Australian External Debt Essay

1219 words - 5 pages

Australian external debtIntroductionForeign debt is referred to also as external debt. Foreign debt is distinguished from other kinds of foreign investment capital inflow such as foreign ownership, because it carries with it the obligation to pay interest or to repay principal.There is no single factor that caused the dramatic deterioration in Australia's external position (McGillivray&Papadopoulos, 1995). The contributing factorsare both internal and external.When domestic interest rates are high relative to overseas interest rates,borrowing in overseas financial markets is attractive because of the lower interest rates, while lending to individuals overseas becomes less attractive.An increase in overseas borrowing leads to an increase in capital inflow while decrease in lending to the overseas sector reduces capital outflow.Australia remains a major net importer of foreign capital, as it has been for most of its history. Without such capital Australia's economic and employment growth would be lower. Yet few people seem to understand that the deficit which Australia has on current account (because importing more goods and services than it exports) is the other side of a surplus on capital account. Moreover, unlike the large investment borrowings from overseas ofthe 1980s, these capital imports are now apparently being used productively.According to Reserve Bank (1994) report, Australian current capital surplus of about 5% of GDP can be regarded as not dangerous by comparison with the same surplus in 1984-1985.As McTaggart et al (1999) says, a country that runs a current account deficit must borrow capital from overseas, to overcome that deficit, and a country that runs a current account surplus lends to the other countries. Over time, if a country continues to run current account deficits, it becomes debtor nation with stock debt owed to others. Therefore, Australia is debtor nation. The levelof Australia's external debt has risen from very low levels in the 1970s to relatively high levels in the 1990s. This also can explained by government policies and regulations that have allowed to accumulate such debt.But, the main issue is, is it a problem or not if country is in large external debt. Should Australian economists and politics be concerned about being a net borrower?McTaggart et al (1999) suggests, that the answer to this question is usually thought to depend on what is done with the borrowed money. If the money is borrowed to consume, then, the country may have a problem.In contrast, if the money is borrowed to invest and generate income which is high enough to service the credit, then country doesn't have any problem, instead it gains benefit from that credit to develop the economy.But however, the increasing level of international debt in Australia has caused concerns among officials and economists. McTaggart et al (1999) suggest that there are several factors which caused these concerns:Servicing the debt - the larger is the debt,...

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