External Debt: A Lifeline or a Liability?

Debt is as an obligation that a borrower (or debtor) owes to a lender (or creditor). Formally, debt is legally-binding contract that involves repayment of the amount borrowed (the principal), along with interest on outstanding amount (the cost of borrowing), over an agreed-upon period of time (the maturity date).

The same logic holds true for external debt as well. While public and private institutions can (and do) borrow from domestic sources (even in high-income countries), it is usually external debt, or the money borrowed from foreign institutions that is the usually the focus in non-high income countries. As we observe in the figure below, high-income countries, have no or close to zero external debt even though they still have public debt:

Own illustration using UNCTAD and World Bank data

We also observe in the figure above reliance on external borrowing increases at lower GDP levels. In other words, in lower-income countries, domestic savings are not sufficient to finance domestic activities and the deficits need to be financed from somewhere. The World Bank even has a special category for Heavily Indebted Poor Countries (HIPC) which get special conditions. Currently there are 37 HIPCs out of which 31 are in Africa.

The stock of external public debt, is taken as one of the key indicators of a country’s ability to manage it finances, and borrow or raise money in the domestic and global arena. It is also an indication of the fiscal space available for domestic development. Since countries with external debt are not high-income countries, it is also an indicator of risks associated with high levels of borrowing that can have significant repercussions across the economy, that we will come back to later in this guide.

The guidelines for monitoring external debt are defined by the External Debt Manual, hosted at the IMF and compiled in collaboration with other major international institutions. Four of these track debt statistics; the IMF, the World Bank Group, the OECD, and the BIS in what is collectively known as the Joint External Debt Hub (JEDH). The External Debt Manual also formally defines external debt as follows:

The definition of external debt is based on the notion that if a resident has a current liability to a nonresident that requires payments of principal and/or interest in the future, this liability represents a claim on the resources of the economy of the resident, and so is external debt of that economy. (IMF 2014. External Debt Statistics: Guide for Users and Compilers. Chapter 2.)

There is already a lot of information packed in the above definition. We will explore all of these elements below.

Debt composition

We usually hear about external public debt through a specific set of indicators, where the most ubiquitous is the (external) debt-to-GDP ratio. We also hear about the burden of debt servicing which includes interest payments, debt sustainability, grants, etc. But what we don’t really hear about is the composition of external debt itself.

Even though there is no shortage of reports and analysis on debt, especially the World Bank’s flagship International Debt Report, in this post we really want to dig a bit deeper and break down external debt statistics using finer categories that will give us better insight about debt compostion. Furthermore, since we have been building the System of National Accounts, we also want to put these finer elements in the context of the broader economy activity in a “whole-of-economy” approach.

Let’s start with the figure below that shows the top-level hierarchy, where we mark external debt in green color:

Own illustration. Dotted lines shows external private sector debt on which we don’t really have much information in the public domain.

Any time a country takes on new debt, it check several boxes in the figure above. It could be (i) short term (<1 year) or long term (≥1 year), (ii) taken up by the public or private institutions, and (iii) it is borrowed from public or private sources. Just these three groupings, already give us a large set of combinations. This tree can be expanded further by adding different types of public sector institutions, or by different types of debt instruments, or by different currency compositions, loan conditions etc.

From the post on the System of National Accounts

Using our SNA framework introduced earlier (and shown above), debt enters the sequence of accounts in different parts of the SNA and it is important to remember these:

• Net lending/borrowing: If domestic saving is insufficient to cover investment, the gap (capital account deficit) must be financed externally, typically by taking on debt. This financing is recorded in the financial account as an increase in liabilities.
• Interest payments: on debt are recorded in the primary income account. These are primary income outflows to foreign residents.
• Principal repayments: are pure financial transactions recorded in the financial account (liabilities ↓, cash ↓). They do not affect saving, income, or production accounts.
• Debt relief and forgiveness: Recorded as a capital transfer (capital account) because it extinguishes a liability without repayment. On the balance sheet, it is also appears in the Other Volume Changes part of the balance sheets.
• Revaluation changes: Debt stock can also change due to exchange rate variations, price changes, or other contractual modifications (e.g., maturity extensions, write-downs). These are captured in the revaluation account.

