External Debt Cause of Financial Crisis

(Sadia Raza, )

Deficit financing is the term that explains how a country’s fiscal budget is financed. There are two ways of budget deficit financing on a short-run base;one is domestic borrowing mostly in the shape of state-issued bonds/ securities and the other is external debt. To answer above questions, it is necessary to address the difference of both sources of financing. Domestic borrowing is the most common way to deficit financing only when there is excessive cash and money in economy specially owned by the private sector. This phenomenon of excessive cash in economy categorically leads to inflation in economy. Domestic borrowing is mostly based on government’s terms and there is no external pressure to change the policies of the state. It is far cheaper than external debt.

On the other hand, external debt is not that simple as domestic borrowings. A country seeking external deficit financing mostly tries to get it from friendly nations but most of the time it is not possible for such situations. There are two international financial institutions, World Bank and IMF.World Bank when advancing budget deficit financing offers strict conditions not just upon financial policy as well as trade and other international policies of the nation to whom it is advancing loans. While IMF is an institution created for the deficit financing as well as policy recommendation for developing economies to get rid of this economic or financial crisis.

Policy recommendation is a key tool to influence country’s sovereignty used by international lobbies. These recommendations, along with the pledge of key stakeholders ofcountry, have terms of changes in economic structures, cuts in developmental budget allocations, in defence budget and subsidies provided by the State to facilitate its household and industrial as well as other sectors of economy, are mostly tools used by IMF.In case of Pakistan from the day we started financing our deficit by external debt, international donors have implemented their tools step by step. This is the main reason that we are not as sovereign in our policies now as we were in the past.

Raanisa Mahbub, Student of BBA at COMSAT, Lahore
 

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