Problems and prospects of external debt management Essay

Problems and prospects of external debt management - Essay Example However, these indigenous institutions may not always have sufficient amount of resources to fulfill all the requirements of the country. In that case, it is forced to resort to international commercial banks or international lending institutions like the IMF of the World Bank. It can also request for financial aid from the Government of its ally nations. The debtors of a country can include the national Government, the private corporations or even the individual households. Usually, external debt is borrowed in two ways: by taking loans from the lending institutions or by selling the country’s securities to acquire the required amount of funds. After the country accomplishes its projects with the help of the borrowed resources, it is required to repay the external debt along with its interest payments. Thus, external debt is actually a liability of the nation. For this reason, it is recorded under the Debit Account in the Balance of Payments (BOP) of the country. The BOP is a statement of accounts of the nation including its assets and liabilities and the outstanding credit and debit of the economy. The BOP gives an indication of the country’s position with respect to the international market. If the country has borrowed a large amount of financial resources from abroad, this will automatically add to the Debit account of the BOP. A huge burden of external debt does not reflect a good financial position of the domestic nation. Instead it indicates that financial resources generated within the economy are not sufficient to fulfill the requirements of the national Government, the private firms and the individual households. That is why; the country has to depend on external sources to finance its multifarious requirements. Economists and financial experts always advise countries to keep their external debt burden down to a minimum. Nations are expected not to borrow extra resources unless and until it becomes absolutely necessary (The World Bank, 2 012). Indicators of a Country’s External Debt Burden Apart from the Balance of Payments Statement, there are other variables which give an indication of the external debt burden of a particular country. These are: a. The Ratio of External Debt to GDP: A high value of this ratio reflects a high external debt burden of the nation. This shows that the country’s external borrowings are greater than the value of its Gross Domestic Product produced within its geographical boundaries. The financial resources generated in turn from the GDP are not being able to meet all the financial requirements within the economy. Therefore, the country has to borrow extra resources from external creditors b. The Foreign Debt to Exports Ratio: When an economy has a high ratio of foreign debt to exports, this also indicates a high external debt burden of the country. It exhibits that the nation’s borrowing from external sources is more than the value of the goods exported by the countr y. This may also reflect that the nation’s external debt liabilities are greater than its external credit earnings. The