Debt crisis: Developing countries external debt hits record $11 4 trillion UN Trade and Development UNCTAD

Foreign commercial loans come from international banks, financial institutions, or private lenders. Many are structured as syndicated loans, where multiple lenders share the risk. Short-term external debt, due within a year, can create liquidity pressures if refinancing options are limited. Credit ratings from agencies like Moody’s, S&P, and Fitch affect borrowing terms, as lower-rated entities face higher interest rates due to perceived default risk. In the following sections, we delve deeper into various aspects of external debt, including its advantages and disadvantages, types, and impact on economies.

External debt statistics (EDS)

Country X incurs a fiscal deficit of $100 million in Year 1 and plans to invest $100 million in an infrastructure project. The loan must be repaid in 10 annual installments of $20 million each, starting from the following year. Make the best decisions about the future of your business with the most reliable economic intelligence. However, it expressed concern over the government’s revenue position, noting that interest payments will consume a substantial portion of income.

What is external debt?

In subsequent years, there might be a situation where it borrows money in order to repay its previous loans. Interest payments on sovereign bonds may be subject to tax regulations in both the issuing and investor’s country. Under U.S. tax law (IRC Section 871(h)), interest on certain foreign-issued bonds is exempt from U.S. withholding tax if structured as portfolio interest. Besides pledging more funds, Antony Blinken urged Pakistan to look for debt restructuring and relief from China, its largest creditor. The loan amount Pakistan still must repay includes the balance of payments supports worth $6 billion. Foreign debt, especially tied loans, might allow a borrower to fulfill certain purposes defined by the two parties.

The nature of External debts is more complex as compared to Internal debts as it uses the concept of foreign currency. The government offers money from external sources to boost its economy after facing any economic crunch, to invest in multiple sectors, etc. External debt refers to the loans raised through foreign lenders, such as foreign commercial banks, foreign governments, and international financial institutions. In the case of external debt, all repayments must be made in the currency in which the debt was issued. External debt is the portion of a country’s debt that is borrowed from foreign lenders, including commercial banks, governments, or international financial institutions.

Fitch said general government debt was expected to remain at about 51 per cent of GDP in 2025 and 2026. For over 45 years, the Debt Management and Financial Analysis System (DMFAS) has helped more than 80 institutions across 60 countries improve transparency, governance and economic stability. Debt distress now looms over more than half of the 68 low-income countries eligible for the International Monetary Fund’s Poverty Reduction and Growth Trust – more than double the number in 2015. FocusEconomics provides data, forecasts and analysis for hundreds of countries and commodities.

• Understanding the differences between these two debt types can help investors make informed decisions concerning risk management and investment strategies.
• Also, assume that the infrastructure project starts to yield an annual return of 10% on the initial investment from the third year.
• The loan amount Pakistan still must repay includes the balance of payments supports worth $6 billion.
• Economic growth occurs when governments and companies incur capital expenditures that boost production and increase output and income levels.
• Sources for internal debts can include citizens, the country’s banks, the country’s financial institutions, business houses, etc.

What Is the Meaning of External Debt in Finance?

In 2023, a historic 54 developing nations – nearly half in Africa – dedicated at least 10% of government funds to debt interest payments. Today, 3.3 billion people live in countries that spend more on debt payments than on health or education. The argument is that debt cancellation can make a significant contribution to improving economic development because it frees up resources to invest in the recipient country – rather than send abroad in debt interest payments. However, countries with large financial sectors, such as the UK and Hong Kong have both higher levels of liabilities, but also a higher level of assets because of its role as a financial centre. The example, though simplified, gives an accurate estimate of how damaging a debt cycle can be.

What is External Debt?

External debts can pose risks for borrowers due to various factors such as exchange rate risk, credit rating downgrades, and the potential for default. However, they also offer benefits such as access to lower interest rates, diversification of financing sources, and economic development opportunities. Effective management strategies, including hedging and risk diversification, can help mitigate external debt risks. External debt, as the name suggests, refers to the financial obligations that a country, organization, or what is external debt individual owes to foreign lenders or creditors. It is the accumulated sum of money borrowed from external sources, which can include commercial banks, foreign governments, or international financial institutions like the World Bank.

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. While debt can be a vital tool for economic growth and development, it becomes a problem when repayment costs outpace a country’s capacity to pay. External debt or external debt It is the total amount of money that a country owes to all foreign or international institutions that is, abroad.

However, the debt will need to be repaid, along with interest, within one year of receiving the loan. The French government will face the pressure of repaying the loan even before the project starts yielding a stable return. The higher-than-expected expenditure highlights the increasing pressure of debt obligations on the nation’s fiscal sustainability. The PUNCH observed that the debt servicing costs recorded in 2024 surpassed the budgeted allocation of N12.3tn for the year. Also, Nigeria spent a total of N13.12 tn on debt servicing in 2024, representing a 68 per cent increase from the N7.8 tn recorded in the previous year, according to an analysis of data from the Debt Management Office. However, the agency warned that risks to Nigeria’s external and fiscal position remained, particularly if oil prices fall or policy implementation slows down.

Argentina’s government had committed to pegging the peso to the US dollar through a currency board system, which artificially maintained a strong exchange rate. This approach, combined with large public sector deficits, led to growing external debt, as Argentina was forced to borrow heavily from foreign investors to meet its obligations. While both forms of debt have advantages and disadvantages, a well-rounded approach to managing financial risks requires an appreciation for the unique characteristics of each type of debt. The International Monetary Fund (IMF) and The World Bank are instrumental in monitoring global external debts through their quarterly reports on external debt statistics and their online database, which covers 55 countries. By tracking external debt, these organizations can help investors and policymakers assess risks and implement strategies to manage potential crises.

The increasing burden of external debt can make Country X go bankrupt in a few years. The most crucial disadvantage of external debt is that it often leads to a vicious cycle of debt for countries. The debt cycle refers to the cycle of continuous borrowing, accumulating payment burden, and eventual default. Countries borrow from foreign creditors mainly to finance their own excess expenditures, build additional infrastructure, finance recovery from natural disasters, and even to repay its previous external debt. External debt takes various forms depending on the borrower, lender, and terms of the agreement.

• The term “external” differentiates it from internal debt, which consists of liabilities incurred within a country’s borders.
• Governments, businesses, and individuals often rely on external borrowing to finance various projects, stimulate economic growth, or meet personal needs.
• Interest payments on sovereign bonds may be subject to tax regulations in both the issuing and investor’s country.
• The government is forced to borrow funds from external sources when the internal sources do not have adequate funds to support the operations of the government.
• Understanding external debt is crucial for investors, economists, and policymakers alike to assess risks, opportunities, and the implications of these obligations on global economic stability and financial markets.

Understanding external debt is crucial for investors, economists, and policymakers alike to assess risks, opportunities, and the implications of these obligations on global economic stability and financial markets. Understanding the global debt landscape is crucial for institutional investors in making informed decisions regarding foreign investments and risk management strategies. Among the most relevant reporting agencies that compile, monitor, and publish external debt statistics are the International Monetary Fund (IMF), The World Bank, and other international financial institutions.

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.