Debt External

By: EconomyWatch Content   Date: 17 November 2009

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Debt external is a nation’s total debt obligation, minus the amount owed to the country’s general public. In other words, debt external refers to the loan owed by a nation to outsiders, who may be individuals, companies or even other nations.

Debt External versus Debt Internal

A debt internal is owed by a country to its own citizens. Many propound that an internal debt does not pose any burden to the nation as essentially the liability lies with itself. Although this is an oversimplified assumption, it nonetheless represents a genuine insight. For instance, every citizen in a country owes government bonds worth $1,000. These citizens or bondholders are liable to pay taxes to the government in favor of debt servicing. Thus, an internal debt is not detrimental to the nation’s debt situation.

A debt external is owed by a country to non-citizens. Hence, this form of debt results in a net deduction from resources available to the debtor nation’s citizens. Debt external may force a nation to export more than it imports, to pat-off principal and interest on past borrowings and cause a significant tide-over of a favorable economic situation. 

In the 1980s, several nations experienced severe economic hardships due to accumulated external debt. Nations like Mexico and Brazil were forced to set aside about one-fourth to one-third of their earnings from exports to service their debt external.

Debt External and Trade Liberalization

The burden of external debt is higher in developing nations, seeking to develop their economies. Such nations are forced to resort to acquiring external debt because they have:

·        Low domestic savings

·        High current account deficits

·        Inadequate capital imports

For nations, particularly developing countries, trade liberalization is an important approach to reduce external debt burden. Trade liberalization facilitates better allocation of resources, at national international levels; thereby helping to develop more resilience to external shocks.

Trade liberalization opens up more channels for obtaining foreign exchanges, leading to higher foreign direct investments and net exports. An overseas market entry restriction impedes a nation’s ability to earn sufficient foreign exchange to service its external debt effectively. This forces a debtor nation to resort to additional unsustainable borrowing.

Restrictive, inward-looking trade policies elevate the cost of imports, and consequently, that of exports. Such policies also hinder optimum utilization of labor and capital, leading to a suboptimal combination of investment, production and consumption; and subsequently, higher debt external.


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