Remember that revaluation and volume changes are not part of the sequence of accounts but do impact the balance sheets. And as we explored in our previous guides, these are quite significant for some countries.

Debt can also be replaced with other instruments such as debt-for-nature swaps, where creditors agree to cancel or restructure part of a country’s external debt in exchange for commitments to environmental protection. In SNA terms, this shows up both as a capital transfer (the forgiveness element) and as changes in the financial account and balance sheet (reduction in liabilities), with corresponding domestic expenditures on conservation activities. More broadly, such restructuring can take forms like debt-for-equity or debt-for-development swaps, where financial liabilities are converted into long-term investments in social or environmental objectives.

Countries can refinance or restructure part of their debt stock by issuing green bonds (earmarked for climate and environmental projects) or blue bonds (focused on sustainable use of ocean and water resources). In practice, this means retiring existing conventional debt and replacing it with debt instruments tied to sustainability outcomes. In the SNA, the refinancing is recorded in the financial account as a change in the composition of liabilities, while on the balance sheet the stock of debt remains but shifts toward instruments with specific environmental purposes.

All in all, external debt is a central component of global financial flows and often a lifeline for countries facing BOP constraints. Because of its significance, external debt is closely monitored and managed not only by national authorities, such as finance ministries and central banks, but also by multilateral development banks (MDBs). These institutions do more than act as financial intermediaries between high-income and lower-income countries. They also provide guarantees, share risks, and embed debt arrangements within broader strategies for poverty reduction, climate resilience, and equitable growth. A concrete example is the IMF-World Bank Debt Sustainability Framework (DSF), which evaluates whether countries can meet current and future debt obligations without compromising growth or development. Such frameworks guide both lending decisions and debt restructuring negotiations, ensuring that borrowing supports long-term stability rather than short-term relief. In this sense, debt is not only a financial liability, it also represents a much more complex set of relationships between countries and donors.

Data on external debt

The actually data itself is collected by the World Bank Group through its Debt Reporting System (DRS). This data also feeds into national statistics compiled for the System of National Accounts or SNA (introduced in detail in a previous post). Debt also enters parts of the SNA accounts and is a key metric tracked by the Balance of Payments statistics.

A good starting point to explore the data is the very extensive World Bank Open Data platform that provides a large selection of debt-related indicators. But it is the World Bank’s Intrenational Debt Statistics (IDS), that provides the most extensive coverage. While both the Open Data and IDS platforms are great sources of information there are two limitations:

1. Details on how variables are constructed, especially if they are a (weighted) combination of various other variables, is not provided. To get full depth of understanding how external debt statistics are captured, one really has to carefully read the extensive External Debt Statistics: Guide for Compilers and Users (2014 edition).
2. Since debt is a portfolio of nested indicators, information on how these are linked with each other (like in the figure shown above), is not really discussed. Unless one is deeply embedded in this topic, the myriad of indicators (especially those pertaining the same variable) and the plethora of abbreviations can quickly become confusing. While there is a method to these naming conventions, learning and understanding the system is usually outside the scope of average users.

Therefore, in this guide we want to circumvent the above two problems as follows:

• First, we want to define the hierachy of external debt introduced enough with easy-to-understand definitions.
• Second, we want to take the different debt indicator series, collate them in our hierarchy, and visualize them to explore their relationships.

Like any other global database, data on external debt is not free of issues. Information on domestic and private debt relies on self-reporting and surveys involving many different organizations. Additionally, parts of the data might not even be always available in the public domain for various reasons. Data on private debt flows also dependends on the goodwill of the sending and/or recieving countries. Since external debt, at least the official part, has to go through various international channels, information is well captured and is very extensive and also subjected to certain data standards.

Again it is important to point out that collecting information on all these indicators for all countries for all time periods is not a trivial task. So a big thanks to the those involved in compiling and sharing this information for public use. Open data is one of the greatest public goods out there that we should support the silent heros behind this endeavor!

