Lý Thuyết
1. Definition
External debt is the portion of a country’s debt that is borrowed from foreign
lenders, including commercial banks, governments, or international financial
institutions. These loans, including interest, must usually be paid in the currency
in which the loan was made. To earn the needed currency, the borrowing
country may sell and export goods to the lending country.
If a country cannot repay its external debt, it is said to be in sovereign debt and
faces a debt crisis.
External debt can take the form of a tied loan, whereby the borrower must apply
any spending of the funds to the country that is providing the loan.
2. Different types of external debt
Classification of foreign debt by borrower
According to this classification criterion, external debt includes public debt,
private debt guaranteed by the public authority and private debt.
In Vietnam, these debts are specifically distinguished as follows:
 Government debt means a debt arising from a domestic or foreign loan
which is signed or issued in the name of the State or the Government or a
loan signed or issued by or under the authorization of the Ministry of
Finance under law. Government debts do not include debts issued by the
State Bank of Vietnam to implement monetary policies in each period.
 Government-guaranteed debt means a domestic or foreign loan
borrowed by an enterprise or financial or credit institution under the
Government's guarantee.
 Private debt includes external debt of the private sector that is not
contractually guaranteed by the public sector of the same economy. In
essence, private debt is debt that is borrowed and paid by the private
sector.
Classification of foreign debts by debt term
According to this classification criterion, external debt is divided into long-term
debt and short-term debt.
 Long-term debt is debt with original maturity (under contract or
renewed) lasting more than 1 year from the date of signing the loan until
the maturity date of the final payment. These are debts that are of great
interest due to their ability to have a great impact on the national financial
system. Therefore, international financial institutions regularly monitor
and analyze the long-term debt of countries in a systematic way.
 Short-term debt includes debt with a maturity of 1 year or less.
Normally, short-term debt accounts for only a small proportion of a
country's total water debt. Due to their short maturity and often
insignificant volume, short-term debt is often not subject to the same
strict management as long-term debt. However, short-term debt is the
debt that directly affects the liquidity situation of the country and has the
potential to cause an economic crisis.
Classification of foreign debt by type of loan
According to this classification criterion, external debt is divided into official
development assistance (ODA) and commercial loans.
 Official Development Assistance (ODA) loan means a loan borrowed in
the name of the Vietnamese State or Government from a donor being a
foreign government, bilateral donor organization, transnational
organization or inter-governmental organization with non-refundable
funds (preferential component) accounting for at least 35% for a binding
loan, and 25% for a non-binding loan.
 Commercial loans, unlike official development assistance loans, often
do not have preferential interest rates and grace periods. The commercial
loan interest rate is the international financial market rate and usually
changes with changes in market interest rates. Therefore, commercial
loans often have a high cost and contain many risks. Commercial
borrowers are usually businesses..
Classification of foreign debt by lender
According to this classification criterion, external debt is classified into
multilateral debt and bilateral debt.
 Multilateral debt is debt to which creditors are usually agencies of the
United Nations, World Bank, International Monetary Fund, regional
development banks, multilateral agencies such as OPEC and
intergovernmental government.
 Bilateral debts are debts to which the creditor is the government of a
country or an international organization on behalf of a single government.
3. The role of external debt
 Foreign debt creates additional capital for economic development.
External debt is an additional source of financing for the shortfall of capital
for countries whose economies are in the early and middle stages of
development. With foreign debt, some countries have the opportunity to
invest in development at a higher rate for the time being without having to
reduce domestic consumption, and thus, be able to achieve a higher rate of
growth. in the present is higher than the economy itself allows
 Foreign debt contributes to technology transfer and management
capacity improvement.
Besides supplementing capital for domestic investment, foreign debts also
contribute to technology transfer and improve management capacity through
the import of modern machinery and equipment, advanced technology.
Investment projects have contributed to the modernization of many
economic sectors and fields. On that basis, create a new and modern
workforce with advanced technology and contribute to promoting the
efficiency of the whole economy.
 External debt offsets the balance of payments and stabilizes domestic
consumption.
In some unfavorable cases of the economy, the balance of payments is in
deficit due to temporary adverse conditions in international trade or severe
output shortfall and severe domestic consumption. In such cases, emergency
foreign loans serve as a measure of short-term economic stability, helping
the economy to regain equilibrium.