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One way of facilitating the rate of a country's economic growth is through external borrowing. Explain the advantages of such borrowing

One way of facilitating the rate of a country's economic growth is through external borrowing. Explain the advantages of such borrowing.

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An external debt is the current amount of disbursed and outstanding loan a country owes to foreign residents to be paid as principal and interests. External borrowing comes with various advantages to both the borrowing country and the lender. But these advantages are only reaped only when the debt is sustainable such that it allows the debtor country to meet its current and future debt obligations without rescheduling of repayments or recourse for further debt relief, while allowing an acceptable level of economic growth. These advantages include:
1) External debt provides the borrowing country with convertible foreign currencies. These are important for making importation and maintaining balance of payment stability. Remember the repayments are made in the same foreign currency and hence its important that the country make its local currency stable to avoid losses.
2) External debts are economical and proceeds huge amounts of finances. Compared to the domestic debts, external debts attracts very low interest rates especially for the multilateral debts. This enable the country to invest in long term economic goals without much repayment pressure.
3) External borrowing provides investing avenues for individual investors. Investing in a foreign bond diversifies the investors' portfolio but this requires mitigation of the risk that come with instability of currencies.
4) External debts enables meeting the budget deficit for an effective budget and securing the development goals. At times the revenues fall short of the expenditures. This necessitates the the gap be bridged with a debt or else the budget will not be effective. External borrowing provides the solution to such situations.
5) During recessionary economic times, external debts enables economic recovery by providing finances that kick starts the economy employment of resources. A debt is hence a monetary policy tool that can boost economy.
Despite the benefits that accrue to external borrowing, measures have to be take to ensure that it is sustainable otherwise it can lead to economic crisis. The debt to Gross Domestic Product ratio and foreign debt to export ratio indicators need to be considered when making the borrowing.

Munekare answered the question on June 30, 2018 at 05:31

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One way of facilitating the rate of a country's economic growth is through external borrowing. Explain the advantages of such borrowing

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