Difference between External Debt and Internal Debt

Last Updated : 4 Sep, 2023

As people and businesses sometimes need to borrow money to pay their expenses, the same goes for the government of any country. The government sometimes may need to borrow money from either inside the country or outside the country. The borrowed money is known as Debt, and the modes of borrowing money can be classified into two categories - External Debt and Internal Debt. External Debt can be defined as money borrowed from outside the country, and Internal Debt can be defined as money borrowed from inside the country.

What is External Debt?

External debt can be defined as the debt borrowed by the government from outside the country. Sources for external debts can include foreign governments, International Monetary Funds (IMF), Foreign Direct Investments (FDI), Foreign Portfolio Investments (FPI), etc. Government is forced to borrow funds from external sources when the internal sources do not have adequate funds to support the operations of the government. External debts are voluntary in nature.

Key Takeaways from External Debts:

External debts are the debts that the government needs to borrow from external sources to fund its operations.
Lack of availability of funds from internal sources forces the government to borrow funds from external sources.
External debts are more complex as they use the concept of foreign currency and the involvement of people outside the country.

What is Internal Debt?

Internal debt can be defined as money borrowed by the government from inside the country. Sources for internal debts can include citizens, the country's banks, the country's financial institutions, business houses, etc. Internal debts are voluntary and/or compulsory in nature. Internal debts are mostly used by the government for the betterment of education and health within the country.

Key Takeaways from Internal Debts:

Internal debts are the debts the government needs to borrow from internal sources to fund its operations.
Internal debts are less complex as it does not undertake the concept of foreign currency.

Difference between External Debt and Internal Debt

Basis	External Debt	Internal Debt
Meaning	External debt can be defined as the debt borrowed by the government from outside the country.	Internal debt can be defined as the debt borrowed by the government from inside the country
Sources	Foreign government, IMF, Foreign banks, or institutions, etc.	Citizens, the country's banks, the country's financial institutions, business houses, etc.
Types	Public and Publicly Gauranteed Debts Loan offered by IMF Non-Guranteed Private Sector External Debts Central Bank Deposits	Bonds Treasury Notes Treasury Bills
Nature	External debts are voluntary.	Internal debts can either be voluntary or compulsory.
Complexity	External debts are more complex for government.	Internal debts are less complex for government.
Currency	External debts use the concept of foreign currency.	Internal debts undertake the concept of domestic currency only.
Interest Rates	External debts generally consist of low-interest rates.	Internal debts consist of higher interest rates.
Uses	Boosting and recovering economy and/or additional expenses.	Betterment of education, health, and other necessary facilities.