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External debt (or foreign debt) is the total
debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The deb ...

debt
which the residents of a country owe to foreign
creditor A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some proper ...
s; its complement is internal debt, which is owed to domestic lenders. The debtors can be the government, corporations or citizens of that country. The debt includes money owed to private commercial
bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital ma ...
s, foreign
government A government is the system or group of people governing an organized community, generally a State (polity), state. In the case of its broad associative definition, government normally consists of legislature, Executive (government), ex ...
s, or international financial institutions such as the
International Monetary Fund The International Monetary Fund (IMF) is an international financial institution, headquartered in Washington, D.C., consisting of 190 countries working to foster global monetary cooperation, secure financial stability, facilitate internationa ...

International Monetary Fund
(IMF) and
World Bank The World Bank is an international financial institution An international financial institution (IFI) is a financial institution that has been established (or chartered) by more than one country, and hence is subject to international law. Its own ...
. Note that the use of gross-liability figures greatly distorts the ratio for countries which contain major money-centers, such as the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the United Kingdom. Some prefer to use Britain as shortha ...
due to
London London is the capital city, capital and List of urban areas in the United Kingdom, largest city of England and the United Kingdom. The city stands on the River Thames in the south-east of England, at the head of its estuary leading to the Nor ...
's role as a financial capital. (Contrast with net international investment position.) The external debt is irrelevant to the underlying currency. The state debt is split between debt denominated in the national currency and debt denominated in any foreign currency.


Definition

According to the
International Monetary Fund The International Monetary Fund (IMF) is an international financial institution, headquartered in Washington, D.C., consisting of 190 countries working to foster global monetary cooperation, secure financial stability, facilitate internationa ...

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 Interest, in finance and economics, is payment from a debtor, borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is ...
. ;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 Egypt ( ; ar, مِصر ), officially the Arab Republic of Egypt, is a transcontinental country spanning the North Africa, northeast corner of Africa and Western Asia, southwest corner of Asia by a land bridge formed by the Sinai Peninsula. ...
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) Indian rupee, Rupee debt, and :(h) Nepalese rupee, NPR debt.


External debt sustainability

Image:US gross external debt position by sectors.png, upright=1.6, Share of U.S. gross external debt by debtors. Fiscal 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 Debt rescheduling, 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 analyses, 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 The World Bank is an international financial institution An international financial institution (IFI) is a financial institution that has been established (or chartered) by more than one country, and hence is subject to international law. Its own ...
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 (NPV) 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

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 ("loans with an original grant element of 25 percent or more") in the total debt stock.“Sri Lanka: Borrowing Capacity Assessment”
, Asian Development Bank, South Asia Department, Nov. 2003, iv + 30 pp.
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.Chandrasekhar, C.P. and Ghosh, Jayat
"The Crisis of State Government Debt"
, Macroscan, May 25, 2005


See also

*Eurodad *Jubilee Debt Campaign *List of countries by external debt *Net international investment position *Odious debt *Public debt *Sovereign default *''The Accumulation of Capital'' *Third-world debt


Notes


External links


IMF National Summary Data Pages
(see "External Debt" under "External Sector")

* [https://www.cia.gov/library/publications/the-world-factbook/rankorder/2079rank.html 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 (which are two of the components that finances the Fiscal Policy)
European Network on Debt and Development
reports, news and links on external debt. {{Authority control Debt Macroeconomic indicators Financial economics International macroeconomics