The role of international debt
Foreign debt
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A country's foreign debts refers to its level of external debt = total amount of debt (public + private) incurred by borrowing from foreign creditors.
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The problem from most developing country is that they have too much public debt
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Foreign government debt arises from three resources: government borrowing from multilateral organisations, government borrowing from foreign commercial banks, and government sales of bonds to foreigners
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When country borrows from a foreign creditor, the debt-service payment (principal + interest) must be paid by foreign exchange.
Reasons to borrow foreign debt
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To acquire foreign exchange and pay for excess deficit
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To finance deficit budget
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Emergency in the country
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A source of funds for huge capital project
Consequence of high levels of foreign debts
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BOP problems
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Possibility of a debt trap
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Lower private investment
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Lower economic growth
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Opportunity cost (caused by the interest which the country has to pay back, since the interest can originally be used do other things such as investment in capital)