Effects of External Debts
External debts are debts borrowed from external sources and use the concept of foreign currency. External debts affect the level of a country on a deeper level. Countries heavily reliant on external debts are more vulnerable to economic downturns. A sudden drop in revenue or an increase in interest rates can worsen their debt situations. Further, If a country borrows in foreign currencies, fluctuations in exchange rates can lead to increased debt servicing costs, especially if depreciation of currency takes place. High levels of external debt can lead to lower credit ratings, making it more expensive for a country to borrow in the future.
External Debt | Types, Effects, Merits and Demerits
External Debt can be defined as money borrowed from outside the country from sources like foreign governments, International Monetary Funds (IMF), Foreign Direct Investments (FDI), Foreign Portfolio Investments (FPI), etc. As people and businesses sometimes need to borrow money to pay their expenses, the same goes for the government of any country. The government sometimes may need to borrow money from either inside the country or outside the country. The borrowed money is known as Debt, and the modes of borrowing money can be classified into two categories – External Debt and Internal Debt.