External debt is the portion of a country's debt that is borrowed from foreign lenders, including commercial banks, governments or international financial institutions. These loans, including interest, must usually be paid in the currency in which the loan was made. To earn the required currency, the borrowing country may sell and export goods to the lending country.
With great external debt comes great responsibility. Countries resort to foreign borrowing to maintain financial liquidity and stimulate growth. For rich nations facing a downturn, taking a loan at low interest rates can be more desirable than raising taxes. For emerging nations, this kind of financing is even more essential to cover for domestic resource gaps and pay for programmes that can help reduce poverty and foster longer-term growth. There is, however, a well-known problem with debts: borrowing money is easier than paying it back.
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 International Monetary Fund is one of the agencies that keeps track of countries' external debt. The World Bank, too, publishes a quarterly report on external debt statistics.
If a nation is unable, or refuses, to repay its external debt, it is said to be in sovereign default. This can lead to the lenders withholding future releases of assets that might be needed by the borrowing nation. Such instances can have a rolling effect. The borrower’s currency may collapse and the nation’s overall economic growth will stall.
Here is a list of countries by external debt as of early 2020. Where does India stand in this list? Guess which country has maximum external debt?
Reference source: www.gfmag.com, wikipedia, investopedia