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External debt Sustainability: Theory and Applications to Heavily Indebted Poor Countries

Author

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  • Chaudhuri, K,
  • Zhu, N.S.

Abstract

We present a conceptual framework for analyzing external debt sustainability in heavily indebted poor countries with predominantly concessional debt owed to official creditors. In the absence of a secondary market for official debt, the paper argues for the dynamic present value of debt as a proxy for assessing the real value of debt with below-market interest rates. It also models the current institutional mechanism of debt relief for low-income countries in the form of rescheduling on concessional terms. The analytical approach combines a stock analysis of external debt with a flow analysis of balance of payments in a parsimonious forward-looking framework suitable for projection of alternative scenarios and sensitivity analysis of key policy variables. Illustrative applications in two country cases show how the theory can be applied for policy formulation.

Suggested Citation

  • Chaudhuri, K, & Zhu, N.S., 1998. "External debt Sustainability: Theory and Applications to Heavily Indebted Poor Countries," Discussion Papers 98-01, University at Albany, SUNY, Department of Economics.
    • Handle: RePEc:nya:albaec:98-01
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    Keywords

    DEBT ; POOR COUNTRIES;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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