They involve an exchange of domestic currency for foreign currency, with an agreed future reversal of the transaction. The use of the term contractual liabilities is a crucial element in the definition, because it gives a precise criterion for deciding whether certain types of liability are included or not. It means, in the context of the definition, an obligation to make specified payments, including instances such as a financial obligation stemming from a court ruling, where there may be no contractual agreement.
- These could only be explicitly built into the definition at the risk of overloading it, but they are nevertheless important for its application.
- It brings together national data available from the QEDS and creditor/market data available from the international agencies.
- A number of items clearly fall within the scope of the core definition but are themselves subject to differences as to possible definition and recording.
- As far as the recording of the reduction of arrears is concerned, a problem is caused by the multiplicity of accounting practices used to handle such cases.
The Limits of Sovereignty
This means that the borrower must utilize the loan amount to only make expenditures in the lender’s country. For example, a loan might only allow a country to purchase the required resources from the nation that sanctioned the loan. Poor debt management, combined with shocks such as a commodity-price collapse or severe economic slowdown, can also trigger a debt crisis.
External Debt (% of GDP) Data
By analogy, it might be considered that the accrued interest forms part of the value of the liability. However, interest is not contractually due until the actual date of payment, and for this reason is not included in accrued form in the core definition of debt. There is the additional point that its inclusion would distort the relationship between the stock of debt and future service payments. Loans repayable in the borrower’s currency fall within the core definition, although presentational practices differ among the organisations. In its debt statistics, however, the OECD has decided to align itself on the core definition and include these amounts as external debt. In the World Bank’s Debtor Reporting System, such flows are classified separately and are at present excluded from published debt statistics.
This wording is one to which all the four organisations have agreed, but, like all compact definitions, it requires a certain degree of elaboration and commentary. Make the best decisions about the future of your business with the most reliable economic intelligence.
Economics
Trade credit extended to enterprises, government and households; and advances for work which is in progress or to be undertaken. Bonds, debentures etc., the maturity of which is more than one year (including what is external debt preferred shares, excepting participating preferred securities). Use of the core definition also involves a number of important questions of interpretation. These could only be explicitly built into the definition at the risk of overloading it, but they are nevertheless important for its application.
A debt crisis can occur if a country with a weak economy is not able to repay the external debt due to an inability to produce and sell goods and make a profitable return. The countries with the lowest national debt in relation to GDP as of 2022 are Brunei Darussalam (2.06%), Kuwait (2.92%), Turkmenistan (5.19%), and Timor-Leste (7.49%). Modern monetary theory (MMT) suggests a sovereign currency issuer’s borrowing capacity is limited mainly by the rate of inflation it’s willing to tolerate. In this model, taxes are raised to cool inflation rather than to offset government spending.
The residence criterion has been chosen in preference to a number of other possibilities. One of these would have been to determine the external or domestic status of a transaction on the basis of the nationality of the transactors. A distinction based on nationality, however, would raise serious difficulties, particularly because of the large number of countries involved, either as host country or country of origin, in major migration movements.
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. Together with The World Bank, it publishes a quarterly report on external debt statistics. Two key objectives of the TFFS have been to develop guidelines on the compilation and use of external debt statistics and to increase the availability of external debt statistics. It should be noted that the terminology of debt reorganisation differs, as do the methods of dealing with it, in the various reporting systems. The three terms are used here in a broad generic sense and the reader is referred to Chapters IV to VII for the definitions and methods applied by individual organisations. There will also often be resectoring on the debtor side, especially where the reorganisation involves the assumption by the central bank or the government of debt previously owed by the private sector.
International standards on EDS
Governments, businesses, and individuals often rely on external borrowing to finance various projects, stimulate economic growth, or meet personal needs. Understanding the types and implications of external debt is essential for policymakers, lenders, borrowers, and anyone interested in finance. As you navigate through the intricate world of finance, remember to consider the role of external debt and its impact on economies around the world. In June 2005, with the support of the TFFS, the Statistics Department concluded the preparation of the DQAF for External Debt Statistics. The DQAF, which is used for comprehensive assessments of countries’ data quality, covers institutional arrangements, statistical processes, and characteristics of the statistical products.
Another possible criterion would have been the currency of denomination of the debt instrument, domestic or foreign. This too, however, would have resulted in the recording of an external debt transaction, even though there had been no cross-border movement, in the case of foreign currency liabilities of one resident of a given economy to another. This approach also ignores the fact that the currency of denomination is of little significance in an external debt context where freely exchangeable currencies are involved, so that any service payment can easily be converted into any currency of the creditor’s choice.
Likewise, if a country needs to build up its energy infrastructure, it might leverage external debt as part of an agreement to buy resources, such as the materials to construct power plants in underserved areas. For information purposes, several non-sovereign entities are also included in this list. In some cases, agreement on the inclusion of a type of liability in the core definition is accompanied by a recognition that serious practical reporting difficulties exist.