News regularly reports: external debt has grown, new bonds have been issued, credit from an international institution has been attracted. For many, these are abstract billions unrelated to daily life. In fact, external debt is one of the indicators that determines the national currency exchange rate, the cost of credit within the country and economic resilience in a crisis.

What is total external debt

A country's total external debt reflects current—that is, not yet paid—obligations of the local economy to foreigners that must be repaid in the future. Creditors include foreign governments, international financial institutions, foreign banks and investors who have purchased debt securities.

The key word is "total": the indicator includes debts not only of the government, but also of all residents of the country who borrowed abroad.

Two parts of debt

External debt is divided into two fundamentally different categories:

  • Government external debt—loans received by the government directly or under government guarantee. If a borrower with a government guarantee cannot pay, the obligations will fall on the budget—that is, ultimately on taxpayers.
  • External debt of the private sector—borrowings by companies and banks, for which the state has not assumed obligations. These borrowers are responsible for these debts with their property and income.

The distinction is important when reading news: growth of private debt and growth of government debt are events with different consequences for the country's budget.

Why countries borrow

External debt in itself is not a problem, but a tool. Countries borrow to:

  1. finance development—roads, energy, schools and hospitals that cannot be built only from current budget revenues;
  2. cover budget deficits during periods when expenses exceed revenues;
  3. obtain long and cheap money—loans from international development institutions are often issued for decades at low interest rates;
  4. develop business—companies attract foreign financing when the domestic capital market is small or expensive.

Practically all countries in the world have external debt, including the richest ones. The question is not whether there is debt, but its size, cost and ability to service it.

What forms does debt take

  • Loans from international financial institutions—World Bank, Asian Development Bank and others: long terms, preferential rates, targeted purpose.
  • Inter-government loans—loans from governments of other countries.
  • Eurobonds—debt securities placed on the international market; purchased by investors from around the world.
  • Commercial loans from banks and companies, trade financing.

How debt safety is assessed

An absolute amount tells little: a billion for a small economy and for a large one are different values. Analysts look at relative indicators:

  • debt to GDP—how many years the entire economy would need to work to repay debt; for developing countries, a level significantly below 60% is usually considered comfortable;
  • debt service to exports—what portion of foreign exchange earnings are consumed by debt payments;
  • debt to gold and foreign exchange reserves—whether there's enough cushion for payments if markets close;
  • structure by maturity—predominance of short-term obligations is riskier than long-term.

The main risk is currency

External debt is almost always denominated in foreign currency, while budget and company revenues are in national currency. Therefore, weakening of the sum automatically makes debt servicing more expensive: the same dollar payments require more revenue in sum. This is how the exchange rate and debt burden are linked both ways: a weakening currency increases the debt burden, and excessive debt puts pressure on the currency.

What does this mean for an ordinary person

Moderate debt invested in infrastructure accelerates economic growth and incomes. Excessive debt forces budget cuts, drives inflation and makes domestic credit more expensive. It's easy to monitor the situation: the Central Bank regularly publishes data on external debt along with the balance of payments and international investment position, and the Ministry of Economy and Finance reports on government debt.

Conclusion: external debt is credit borrowed by an economy from the rest of the world. Like a household loan, it is useful when it finances development and is manageable to service—and dangerous when payments begin to consume income. The difference is only that citizens ultimately pay for the government portion of the debt.