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What is Foreign Debt?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 14 September 2016
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Foreign debt, also known as external debt, is a term used to classify the amount of money a country owes to other countries or external banking organizations such as the World Bank. There are many reasons a country may choose to go into foreign debt, including infrastructure development or economic stimulation. As of 2009, the estimated foreign debt for all world countries combined hovered at about $56.9 trillion US Dollars (USD).

The idea of foreign debt is hardly a new one; since the rise of civilization it has not been unusual to borrow money or resources from friendly territories. Wars have been waged, cities have been built, and natural disasters have been weathered thanks to the concept of foreign debt. The United States has used the policy of external borrowing since its inception; the Revolutionary War was largely financed by the loans of nations friendly to the colonist cause.

The nearly global use of foreign borrowing has lead to the establishment of international financial institutions, or IFIs. These are essentially banks subject to international laws and run by officials of member nations. Many of the best known IFIs were established post-WW II, when economic relief was sorely needed to bandage the many bleeding and damaged countries left in the wake of the global war.

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Since that time, many IFIs specialize in loans to developing or Third World nations that will help improve both infrastructure and economic pursuits in the hopes of benefiting the global economy. Some detractors of IFIs suggest that these institutions are rife with corruption and potential danger, claiming that international law is a flimsy and extremely vague set of guidelines created by unelected officials. Many disagree with the idea that a democratic country with a clear set of laws could be subject to international laws that its citizens neither voted on nor elected officials to join.

One term that comes up often when considering foreign debt is sustainability. For external debt to be sustainable, a country must have a high enough gross domestic product (GDP) in order to pay down and eventually pay off the debt while continuing its own economic function. Therefore, a country with a high GDP or large employed population may be able to sustain much more debt than a small or poor country. In the US, for instance, the 2009 debt was about $13.5 trillion USD, but only equaled 98% of the GDP. Zimbabwe, on the other hand, has a much lower debt of just over $5.8 billion USD, but this amount totals 282.6% of the GDP.

Since it is generally in the interest of the global economy to keep one another afloat, countries that cannot pay their foreign debt often have a variety of extension and forgiveness options. Some wealthier countries will offer debt relief in return for trade deals or in exchange for putting economic resources toward improvement programs, such as education for women. The danger in high foreign debt is extreme: if one country owes another a high majority of debt, the loaning nation may choose to call all debts due as a means of asserting economic control, forever altering the ownership of an indebted nation to its creditors.

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