Implications of external debt

 Excessive confidence in borrowing to promote economic growth and development.

Equally, there could be over-confidence in lenders to lend money in short-term
without evaluation of possible problems.
 Investment that is misplaced and fails to achieve a decent rate of return to help pay the
debt interest payments. For example, developing countries may struggle to make use
of funds for industrialisation if they lack the necessary skills and infrastructure.
 Unexpected devaluation in the exchange rate, which increases the real value of debt
interest payments denominated in dollars.
 A decline in commodity prices which leads to a decline in the terms of trade for
developing economies and relative fall in export earnings.
 Demand-side shock which reduces GDP. For example, conflict or global recession
which hits demand and GDP.
 Servicing external debt (paying debt interest payments) ceteris paribus, reduces GDP
because the monetary payments flow out of the country. These debt payments reduce
the amount available to invest in improving public services, which can help economic
development.
 Growing levels of debt can discourage foreign and private investment because of
concerns that the debt is becoming unsustainable.
 If a country is struggling to meet interest payments, they may be tempted to borrow to
meet debt interest payments, but then the problem can spiral and magnify.
 Countries in regional areas may suffer from a regional downgrade in credit
assessment. For example, many Sub-Saharan African countries experienced rising
external debt ratios, and this made investors reluctant to lend at cheap rates.