External debt

Updated on Oct 12, 2024

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External debt (or foreign debt) is the total debt a country owes to foreign creditors, complemented by internal debt owed to domestic lenders. 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 (IMF) 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 with 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.

References

External debt Wikipedia

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