Domestic and External Public Debt in Developing Countries

Abstract

Analysis of public debt in developing countries has traditionally focused on external debt. However, in recent years, several developing countries adopted aggressive policies aimed at retiring public external debt and substituting it with domestically issued debt. This paper discusses alternative definitions of external and domestic debt and then introduces a new dataset on domestic and external public debt. It uses this dataset to describe recent trends in the composition of public debt in developing countries and discusses the reasons for these trends. The paper also identifies possible challenges and opportunities arising from the new debt management strategy adopted by several emerging and developing countries and points out that there are conceptual and practical issues with the traditional external/domestic debt dichotomy. In doing so, the paper discusses possible trade-off between domestic and external borrowing and points out that while the switch towards more domestic borrowing can play a positive role in reducing the risks of sovereign finance, policymakers should not be too complacent.