Two disclaimers before we move forward

First disclaimer: this post is not conducting debt analysis or attempts to make certain assertions on external debt positions. It aims to help explain the nature and structure of debt as captured in external debt statistics by showing data as provided in the public domain. Whether the indicators are good or bad for a country is up to the user to decide. There is copious amount of literature on this topic.

Second disclaimer: the figures and interactive visualizations are derived from raw data that I have processed. Hence there are (a) chances of errors and (b) the data itself might get outdated as databases get updated. Therefore, please check official sources for the latest possible information. And please report major issues if you find any.

Additional points: in this post, we will use debt as a synonym for external debt. We will also use the following World Bank regional classifications: Sub-Saharan Africa (SSA), South Asia (SA), Middle East and North Africa (MENA), Latin America and the Caribbean (LAC), Europe and Central Asia (ECA), and East Asia and Pacific (EAP).

So let’s get started!

A first look at the data

Countries take on new debt each year that adds to their debt stock. Globally, debt stock has been continuously rising in nominal terms, which when broken down by World Bank regions, gives us the following picture:

But looking at absolute debt in current USD is a bit misleading as regions have also grown over the years. So if we take debt stock (in current USD) as a share of gross domestic product (GDP, in current USD), we get the following picture:

Overall, we observe that late 1980s and 1990s saw a rise of external debt ratios. External debt shares were significantly reduced in the early 2000s but the last decade has seen a resurgance of rising debt burdens across the regions. Region peaks are also marked. We can observe that South Asia and the MENA regions peaked very recently, ECA’s debt-to-GDP ratio plateued after hitting their peak in 2016 SSA, and EAP debt levels, even though far from their peak levels, are again on the rise.

It is also import to point out that debt is a stock and GDP is a flow. Therefore, the debt-to-GDP ratio is a rough indicator of the long-term burden on the economy based on the economy performance. In contrast, debt servicing is a flow that logically makes it more compatible when comparing it with GDP. The graph below shows how debt and debt service to GDP correlate. Countries above the marked thresholds are labeled to give a sense of debt burdens in selected countries.

External debt from the creditor’s perspective

Countries can borrow money from either official or private sources. Creditors are formally categorized as follows:

Official creditors:

• Multilateral organizations such as the World Bank, the IMF, BIS, and various regional (AfDB, ADB, IADB) or union development banks (ECB) , are financial institutions set up by mutual agreement among a group of countries and have their own international treaties. These intitutions play the role of intermediaries between the lending and borrowing countries. These institutions can also directly lend with the aim of collectively improving the well-being of the lending country.
• Bilateral debt is taken directly from official government bodies including their various institutions (e.g. central banks). Bilateral debt is issued by high-income countries that are member of the Development Assistance Committee (DAC) and other non-DAC members that report their bilateral debt obligations to the OECD’s Creditor Reporting System (CRS). Bilateral debt is also issued by autonomous bodies (e.g. OECD, Sovereign Wealth Funds, other global investment funds etc), aid agencies (e.g. Gates Foundation). It also includes loans from export credit agencies e.g. Export-Import Bank (USA), Japan Bank for International Cooperation (JBIC), and a host of other Development Financial Institutions (DFIs) and National Development Banks (e.g. Brazil’s BNDES). This category can have a fairly large share for some countries.

Private creditors are split into the following categories:

• Bondholders: Governments can issue long-term bonds to raise finance. These bonds can be bought openly where the composition of entities holding these bonds is usually not disclosed in official websites. Bolds can be held by other governments, MFIs, Soverign Wealth Funds, Central Banks etc, or even large investment enterprises.
• Commercial Banks: Private banks can provide direct credit to governments in the form of either direct (one bank to a country’s entity) or syndicated loans (many banks to a country’s entity). These can also include short-term loans (maturity of less than one year) for example to enable trade or provide bridge financing or open up a Line of Credit (LoC).
• Other private financial institutions: These include a range of private financial institutions that provide credit to government agencies where the loans are guaranteed by export credit agencies. These agencies, which are not commonly known even in the world of development finance, are pivotal for ensuring domestic firms can export goods and services, can link or the private or public sector with private lenders and can (almost) guarantee support even if risk-averse private creditors pull out. The Export-Import Bank of the United States is the official export credit agency for the USA. Others include Euler Hermes (Germany), UK Export Finance (UKEF, UK), Nippon Export and Investment Insurance (NEXI, Japan), Export Development Canada (EDA), Sinosure (China), Atradius Dutch State Business (Netherlands), Finvera (Finnland), and many more. These agencies minimize domestic risk by ensuring streamlined access to finance and are critical for domestic industrial policy.

