The Choice Between External and Domestic Debt in Financing Budget Deficits

Abstract

The paper reviews the principles and practical considerations involved in the choice between foreign and domestic financing of fiscal deficits, and derives a series of recommendations broadly applicable to Central and West African countries. The paper develops a simple analytical framework and shows that highly concessional external debt is usually a superior choice to domestic debt in terms of financial costs and risks, even in the face of a probable devaluation. The paper stresses the importance of the availability and terms of financing, and of overall long-term debt sustainability. It concludes that these countries need to take a gradual approach to domestic debt financing, beginning with the issuance of short-term bills, and ensure a solid track record of meeting their debt-service obligations.External debt;Domestic debt;Central Africa;West Africa;public debt, debt management, central bank, budget deficit, debt service, domestic financing, external borrowing, foreign debt, debt sustainability, external financing, foreign loan, public debt management, domestic currency, debt relief, foreign borrowing, government expenditure, debt sustainability analysis, domestic borrowing, current account, primary deficit, deficit financing, balance of payments, debt burden, fiscal policy, government deficit, fiscal deficits, budget deficits, external loans, government revenue, debt servicing, central banks, debt strategy, debt management agency, debt management strategy, government deficits, external debt management, public and publicly guaranteed debt, bilateral creditors, foreign currency debt, concessional debt, debt situation, accumulation of arrears, debt crisis, government debt, long-term debt, external borrowings, domestic financial markets, public and publicly guaranteed, external public debt, debt managers, taxation, fiscal policies, currency debt, public finance, domestic debts, increase in government expenditure, commercial borrowing, debt management strategies, external debt service, long-term debt sustainability, foreign aid, fiscal management, budget constraint, debt service to exports, day-to-day debt management, domestic investors, debt recording, debt buildup, external debt sustainability, debt-service, external shocks, public sector debt, debt problem, domestic savings, commercial debt, debt ratio, principal repayments, domestic debt management, foreign loans, debt portfolio, national budget, amortization payments, government budget constraint, external debt situation, borrowing on debt sustainability, debt relief mechanisms, primary expenditure, fiscal stability, reserve bank, public deficits, government budget, debt crises, long-term external debt, debt management functions, traditional debt relief, debt-service obligations, debt management system, repayments, debt sustainability analyses, ratio of debt, debt stocks, domestic saving, traditional debt relief mechanisms, currency composition, tax system, debt burdens, stock of debt, composition of government expenditure, tax burden, debt management authority, debt outstanding, relief mechanisms