External debt (also called “foreign debt”) is the portion of total country debt that is owed to creditors outside of the country. The debtors can be the government, corporations or private households. The creditors include private commercial banks, other governments and international financial institutions (such as the IMF and the World Bank).
The International Monetary Fund (IMF) defines external debt as the outstanding amount of actual, current, and not contingent, liabilities that require payment(s) of interest and/or principal by the debtor at some point(s) in the future and that are owed to nonresidents by residents of an economy (determined by where one is located, not one’s nationality). The debt includes both principal and interest payments due.
For some countries, particularly developing ones, debt incurred by governments can exceed those governments’ ability to pay (based on tax revenues and on the nation’s gross domestic product). Government funds spent on poverty reduction, job creation, infrastructure improvement, education and the like, foster longer-term growth, possibly leading to lower levels of borrowing in the future. However, the burden of loan repayments can make these beneficial expenditures impossible. In addition, sometimes the debts were incurred by regimes that are no longer in power, but the burden to pay down the loan falls to a subsequent administration. Loans are sometimes restructured, allowing longer time-periods for repayment. And debt cancellation for developing nations is a topic that is hotly debated.