Final Project Report on External Debt Management

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I

NTRODUCTION

TO

E

XTERNAL

D

EBT

M

ANAGEMENT

E

XTERNAL

DEBT

(or

foreign debt

) is that part of the total debt in a country that is owed tocreditorsoutside the country. The debtors can be the government, corporations or privatehouseholds. The debt includes money owed to private commercialbanks, other governments, or international financial institutionssuch as theIMFandWorld Bank.

D

EFINITION

IMF defines it as "

Gross external debt, at any given time, is the outstanding amount of thoseactual current, and not contingent, liabilities that require payment(s) of principal and/or interest by the debtor at some point(s) in the future and that are owed to nonresidents byresidents of an economy

."In this definition, IMF defines the key elements as follows:(a)

Outstanding and

Actual Current Liabilities

: For this purpose, the decisive consideration iswhether a creditor owns a claim on the debtor. Here debt liabilities include arrears of both principal and interest.(b)

Principal and Interest

: When this cost is paid periodically, as commonly occurs, it is knownas an interest payment. All other payments of economic value by the debtor to the creditor thatreduce the principal amount outstanding are known as principal payments. However, thedefinition of external debt does not distinguish between whether the payments that are requiredare principal or interest, or 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.

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(c)

Residence

: To qualify as external debt, the debt liabilities must be owed by a resident to anonresident. 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.d)

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 befulfilled before a financial transaction takes place. However, from the viewpoint of

understanding vulnerability, there is analytical interest in the potential impact of contingentliabilities on an economy and on particular institutional sectors, such as government.Generally external debt is classified into four heads i.e. (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 maintainsthis four head classification, in India it is classified in seven heads i.e. (a) multilateral, (b) bilateral, (c) IMF loans, (d) Trade Credit, (e) Commercial Borrowings, (f) NRI Deposits, and (g)Rupee Debt.

E

XTERNAL

D

EBT

AND

M

ACROECONOMIC

C

ONSIDERATIONS

How foreign borrowing affects macroeconomic stability can be best understood in the context of production, consumption, savings, and investment. In a closed economy (no foreign trade), production comprises goods and services for personal consumption (consumer goods), capitalgoods (buildings, plant and equipment, inventories used by enterprises), and goods and servicesused by the government, which can be both for consumption (for current use) and for investment.Where there is foreign trade, production also includes goods for export; imports are a supplementto domestic consumption, for investment, for government use or for exports.

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