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Distinguishing Some Concepts About Debt


Government borrowing should be considered very carefully and should only be undertaken as a last resort.

Analyses on assessing Vietnam's foreign debt situation are conducted mainly by classifying foreign debt by loan type into ODA loans and commercial loans.


1.1.2.4. Distinguishing some concepts about debt

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National debt and domestic debt

Distinguishing Some Concepts About Debt


Sometimes, foreign debt is called “national debt” to distinguish it from “domestic debt”. In the case of domestic debt, the borrower and the lender have a civil contractual relationship within the country, and the legal rights of the lender are protected by a legal system with clear provisions. If the borrower defaults on the debt, the lender can seek legal recourse through the courts to enforce its legal rights. When a country borrows from abroad, the debt contract is not governed by a single legal system. The national lender can impose sanctions on the defaulting national borrower, but these sanctions usually do not directly benefit the lender. For example, the lending country may stop providing promised commercial credit or cut off trade relations with the defaulting borrower.

debt, but such measures are detrimental to both the borrower and the lender. The lending country, therefore, usually examines the situation of the country very carefully.

Borrowing to ensure that the borrowing country will repay the debt.


Actual regular debt, irregular debt


Actual regular debts are actual loans and are recorded in the debt table. Extraordinary debts are not within the definition of foreign debt and are not included in the debt table. Extraordinary debts are potential debts that have not yet arisen but may arise when one of the following conditions occurs:


pre-determined events . [36] Although not included in the total debt, it is necessary to have certain analysis and assessment of extraordinary debts to prevent impacts on the national finance, especially the government. A typical example of extraordinary debt is the case of Indonesia. Government debt increased from zero before the 1997 crisis to 500 billion Rupiah by the end of 1999 due to the insurance of equitized banking system shares. [36] Therefore, the IMF encourages countries to establish a system to monitor and assess extraordinary debt.

One point to note is that leaving extraordinary debt out of total debt does not mean leaving private debt guaranteed by the government out because private debt guaranteed by the government is the real debt of the private sector, not extraordinary debt to the country.


Direct debt and contingent liabilities


Unlike direct debt, which is an actual debt that the borrower is responsible for repaying and is accounted for by the borrower, contingent liabilities are debt obligations that arise only when one or more predetermined conditions occur. For example, in the case of private debt guaranteed by the Government. This is a direct debt.

for the private sector, but is a contingent liability for the Government. If a situation arises where the private sector cannot pay, the Government will have to pay.


National debt and government debt


The concept of national foreign debt is broader than the concept of government foreign debt. While Vietnam's national foreign debt covers Vietnam's foreign debt in general, including public sector foreign debt and private sector foreign debt, government foreign debt is a part of public sector foreign debt. Government foreign debt is the balance of all current debt obligations (excluding contingent debt obligations) of the government alone.


1.1.3 The role and cycle of foreign debt


1.1.3.1.The role of foreign debt


Foreign debt meets investment capital needs


In order to accelerate the pace of socio-economic development, the demand for investment capital of developing countries is very large, exceeding the capacity of the economy. Foreign loans are a common source of additional investment financing for countries with market economies in the early and middle stages of development. Many of these countries, when they reach a high level of development, become large lending countries, such as Japan. Foreign debt can also replace

Restructuring the economy by investing in key industries, creating momentum for economic development.

Foreign borrowing is an additional source of economic development when domestic production is only sufficient to maintain a low level of consumption. By borrowing from abroad, a country has the opportunity to invest in development at a higher level in the present without reducing domestic consumption, and thus can achieve a higher growth rate in the present than the economy itself allows. The price of this is a reduction in investment - also a source of growth - in the future, when the country will have to pay back foreign debt and principal. Thus, for developing countries, the use of foreign borrowing is essentially a matter of balancing current consumption with future consumption. Foreign borrowing can only be effective if it ensures that it does not seriously affect the consumption of future generations.


Foreign debt contributes to technology transfer and management capacity improvement

In addition to using own capital to import machinery and equipment along with technology transfer and management skills, borrowing foreign capital


provide additional capital to import modern machinery and equipment, advanced technology and foreign management skills. Investment projects have contributed to the modernization of many industries and fields, promoting the transformation of other industries and fields, creating a new, modern workforce with advanced technology and contributing to promoting the efficiency of the entire economy. Along with investment projects is the transfer of management skills of foreign experts. Training cooperation projects also create many opportunities for retraining and

Advanced training for key staff of sectors and localities, contributing to improving the management capacity of the entire socio-economic sector in general.


Foreign debt stabilizes domestic consumption

When sudden shocks hit the economy, output is severely short-circuited and domestic consumption is severely affected. For example, successive natural disasters lead to major crop failures in the agricultural sector; regional financial crises cause severe damage to the economy. In such cases, in addition to emergency aid, emergency foreign loans act as a short-term stabilizing measure for domestic consumption while the economy gradually recovers.

Foreign debt to offset balance of payments


The balance of payments may be in temporary deficit due to temporary adverse conditions in international trade. For example, when the export prices of a country's products fall sharply relative to the prices of its imports, the country may resort to foreign borrowing to maintain short-term consumption. However, this solution is often risky, because there is no certainty that the borrowing country will have a better income when the debt is due. In addition, loans to offset the trade balance are often short-term.

Developing countries also use short-term commercial credit to participate in international trade with foreign capital.


little currency. By receiving trade credit from its partners, the borrowing country will avoid

The borrowing country must mobilize its foreign exchange reserves to pay for imports of goods, export costs or transportation costs. However, short-term trade credit naturally has a correspondingly high interest rate that the borrowing country has to bear.

