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The Choice Between External and Domestic Debt in Financing Budget Deficits

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  • Philippe Beaugrand
  • Montfort Mlachila
  • Boileau Loko
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    Abstract

    The paper reviews the principles and practical considerations involved in the choice between foreign and domestic financing of fiscal deficits, and derives a series of recommendations broadly applicable to Central and West African countries. The paper develops a simple analytical framework and shows that highly concessional external debt is usually a superior choice to domestic debt in terms of financial costs and risks, even in the face of a probable devaluation. The paper stresses the importance of the availability and terms of financing, and of overall long-term debt sustainability. It concludes that these countries need to take a gradual approach to domestic debt financing, beginning with the issuance of short-term bills, and ensure a solid track record of meeting their debt-service obligations.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/79.

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    Length: 30
    Date of creation: 01 May 2002
    Date of revision:
    Handle: RePEc:imf:imfwpa:02/79

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    Related research

    Keywords: External debt; Domestic debt; Central Africa; West Africa; public debt; debt management; central bank; budget deficit; debt service; domestic financing; external borrowing; foreign debt; debt sustainability; external financing; foreign loan; public debt management; domestic currency; debt relief; foreign borrowing; government expenditure; debt sustainability analysis; domestic borrowing; current account; primary deficit; deficit financing; balance of payments; debt burden; fiscal policy; government deficit; fiscal deficits; budget deficits; external loans; government revenue; debt servicing; central banks; debt strategy; debt management agency; debt management strategy; government deficits; external debt management; public and publicly guaranteed debt; bilateral creditors; foreign currency debt; concessional debt; debt situation; accumulation of arrears; debt crisis; government debt; long-term debt; external borrowings; domestic financial markets; public and publicly guaranteed; external public debt; debt managers; taxation; fiscal policies; currency debt; public finance; domestic debts; increase in government expenditure; commercial borrowing; debt management strategies; external debt service; long-term debt sustainability; foreign aid; fiscal management; budget constraint; debt service to exports; day-to-day debt management; domestic investors; debt recording; debt buildup; external debt sustainability; debt-service; external shocks; public sector debt; debt problem; domestic savings; commercial debt; debt ratio; principal repayments; domestic debt management; foreign loans; debt portfolio; national budget; amortization payments; government budget constraint; external debt situation; borrowing on debt sustainability; debt relief mechanisms; primary expenditure; fiscal stability; reserve bank; public deficits; government budget; debt crises; long-term external debt; debt management functions; traditional debt relief; debt-service obligations; debt management system; repayments; debt sustainability analyses; ratio of debt; debt stocks; domestic saving; traditional debt relief mechanisms; currency composition; tax system; debt burdens; stock of debt; composition of government expenditure; tax burden; debt management authority; debt outstanding; relief mechanisms;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    2. Haque, Nadeem U & Montiel, Peter, 1989. "Consumption in Developing Countries: Tests for Liquidity Constraintsand Finite Horizons," The Review of Economics and Statistics, MIT Press, vol. 71(3), pages 408-15, August.
    3. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
    4. Vaidyanathan, Geetha, 1993. "Consumption, liquidity constraints and economic development," Journal of Macroeconomics, Elsevier, vol. 15(3), pages 591-610.
    5. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    6. Sheku Bangura & Robert Powell & Damoni N. Kitabire, 2000. "External Debt Management in Low-Income Countries," IMF Working Papers 00/196, International Monetary Fund.
    7. Kevin Ross & R. Brooks & Robert Powell & Ydahlia A. Metzgen Quemarez & Doris C. Ross & Mariano Cortes & Saqib Rizavi & Benoit Ketchekmen & Francesca Fornasari, 1998. "External Debt Histories of Ten Low-Income Developing Countries," IMF Working Papers 98/72, International Monetary Fund.
    8. Jeffrey D. Sachs, 1989. "Developing Country Debt and the World Economy," NBER Books, National Bureau of Economic Research, Inc, number sach89-3, June.
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    Citations

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    Cited by:
    1. Jakob Christensen, 2004. "Domestic Debt Markets in Sub-Saharan Africa," IMF Working Papers 04/46, International Monetary Fund.
    2. M. Arnone & A. F. Presbitero, 2007. "External Debt Sustainability and Domestic Debt in Heavily Indebted Poor Countries," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 115(2), pages 187-213.
    3. Garima Vasishtha, 2007. "Domestic versus External Borrowing and Fiscal Policy in Emerging Markets," Working Papers 07-33, Bank of Canada.

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