Difference between External Debt and Internal Debt

The loan amount Pakistan still must repay includes the balance of payments supports worth $6 billion. This sub-type refers to private debtors’ long-term external obligations that a public entity does not guarantee to repay. If the currency of the borrowing country depreciates with respect to that of the lending country, then the real value of interest (as denominated in the domestic currency) will rise.

The Human Cost of High Foreign Debt

External debt is the portion of a country’s debt that is borrowed from foreign lenders, including commercial banks, governments, or international financial institutions. These loans, including interest, must usually be paid in the currency in which the loan was made. To earn the needed currency, the borrowing country may sell and export goods to the lending country. External debt refers to the loans raised through foreign lenders, such as foreign commercial banks, foreign governments, and international financial institutions.

1. Together with The World Bank, it publishes a quarterly report on external debt statistics.
2. External debt is the portion of a country’s debt that is borrowed from foreign lenders, including commercial banks, governments, or international financial institutions.
3. If it means procuring money for important investments at a cheaper rate than can be found domestically, then it can ultimately be viewed as a good thing.
4. Let us look at a few external debt examples to understand the concept better.

Foreign debt also includes obligations to international organizations such as the World Bank, Asian Development Bank (ADB), and the International Monetary Fund (IMF). Total foreign debt can be a combination of short-term and long-term liabilities. Foreign debt can be useful as it allows the country to fund investment in different sectors, thus improving economic growth. Moreover, a country can utilize the funds received from a foreign lender to meet various expenditures.

Defaulting on External Debt

If the French government borrows money from the U.S. to set up a pharmaceutical factory, it will take time for the factory to become functional, start production, and earn money through sales. 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. Gestation period is the interim period between the initial investment in a project and the time the project becomes productive. When external debt is used to fund infrastructure projects, it takes a few years for the project to start giving a return on the investment. The nations that follow the U.S. in the list are —- United Kingdom- France- Germany- Japan- The Netherlands, etc.

External debt can be defined as the debt borrowed by the government from outside the country. Sources for external debts can include foreign governments, International Monetary Funds (IMF), Foreign Direct Investments (FDI), Foreign Portfolio Investments (FPI), etc. 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. Foreign debt is money borrowed by a government, corporation or private household from another country’s government or private lenders.

External debt statistics (EDS)

This is an external obligation of public debtors, like national governments, autonomous public bodies, etc. The borrower guarantees to repay the outstanding borrowings to the lender and fulfill the obligation. The external debt of an economy represents, at any given time, the outstanding actual (rather than contingent) liabilities (and assets) vis-à-vis non-residents.

It is possible that countries that default on external debt may potentially avoid having to repay it. Assume that all subsequent deficits arise out of loan repayments, and X takes further external loans to finance the deficits at the same terms as the first loan. Also, assume that the infrastructure project starts to yield an annual return of 10% on the initial investment from the third year. 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.

External debt entails the payment of principal and/or interest by the debtor at a single or several points in the future. The IMF and The World Bank produce an online database of external debt statistics for 55 countries that is updated every three months. A debt crisis can occur if a country with a weak economy is not able to repay the external debt due to an inability to produce and sell goods and make a profitable return.

Extraordinarily low interest rates in place since the 2008 Global Financial Crisis have made it easier for governments, businesses, and consumers to take on higher levels of debt. And with a severe global economic downturn unfolding due to the spread of the novel coronavirus, a disruptive debt crisis in one or more countries seems likely in the not-too-distant future. If governments lack the funds required for capital expenditures what is external debt to boost income levels and out in the economy, they often take on foreign debt.

External debt is broken down by instrument, original maturity and institutional sector. The example, though simplified, gives an accurate estimate of how damaging a debt cycle can be. X needs to take new loans every year in order to pay off its past deficits. The increasing burden of external debt can make Country X go bankrupt in a few years. Foreign debt as a percentage of a country’s Gross Domestic Product or GDP is the ratio between the amount owed by a country to foreign lenders and its nominal GDP. Secretary of State, pledged more funds to help Pakistan cope with the devastating flood that killed over 1,600 people.

Foreign Debt: Definition and Economic Impact

With the country already struggling to address its existing economic challenges and repay its external debt amid the diminishing cash reserves, the natural disaster certainly worsens things. The conditions of default can make it challenging for a country to repay what it owes plus any penalties that the lender has brought against the delinquent nation. Defaults and bankruptcies in the case of countries are handled differently from defaults and bankruptcies in the consumer market.

Usually, governments take on this debt to fulfill certain objectives like meeting additional expenses and boosting economic recovery after a natural disaster. International financial institutions like the IMF and the World Bank are the most common external debt sources. Besides these, governments may also avail financial assistance from foreign commercial banks to meet their financial objectives.