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How can a country fix its high external debt?

Question:

How can a country fix its high external debt?

External Financial Sources:

A nation may be involved in borrowing from other countries because financial requirement may be too huge to raise internally. Therefore, a country will borrow funds from other nations. The debt usually comes with strings attached.

Answer and Explanation:

A country can fix its high external debt by following methods:

  1. Reduction of government spending. When the government reduces its spending there are low chances of experiencing a budget deficit therefore, there will be no external debt which will be required to cater for the deficit.
  2. The government would increase its revenue by introducing new taxes or increase tye existing taxes but the increase should be considered not to affect the growth of the economy. In this case, a proportion of the revenue that is collected will be used in debt repayment.
  3. In case a country must borrow then the amount borrowed should be used in capital expenditure and not in the recurrent expenditure. This means that the money should be used in creating assets which will be income-generating this will help a nation in raising money to repay the loan.

Learn more about this topic:

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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

Chapter 8 / Lesson 7
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