recorded as part of the financial account in the BOP. Inflows from commercial borrowings are recorded as credits (positive entries), while repayments are recorded as debits (negative entries).

Example of Commercial Borrowing in the BOP

Let’s consider a hypothetical country, Country L, for a year.

1. Syndicated Loans:
   • Loans Received: $800 million (Borrowed from a syndicate of international banks).
   • Loans Repaid: $200 million (Repayment of previous syndicated loans).
   • Net Syndicated Loans: $800 million – $200 million = $600 million (Surplus).
2. Bonds and Debentures:
   • Bonds Issued: $1 billion (Government bonds sold to foreign investors).
   • Bonds Redeemed: $300 million (Redemption of maturing bonds).
   • Net Bonds: $1 billion – $300 million = $700 million (Surplus).
3. Trade Credit:
   • Trade Credit Received: $400 million (Credit terms for imported goods).
   • Trade Credit Repaid: $350 million (Payment for previous trade credit).
   • Net Trade Credit: $400 million – $350 million = $50 million (Surplus).

Calculation of Country L’s Commercial Borrowing

Net Commercial Borrowing=Net Syndicated Loans+Net Bonds+Net Trade Credit

{Net Commercial Borrowing} = $600 { million} + $700{ million} + $50{ million}

{Net Commercial Borrowing} = $1.35 { billion}

Interpretation

Country L has a net commercial borrowing surplus of $1.35 billion. This indicates that the country receives more from commercial borrowing (syndicated loans, bonds, and trade credit) than it repays, contributing positively to the financial account of the BOP.

Impact on the Economy

1. Capital Availability:
   • Commercial borrowing provides immediate access to capital, enabling governments and corporations to finance large projects and investments.
2. Economic Growth:
   • Funds from commercial borrowing can be used for infrastructure, industrial expansion, and other development projects, fostering economic growth.
3. Debt Servicing:
   • While commercial borrowing provides necessary funds, it also creates obligations for future repayments, which can strain the country’s fiscal resources if not managed properly.
4. Interest Payments:
   • Commercial loans typically come with higher interest rates compared to concessional loans, increasing the cost of borrowing and impacting the budget.

Broader Context in the Balance of Payments

Example of Country L’s Balance of Payments

1. Current Account:
   • Trade Balance: -$3 billion (Deficit in goods and services).
   • Net Income: $1 billion (Surplus in investment income and compensation).
   • Net Private Transfers: $1.5 billion (Surplus in remittances and gifts).
   • Net Official Transfers: -$1 billion (Deficit in government transfers).
2. Capital and Financial Account:
   • Net Commercial Borrowing: $1.35 billion (as calculated above).
   • Other Capital Flows: $2 billion (Foreign direct investment and portfolio investment).

Calculation of Country L’s Overall BOP

{Current Account Balance} = -$3 { billion} + $1 { billion} + $1.5 { billion} – $1{ billion}

{Current Account Balance} = -$1.5{ billion}

Capital and Financial Account Balance=Net Commercial Borrowing+Other Capital Flows

{Capital and Financial Account Balance} = $1.35 { billion} + $2{ billion}

{Capital and Financial Account Balance} = $3.35 { billion}

Overall BOP=Current Account Balance+Capital and Financial Account Balance

{Overall BOP} = -$1.5 { billion} + $3.35{ billion}

{Overall BOP} = $1.85 { billion}

Conclusion

Country L has an overall BOP surplus of $1.85 billion. Despite a trade deficit, the substantial inflows from commercial borrowing and other capital flows contribute to a positive balance. Understanding commercial borrowing and its role in the BOP helps policymakers and economists develop strategies to manage debt, attract investment, and support economic growth.