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The Choice Between External and Domestic Debt in Financing Budget Deficits; The Case of Central and West African Countries

  • Philippe Beaugrand
  • Montfort Mlachila
  • Boileau Loko
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    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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    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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    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. Vaidyanathan, Geetha, 1993. "Consumption, liquidity constraints and economic development," Journal of Macroeconomics, Elsevier, vol. 15(3), pages 591-610.
    3. 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.
    4. Jeffrey D. Sachs, 1989. "Developing Country Debt and the World Economy," NBER Books, National Bureau of Economic Research, Inc, number sach89-3.
    5. Sheku Bangura & Robert Powell & Damoni N. Kitabire, 2000. "External Debt Management in Low-Income Countries," IMF Working Papers 00/196, International Monetary Fund.
    6. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    7. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    8. 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; Lessons From their Experience," IMF Working Papers 98/72, International Monetary Fund.
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