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Accumulation Of External Debt Essay

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Accumulation of external debt is a common phenomenon in developing countries. According to the World Bank, total external debt is defined as debt owed to non-residents repayable in terms of foreign currency, goods or services. External debt is the composition of long term debt (public and publicly guaranteed debt plus private non-guaranteed debts), short term commercial debt and International Monetary Fund (IMF) loans (Ali & Mustafa, 2012).
It was forecasted that Malaysia’s economy should be growing by six to seven percent per annum in order to achieve a status of a developed country (Hayati, 2012). If a country’s public savings ratio is less than required investment, then the country will have to borrow more to finance its given rate of economic growth. So like the case with Malaysia, external debt is sourced to achieve the growth rate of the economy, which otherwise would not have been feasible with the given domestic resources. To highlight the motivation behind external debt to the growth-model, the dual-gap theory explains further the savings gap (savings-investment) and foreign exchange gap (import-export).
For reasons of national balance of payments accounting, countries can also borrow in the short-term from external sources to finance current account deficits originating from external …show more content…

There is no consensus on the role of external debt in growth. It has both positive and negative aspects. Though one thing is sure, when external debt accumulates beyond a certain limit, it will counteract the economic growth by hampering investment. A leading explanation for this negative relationship is the so-called ‘debt overhang’ hypothesis, which states that high level of indebtedness discourage investment and negatively affect growth as future higher taxes are expected to repay the debt (Ali & Mustafa,

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