External debt is the total debt a country owes to foreign creditors. The
debtors can be the government, corporations or citizens of that
country. The debt includes money owed to private commercial banks, other
governments, or international financial institutions such as the International
Monetary Fund and World Bank. Note that the use of gross liability figures
greatly distorts the ratio for countries which contain major money centers such
as the United Kingdom due to London's role as a financial capital. Contrast
net international investment position Definition
According to the International Monetary Fund, "Gross external debt is the
amount, at any given time, of disbursed and outstanding contractual liabilities
of residents of a country to nonresidents to repay principal, with or
without interest, or to pay interest, with or without principal".
In this definition, the IMF defines the key elements as follows:
Outstanding and Actual Current Liabilities
Debt liabilities include arrears of both principal and interest.
Principal and Interest When the cost of borrowing is paid
periodically, as commonly occurs, it is known as an interest payment. All other
payments of economic value by the debtor to the creditor that reduce the
principal amount outstanding are known as principal payments. However, the
definition of external debt does not distinguish between principal payments
or interest payments, or payments for both. Also, the definition does not
specify that the timing of the future payments of principal and/or interest
need be known for a liability to be classified as debt.
Residence To qualify as external debt, the debt
liabilities must be owed by a resident to a nonresident. Residence is
determined by where the debtor and creditor have their centers of economic
interest—typically, where they are ordinarily located—and not by their
nationality. Current and Not Contingent
Contingent liabilities are not included in the definition of external debt.
These are defined as arrangements under which one or more conditions must be
fulfilled before a financial transaction takes place. However, from the viewpoint
of understanding vulnerability, there is analytical interest in the potential
impact of contingent liabilities on an economy and on particular institutional
sectors, such as the government. Generally, external debt is classified
into four heads: (1) public and publicly guaranteed debt;
(2) private non-guaranteed credits; (3) central bank deposits; and
(4) loans due to the IMF. However, the exact treatment varies from
country to country. For example, while Egypt maintains this four-head
classification, in India it is classified in seven heads:
(a) Multilateral, (b) Bilateral,
(c) IMF loans, (d) Trade credit,
(e) Commercial borrowings, (f) Non-resident Indian and person of
Indian origin deposits, (g) Rupee debt, and
(h) NPR debt. External debt sustainability
Sustainable debt is the level of debt which allows a debtor country to meet
its current and future debt service obligations in full, without recourse to
further debt relief or rescheduling, avoiding accumulation of arrears, while
allowing an acceptable level of economic growth.
External-debt-sustainability analysis is generally conducted in the context of
medium-term scenarios. These scenarios are numerical evaluations that take
account of expectations of the behavior of economic variables and other factors
to determine the conditions under which debt and other indicators would
stabilize at reasonable levels, the major risks to the economy, and the need
and scope for policy adjustment. In these analysis, macroeconomic
uncertainties, such as the outlook for the current account, and policy
uncertainties, such as for fiscal policy, tend to dominate the medium-term
outlook. The World Bank and IMF hold that "a
country can be said to achieve external debt sustainability if it can meet its
current and future external debt service obligations in full, without recourse to
debt rescheduling or the accumulation of arrears and without compromising
growth". According to these two institutions, "bringing the net present
value of external public debt down to about 150 percent of a country's exports
or 250 percent of a country's revenues" would help eliminating this "critical
barrier to longer-term debt sustainability". High external debt is
believed to be harmful for the economy. Indicators of external debt
sustainability There are various indicators for
determining a sustainable level of external debt. While each has its own
advantage and peculiarity to deal with particular situations, there is no
unanimous opinion amongst economists as to a sole indicator. These indicators
are primarily in the nature of ratios—i.e., comparison between two
heads and the relation thereon and thus facilitate the policy makers in their
external debt management exercise. These indicators can be thought of as measures
of the country’s “solvency” in that they consider the stock of debt at certain
time in relation to the country’s ability to generate resources to repay
the outstanding balance. Examples of debt burden indicators
include the (a) Debt-to-GDP ratio,
(b) foreign debt to exports ratio, (c) government debt to current fiscal
revenue ratio etc. This set of indicators also covers the
structure of the outstanding debt, including:
(d) Share of foreign debt, (e) Short-term debt, and
(f) Concessional debt in the total debt stock.
A second set of indicators focuses on the short-term liquidity requirements of
the country with respect to its debt service obligations. These indicators
are not only useful early-warning signs of debt service problems, but also
highlight the impact of the inter-temporal trade-offs arising from
past borrowing decisions. Examples of liquidity monitoring indicators include
the (a) Debt service to GDP ratio,
(b) Foreign debt service to exports ratio,
(c) Government debt service to current fiscal revenue ratio
The final indicators are more forward-looking, as they point out how
the debt burden will evolve over time, given the current stock of data and
average interest rate. The dynamic ratios show how the debt-burden ratios
would change in the absence of repayments or new disbursements,
indicating the stability of the debt burden. An example of a dynamic ratio is
the ratio of the average interest rate on outstanding debt to the growth rate
of nominal GDP. See also
List of countries by external debt Third-world debt
Odious debt Public debt
Eurodad Jubilee Debt Campaign
Net international investment position Internal debt
Sovereign default The Accumulation of Capital
Notes External links
IMF National Summary Data Pages IMF World Economic Outlook-- September
2003 -- Public Debt in Emerging Markets External debt list in CIA World Factbook
IMF Guide to understanding External Debt US - External Debt viz Savings rate
Comparing External debt viz Savings rate - since 1995
European Network on Debt and Development reports, news and links on external
debt.