Identifying external debt shocks in low- and middle-income countries

Using a unique loan-level dataset from the World Bank’s Debtor Reporting System, we construct new measures of external debt shocks for 120 low- and middle-income countries during the 1975–2018 period. We identify the shock in two steps by first calculating the difference between actual and predicted net disbursement on external debt obligation for each loan and then taking aggregation at the country-year level. During expansionary times, external debt shocks lead to persistent decreases in the external debt to GDP ratio, possibly due to the availability of other sources of financing. During recessionary episodes, however, we see heavy reliance on external debt financing for most of developing countries. This reliance is more substantial for countries with higher levels of external debt stock, raising serious concerns for debt distress in these countries and in their road to building resilience.