The impact of foreign debt on economic and social development of countries

is very clear. However, the use of foreign debt solutions always carries the risk of leading to an unsustainable financial system and it is not uncommon for foreign debt to be too high and loosely managed, leading to financial crises and economic recessions. The impact of foreign debt on developing economies varies greatly, depending on the policy environment of these countries and the capacity of governments to manage foreign debt. However, not all governments are aware of and have the institutional capacity and ability to manage the economy as desired, especially managing foreign debt of the private economic sector. For example, many Latin American countries such as Mexico, Argentina, and Chile fell into a serious economic recession with significant setbacks in development as a result of the foreign debt crisis in the 1980s. The Asian financial crisis in the 1990s is a similar example. Due to their heavy dependence on foreign loans, many developing countries such as Thailand and Indonesia fell into a state of serious financial system imbalance, leading to economic crisis with the simultaneous bankruptcy of financial institutions and companies.


1.1.3.2.Foreign debt cycle


Borrowing countries often go through different stages in the development process, in which foreign debt is accumulated, increasing gradually in the beginning and decreasing gradually as domestic savings increase and accumulate. With an effective economic development strategy in general and a debt strategy in particular,


As a result, the debtor country gradually becomes a creditor country. Each borrowing country needs to be aware of these stages as well as the problems and potential risks in each stage in order to have appropriate debt management strategies and policies. According to the external debt cycle hypothesis of development economics, a borrowing country will go through the following debt stages:

Stage 1: Young Borrower Country. The prominent feature of this stage is the foreign trade deficit. During the period of slow development, government investment and expenditure often exceed savings and tax revenues, resulting in a permanent resource deficit in the economy. This deficit is reflected in the country's current account, in which imports are higher than exports. Meanwhile, the capital account is often positive due to the inflow of borrowed capital from abroad. Foreign debt acts as a resource to compensate for the real domestic deficit. During the young borrowing country stage, foreign debt tends to increase gradually, along with debt repayments, increasing the current account deficit. The accumulation of foreign debt reaches its peak when the country becomes a mature borrowing country.

Stage 2: The borrowing country matures. This period is characterized by a decrease in foreign trade deficit and a slight surplus as the domestic export industry achieves certain successes. The flow of foreign loans increases gradually, however, the amount of accumulated foreign debt is quite large and along with the debt, the annual debt repayment cash flow is also large.

Stage 3: Debt Repayment. In this stage, the borrowing country has more domestic savings than domestic investment plus debt repayments. The surplus of domestic resources is represented by a surplus on the current account – exports exceed imports. The borrowing country begins to repay the principal, represented by capital outflows on the capital account. At the same time, the flow of money to repay the debt decreases. The amount of foreign debt gradually decreases during this stage.


Stage 4: Young debtor country. This stage is characterized by a gradually decreasing trade surplus and then turning into a deficit; debt repayment cash flow gradually decreases and then turns into income cash flow. Borrower country turns into lender country with capital flowing out and foreign assets increasing.

Stage 5: Mature debtor country. This stage is characterized by a deficit in the foreign trade balance, which is compensated by foreign inflows. Foreign lending increases at a decreasing rate and foreign assets increase slowly.

It can be seen that in all stages of debt, at the macro level, the ratio between exports and foreign debt always plays an important role as an indicator of the debt situation of the country. If the ratio of foreign debt to exports gradually decreases, although the foreign debt ratio is high, the foreign debt is in a manageable state because increased exports allow the borrowing country to have resources to pay off its debt. On the contrary, a decreasing ratio between exports and foreign debt reflects the situation that the borrowing country will increasingly have difficulty in paying off its debt. In other words, the sustainability of foreign debt is a dynamic that depends on the relationship between the growth rate of exports and the growth rate of foreign debt. As long as foreign debt is considered sustainable, borrowing for development is considered less risky for the borrowing country.

Developing countries borrow from abroad to accelerate domestic growth without cutting back on consumption. However, borrowing is not always effective. Many studies comparing the impact of foreign borrowing across countries show that borrowing only has a positive impact on growth in countries with favorable macroeconomic policy environments and where the economy is managed effectively. In other words, borrowing can boost growth that is already there.


country's resources but cannot reverse the situation of a declining economy with a stagnant, mismanaged and corrupt government.

The context of globalization is an external factor that has a very significant influence.

to the external debt of developing countries. While capital markets have been increasingly liberalized and loans from rich industrialized countries to developing countries have increased rapidly, developed countries have closed their commodity markets to many products of poor countries. This policy has created serious obstacles for borrowing countries in generating investment efficiency, exporting products and repaying foreign debts. The struggles of developing countries

The growing global trade negotiations are all aimed at forcing developed countries to gradually remove restrictions on poor countries' exports, creating conditions for poor countries to participate more widely in the global market and thereby increase their ability to repay foreign debts.

The closed labor market policies of industrialized countries towards workers from less developed countries are another injustice that hinders developing countries from improving their external debt situation. Immigration restrictions on migrant workers from developing countries demonstrate a clear double-edged approach by industrialized countries: on the one hand, they try to force developing countries to open their capital and goods markets, but on the other hand, they erect many obstacles to hinder the globalization of labor markets.

labor, which in essence does nothing more than prevent workers from poor countries from sharing in the fruits of globalization.

In such a context, developing countries need to realistically consider the gains and losses of foreign borrowing in relation to the overall policies of lending countries in the long term in order to make the most beneficial choices and negotiations.

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