Countries around the world are on a mission to foster healthy, prosperous relations with other countries. One of the ways in which this is done is through foreign lending.
What is International debt?
International debt can be defined as the debt one government owes to a foreign government or corporation. These are outstanding loans owed by borrowing countries to the World Bank, International Monetary Fund, Central Banks and private sector commercial banks and other lending institutions.
Why do countries end up with international debt?
Countries may borrow from private capital markets, international financial institutions and governments in order to pay for infrastructure such as roads and public services.
Having international debt can therefore be advantageous because it may allow a country to finance its development.
It can be useful in facilitating economic development by providing funds to countries lacking domestic capital.
How international debt works:
The loans, including any interest to be paid, must usually be paid in the currency in which the loan was made.
The International Monetary Fund (IMF) is one of the agencies that keep track of the country’s external debt.
In reality, poor countries pay a high price in order to service their debt.
An international debt crisis occurs when a national government cannot pay the debt it owes and seeks some form of assistance.
Having international debt is a double-edged sword in a way. Having the debt can be helpful in terms of providing the finance needed to facilitate infrastructure improvement. It also means that the country’s economic growth outlook needs to be positive, so that the country can repay its debts.
A healthy amount of debt is necessary for economic expansion, but too much debt can cause significant financial distress.
High international debt isn’t a problem, as long as long as that debt is being used to create assets worth more than the debt.