External Debt

External debt refers to a debt that a country is owed to creditors outside the country. It is also referred to as a foreign debt. It could be money owed to other governments or international financial institutions such as the World Bank and the IMF. The debtors or borrowers can be for example a government of a particular country or it can be a corporation.

Normally foreign debts can be classified into four. We have public and publicly guaranteed debt, private non-guaranteed credits, central bank deposits and loans due to IMF. The way the debt is treated and regarded varies from one country to another. While a country like Egypt maintains the four classifications of an external debt, India classifies it into seven groups.

Sustainable debt refers to the level of debt that allows a debtor country to service fully its current and future debts. Foreign debt sustainability of any country is analyzed on a medium-term basis. The analysis takes into account the expectations of the behavior of the economic variables. World Bank and IMF hold the view that for a country to be said to achieve external debt sustainability, it must service in full its current and future external debts. This must be done without debt rescheduling and also without accumulation of arrears. At the same time, the country must maintain an acceptable level of economic growth.

External debt service to GDP ratio, debt service to exports ratio as well as government debt to fiscal revenue ratio are used to show the debt burden of a particular country. A huge foreign debt harms a country's economy.

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