What are External Debts?
External debt can be defined as the debt borrowed by the government from outside the country. Sources for external debts can include foreign governments, International Monetary Funds (IMF), World Bank, Foreign Direct Investments (FDI), Foreign Portfolio Investments (FPI), etc. The government is forced to borrow funds from external sources when the internal sources do not have adequate funds to support the operations of the government. External debts are voluntary in nature. The nature of External debts is more complex as compared to Internal debts as it uses the concept of foreign currency. The government offers money from external sources to boost its economy after facing any economic crunch, to invest in multiple sectors, etc.
Key Takeaways from External Debts:
- External debts are the debts that the government needs to borrow from external sources to fund its operations.
- Lack of availability of funds from internal sources forces the government to borrow funds from external sources.
- External debts are more complex as they use the concept of foreign currency and the involvement of people outside the country.
- Interest rates on external debts are generally lower than it is on internal debts but may offer better repayment terms.
External Debt | Types, Effects, Merits and Demerits
External Debt can be defined as money borrowed from outside the country from sources like foreign governments, International Monetary Funds (IMF), Foreign Direct Investments (FDI), Foreign Portfolio Investments (FPI), etc. As people and businesses sometimes need to borrow money to pay their expenses, the same goes for the government of any country. The government sometimes may need to borrow money from either inside the country or outside the country. The borrowed money is known as Debt, and the modes of borrowing money can be classified into two categories – External Debt and Internal Debt.
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