External Debt in Emerging Markets: A Double-Edged Sword
- Editor
- Oct 3
- 5 min read
by KarNivesh | 03 October, 2025
External debt in emerging markets is one of the most important and yet misunderstood aspects of today’s global economy. On the one hand, it provides developing countries with the money needed to build infrastructure, grow industries, and improve people’s lives. On the other hand, it can create serious risks that sometimes push entire economies into crisis. This is why external debt is often called a double-edged sword – it can support growth, but it can also cut deep if not managed wisely.
The Growing Global Debt Picture
Over the past few decades, external debt around the world has grown dramatically. By 2024, total external debt globally had reached about ₹82.8 lakh crore (₹82,800,000 crore), equal to $98.58 trillion. Developing countries have seen an even faster rise – in just 20 years, their external debt has quadrupled, reaching ₹9.58 lakh crore ($11.4 trillion) in 2023. This equals almost all of their export earnings.
Clearly, foreign borrowing has become a central part of how developing nations fund growth. But as the numbers rise, so do the risks.
What Is External Debt?
External debt is simply the money a country owes to foreign lenders. It works like a personal loan – just as you borrow from a bank to buy a house and must repay with interest, countries borrow from foreign governments, banks, or international organizations.
Emerging markets – countries that are developing but not yet fully advanced like the U.S. or Germany – rely on such loans because they often don’t have enough savings at home to fund their growth. Borrowing from outside helps them build roads, schools, industries, and digital infrastructure.
An important trend is that today most of this debt is not taken by governments but by companies and households. In fact, over 60% of emerging market debt comes from the private sector, while governments borrow less than a quarter. This shows how connected these economies have become with global markets.
The Bright Side of External Debt
1. Access to Capital
The biggest benefit of external debt is that it gives countries access to money they don’t have locally. For example, India’s external debt stands at about ₹62.7 lakh crore ($747.2 billion), which is only 18.9% of its GDP. This borrowing has allowed India to build highways, ports, and telecom networks that power its rapid growth.
2. Bridging the Savings Gap
Many developing countries simply do not save enough money at home to meet their investment needs. Borrowing from abroad allows them to keep building without waiting for domestic savings to catch up. Studies show countries with more access to foreign capital grow faster than those without it.
3. Technology and Expertise Transfer
Foreign loans often bring more than money – they come with modern technology, global practices, and expertise. Industries like telecom, manufacturing, and financial services in emerging economies have advanced more quickly because of the know-how that comes with foreign borrowing.
4. Economic Diversification
External debt also helps countries shift away from being dependent on raw materials or agriculture. Brazil, for example, used foreign borrowing of around ₹51.0 lakh crore ($607.1 billion) to strengthen its manufacturing and services industries, making its economy more balanced and less vulnerable to commodity price swings.
The Dark Side of External Debt
While the benefits are clear, the risks can be severe if borrowing is not handled carefully.
1. Currency Risk
Most external debt is borrowed in U.S. dollars. This means if a country’s currency weakens against the dollar, its debt burden in local terms becomes much heavier. For instance, if Turkey borrowed $1 billion when its currency traded at 5 lira per dollar, it owed 5 billion lira. But if the lira later fell to 10 per dollar, that same loan doubled to 10 billion lira in local terms.
This is a hidden trap that has caused repeated crises in emerging markets. Turkey’s 2018 crisis is a major example.
2. Sudden Stops and Capital Flight
Foreign money can come in quickly but also leave just as fast. When global conditions worsen or investors lose confidence, funds can vanish overnight. This happened during the COVID-19 pandemic, when capital left many emerging markets in large amounts.
3. Debt Sustainability
At some point, paying back debt can consume too much of a country’s resources. In 2023, developing countries paid ₹71.2 lakh crore ($847 billion) in interest – a 26% jump from just two years earlier. In some nations, interest payments now eat up nearly 40% of their export earnings.
4. Pro-Cyclicality
Debt tends to rise in good times, when it’s easiest to borrow, but vanish in bad times when countries need it most. This makes crises worse and forces governments into painful austerity measures.
Learning from Argentina and Turkey
History provides clear lessons about both the dangers and opportunities of external debt.
Argentina defaulted on ₹8.4 lakh crore ($100 billion) in 2001 – the largest default ever at the time. The crisis brought unemployment, poverty, and years of stagnation. Yet, restructuring allowed Argentina to later recover, showing that even severe crises can be managed.
Turkey, with debt of ₹42.0 lakh crore ($499.8 billion), has grown quickly using foreign borrowing but continues to face risks due to its reliance on dollar-denominated loans. Its 2018 currency crisis showed how fragile external borrowing can be if mismatched with local conditions.
Current Situation in Emerging Markets
Emerging markets today are in a better position than in the past, but challenges remain.
Debt-to-GDP ratios: At about 69.4%, they are lower than developed economies’ 126.5%.
Shift to local currency borrowing: Many countries now issue bonds in their own currencies, reducing currency risk.
Rising interest costs: Despite lower debt ratios, interest payments have surged to ₹34.1 lakh crore ($406 billion) in 2023 due to higher global rates.
Institutional improvements: Stronger central banks, inflation targeting, and fiscal rules have improved credibility.
Managing the Double-Edged Sword
To use external debt wisely, countries need a balanced approach:
Borrow in local currency as much as possible.
Build foreign exchange reserves to cushion against sudden stops.
Strengthen institutions like central banks and adopt transparent policies.
Diversify financing sources, including domestic markets and foreign direct investment.
Maintain macroeconomic stability with sound fiscal and monetary policies.
Looking Ahead
The future of external debt will be shaped by new challenges and opportunities:
Technology like blockchain and digital currencies can make debt management more transparent.
Climate finance will become crucial as countries borrow to fund green projects.
China’s rise as a major lender is changing global financial structures.
Debt transparency and governance will determine how cheaply and easily countries can borrow.
Conclusion
External debt in emerging markets is both a blessing and a risk. It can power growth, modernization, and better living standards when managed well. But mismanagement can lead to devastating crises.
The success stories of India and Brazil show that external borrowing can be used responsibly to fuel development. At the same time, Argentina and Turkey remind us that over-reliance and poor management can bring sharp setbacks.
The future will depend on whether emerging markets can strike the right balance – using external debt as a tool for growth while guarding against its dangers. Those that succeed will thrive in the global economy. Those that fail may once again face the sharp edge of this double-edged sword.
Comments