What is Foreign Debt?

Foreign debt is money borrowed by a government, corporation or private household from another country's government or private lenders. Foreign debt also includes obligations to international organizations such as the World Bank, Asian Development Bank (ADB), and the International Monetary Fund (IMF). Total foreign debt can be a combination of short-term and long-term liabilities.

Foreign debt, also known as external debt, has been rising steadily in recent decades, with unwelcome side-effects in some borrowing countries. These include slower economic growth, particularly in low-income countries, as well as crippling debt crises, financial market turmoil, and even secondary effects such as a rise in human-rights abuses.

Key Takeaways

  • Foreign debt is money borrowed by a government, corporation or private household from another country's government or private lenders.
  • Foreign debt has been rising steadily in recent decades, with unwelcome side-effects in some borrowing countries, especially developing economies.

Understanding Foreign Debt

A government or a corporation may borrow from a foreign lender for a range of reasons. For one thing, local debt markets may not be deep enough to meet their borrowing needs, particularly in developing countries. Or foreign lenders might simply offer more attractive terms. For low-income countries especially, borrowing from international organizations like the World Bank is an essential option, as it can provide funding it might not otherwise be able to attain, at attractive rates and with flexible repayment schedules.

The World Bank, in conjunction with the IMF and the Bank for International Settlements (BIS), gathers short-term foreign debt data from the Quarterly External Debt Statistics (QEDS) database. Long-term external debt data compilation is also collectively accomplished by the World Bank, individual countries that carry foreign debt, and multilateral banks and official lending agencies in major creditor countries.

The Impact of Rising Foreign Debt

Excessive levels of foreign debt can hamper countries' ability to invest in their economic future—whether it be via infrastructure, education, or health care—as their limited revenue goes to servicing their loans. This thwarts long-term economic growth.

Poor debt management, combined with shocks such as a commodity-price collapse or severe economic slowdown, can also trigger a debt crisis. This is often exacerbated because foreign debt is usually denominated in the currency of the lender's country, not the borrower. That means if the currency in the borrowing country weakens, it becomes that much harder to service those debts.

High levels of foreign debt have contributed to some of the worst economic crises in recent decades, including the Asian Financial Crisis and, at least in the case of Greece and Portugal, the Eurozone debt crisis.

Waiting for the Next Crisis

According to one estimate, the amount of money developing country governments are paying toward foreign debt nearly doubled from 2010 to 2018, as a percentage of government revenues. Extraordinarily low interest rates in place since the 2008 Global Financial Crisis have made it easier for governments, businesses, and consumers to take on higher levels of debt. And with a severe global economic downturn unfolding due to the spread of the novel coronavirus, a disruptive debt crisis in one or more countries seems likely in the not-too-distant future.

The Human Cost of High Foreign Debt

In addition to the suffering that results from economic stagnation, the United Nations has also linked high levels of foreign debt and a government's dependency on foreign assistance to human rights abuses. Economic distress causes governments to cut social spending, and reduces the resources it has to enforce labor standards and human rights, the U.N. says.