Difference between Internal & External Debt

Internal or external debts are debts incurred by the government which has to pay them off. These debts usually represent a deficit in the country’s budget. A government will borrow to finance big projects or to escape a financial crisis such as when Egypt borrowed from the IMF in 2017.

Internal Debt:

It is a loan taken by the government from banks or financial organizations within the country or by issuing bonds. It is usually in domestic currency.

External Debt:

The government borrows from foreign banks or international financial organizations such as the World Bank or the IMF.

“By late 2019 Egypt had more than $108699 billion in external debt with almost 30% to international organizations. 

How does a government decide whether to take out an external loan?

It depends on the country but most governments put the topic up for discussion in parliament. The discussion includes the risks involved and the proposed plan to repay the loan and it is up to parliament whether to approve or deny the proposal.

As to the lending organization they always impose special terms on loans that must be implemented by the borrowing government before the loan is even granted. For example, in 2017 the Egyptian government implemented austerity measures such as the removal of subsidies to comply with the IMF’s terms. 

At the same time the lending organization assesses the risks involved by comparing the country’s debts with its gross national product.

How can internal debt be reduced?

• Decrease government spending.
• Increase taxes

By taking these two measures the country’s income increases and allows it to pay off its debts.

Egyptian debts:

 By late 2019 Egypt had more than $108699 billion in external debt with almost 30% to international organizations.

Internal debts reached 4.186 trillion EGP which includes bonds, social insurance, etc.