External Debt

External debt is the money that the residents of a country owe to non-residents. Under the international standard set out in the External Debt Statistics Guide, published jointly by the International Monetary Fund (IMF), the World Bank and other agencies, gross external debt is the outstanding amount of actual, not contingent, liabilities that require the debtor to pay principal, interest or both at some point in the future, and that are owed by residents to non-residents. The debtor can be the government, the central bank, banks or private companies; what matters is where the creditor lives, not the currency.

External debt is the counterpart of domestic debt, which is owed to residents. It is closely tied to the balance of payments (BOP) and the international investment position, because repaying it uses foreign currency earned from exports, remittances and investment inflows. Statisticians split it by borrower, by maturity and by whether a public body stands behind it, which is where the category of publicly guaranteed debt comes from.

Picture a village that buys more from the next town than it sells there. To cover the gap it borrows from shopkeepers in that town. Those loans are the village's external debt: they can only be paid back with money that comes in from outside, by selling more to the town, getting gifts from relatives there, or borrowing again.

Inside the village, people also lend to each other, but those debts just move money around between neighbours. The outside loans are different, because if the town stops lending or the village's goods stop selling, the village has to find outside money it may not have.

The guide breaks gross external debt into four institutional sectors: general government, the central bank, deposit-taking corporations (mainly banks), and other sectors such as private companies and households, with intercompany lending between related firms shown separately. Each sector's debt is then split by maturity into short-term (one year or less) and long-term debt, and by instrument, such as loans, debt securities, trade credit and currency and deposits. Equity investments are not debt, so foreign shareholdings in local companies are excluded.

The World Bank's International Debt Statistics, which covers low- and middle-income countries, groups long-term external debt by borrower into public debt, publicly guaranteed private debt and private nonguaranteed debt, and adds short-term debt and use of IMF credit to reach the total.

Raw totals mean little without scale, so analysts compare external debt with the size of the economy and with export earnings. Two common ratios are:

• $\text{Gross external debt}$ is the stock owed to non-residents at a date.
• $\text{GDP}$ is gross domestic product for the year, in the same currency.
• $\text{Principal} + \text{Interest}$ is the external debt service paid in the year.

Worked example: a country with external debt of 120 billion dollars and GDP of 400 billion dollars has an external debt ratio of $120 \div 400 \times 100 = 30\%$. If it pays 12 billion dollars in principal and interest during a year in which exports earn 40 billion dollars, its debt service ratio is $12 \div 40 \times 100 = 30\%$, meaning nearly a third of export earnings goes to creditors abroad. Analysts also compare short-term external debt with foreign exchange reserves to judge reserve adequacy.

External debt is usually owed in a hard currency such as the dollar, so it carries exchange rate risk as well as interest rate risk, the same currency mismatch that affects foreign currency loans at the level of a single borrower. A sudden stop in capital inflows, a fall in export prices or a currency crisis can make repayment impossible, leading to sovereign default, rescheduling with official creditors or an IMF-supported programme. Historical cases range from the Latin American debt crisis of the 1980s to the London Agreement on German External Debts of 1953, and the debate over odious debt asks whether successor governments should repay loans taken by earlier regimes.

The State Bank of Pakistan publishes quarterly figures on Pakistan's external debt and liabilities (EDL). The series covers public debt (owed by the government and by public sector enterprises), IMF credit, the external debt of banks and private companies, and intercompany debt owed to foreign parent firms. Because coverage and timing differ, Pakistani headline figures do not always match World Bank totals. According to SBP data reported in the press, total external debt and liabilities were roughly 135 billion dollars at the end of June 2025. The Ministry of Finance also reports public external debt in its debt policy statements, as part of debt management alongside domestic borrowing through Market Treasury Bills and Pakistan Investment Bonds.

• External Debt Statistics: Guide for Compilers and Users (Task Force on Finance Statistics)
• World Bank International Debt Statistics