External debt is the total amount of money that a country’s government, businesses, and people owe to lenders in other countries. This debt must be paid back in a foreign currency, such as dollars or euros.

Key characteristics:

• Repayment must be made in foreign currency, which means the country must earn foreign money through trade.
• It includes sovereign debt (government borrowing), private sector debt, and loans from international organizations like the World Bank.
• It is commonly measured using the debt-to-GDP ratio or the debt service ratio, which compares debt payments to export earnings.

Why it matters:

• Unlike domestic debt, a country cannot pay this debt by simply printing more money; it requires real economic resources.
• If the country’s own currency loses value, the real burden of the debt increases.
• High levels of external debt reduce a country’s financial stability and make it more vulnerable to economic crises.

Indicators of sustainability:

• A debt-to-GDP ratio below 60%.
• A debt service-to-exports ratio below 20%.
• Low interest rates on new loans compared to the country’s economic growth rate.

History shows that when external debt becomes too high and unsustainable, it often leads to painful debt crises, as seen in various developing economies over the past several decades.