Check out the interactive visualization below to see how debt composition by creditor varies for each country in IDS database:

Since bilateral loans are also tracked at the country-country pairs, the interactive visualization below shows top creditor countries for each recieving country in 2022:

External debt from the debtor’s perspective

On the debtor side, the debt stock is split into three broad categories with the following hierarchy:

Debt stocks
|
|--- (1) Short-term debt: Debt with maturity of less than one year
|
|--- (2) Long-term debt: Debt with maturity of more than one year
|    |
|    |--- Private non-guaranteed (PNG)   
|    |--- Public and publicly guaranteed (PPG)
|         |
|         |--- Private debt guaranteed by public sector (PPS)
|         |--- Public sector
|              |
|              |--- General Government
|              |--- Central Bank
|              |--- Other Public Sector
|
|--- (3) Use of IMF credits
|    |
|    |--- Special Drawing Rights (SDRs)

Let’s briefly introduce these terms:

Short-term debt has a maturity of less than one year. This usually implies bridge financing to ensure firms operational costs and trade are not hampered by liquidity constraints. This includes financing options like trade credits, line of credit, short-term leases, dividends payable, bank overdrafts etc.

Long-term debt has the largest composition in all debt that trickles through different part of the economy through a nested tree structure. This loan is divided into two parts: Private non-guaranteed (PNG) debt taken on directly by private firms without any risk backed by the government. These are purely private sector loans from foreign entities that carry their own set of risks. In contrast, public and publicly guaranteed (PPG) loans are backed by the government, including loans taken by the private sector. Again this can get complex but private sector loans guaranteed by the public sector are essentially large-scale projects carried out by private firms that might have national importance. These can inlude public-private partnerships (PPPs) such as large energy, transport, and infrastructure projects. They can also include nascent sectors (such as green industries) that require the public sector to back risks in order to allow these industries to evolve.

The last term is the use of IMF credits. These can be access to relieve balance of payment constraints, especially foreign exchange, to stabilize the economy. Similarly SDRs is sort of a special world reserve currency comprising of five global currencies (US dollar, the euros, Japanese yen, Chinese reminbi, and the British pound). SDRs have specific and limited uses, mostly to boost liquidity under high economic stress situations (2008 financial crisis, COVID-19 crisis). SDRs themselves an interesting instrument that require a decidated post but more information can be found on the IMF website.

For the top-level categories we get the following picture:

The figure shows a slight increase in the importance of short-term debt while the use of IMF credits shows waves of increased activity mostly around major economic crises. The figure below shows the above data in percentage terms for a clearer picture:

Looking just the composition of long-term public debt, we observe that private debt has increased significantly after 2000. While the trend has been mostly downwards after 2016, the share of private debt was still a massive 44%:

And in percentage terms we can see the rising share of PNG laons that peaked around 2014/15 but have slowly declined over the years:

Combining all the various categories explained above, we can derive the following Sankey diagram that provides the full picture of global debt stocks from the debtor perspective for the year 2022:

Individual countries can be explored using the interactive tool below:

Before we end, let’s highlight another important point: even though debt disbursements have increased over time, in 2022, global debt servicing became more than the amount of debt given out. This implies that some countries might now be even borrowing to pay back old loans! If we take this in the context of contemporary issues such as stangnation and fragmented trade, there have been a renewed interest in looking at the role of debt and debt burden in the context of supporting developmental outcomes.

And that is it for this post. We continue the discussion in a follow-up posts!

About the author

Asjad Naqvi is an economist based in Vienna, Austria. He has been teaching, doing research and policy work on macro-financial-climate topics for over a decade. You check his profile and projects on GitHub or on his personal website. You can connect with him via Medium, Twitter/X, BlueSky, LinkedIn, or simply via email: asjadnaqvi@gmail.com.

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