IMF Working Papers

The Choice Between External and Domestic Debt in Financing Budget Deficits: The Case of Central and West African Countries

Author/Editor:

Philippe Beaugrand ; Montfort Mlachila ; Boileau Loko

Publication Date:

May 1, 2002

Electronic Access:

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Summary:

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.

Series:

Working Paper No. 2002/079

Subject:

Budget planning and preparation Debt service Domestic debt External debt Government debt management Public debt Public financial management (PFM)