Define and discuss the advantages and disadvantages of foreign debt

Foreign debt can provide countries with access to much-needed capital from lenders from other countries to finance investments and development of infrastructure. The advantages of foreign debt can include lower-interest rates, longer repayment terms, and in some cases, access to technical expertise from the lending country. Additionally, foreign debt can provide access to capital that the lending country may not have available to provide. On the other hand, the disadvantages of foreign debt can include increased exposure to the currency and economic cycles of the lending country. As international currencies fluctuate in foreign debt exposure, it may require countries to renegotiate the terms if their currencies become weaker. Additionally, if a country runs into a financial crisis, particularly with an economy heavily dependent on foreign debt, it may become difficult to service and repay this debt. This can lead to a country’s foreign debt exposure becoming untenable and its IMF bailout terms particularly harsh. Finally, foreign debt can also lead to trade deficits, as certain countries are more reliant on imported goods, leading to an even higher debt burden.