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

Philippe Beaugrand, Montfort Mlachila and Boileau Loko

No 2002/079, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; central bank; debt management; private sector; budget deficit financing; external debt; domestic debt; Central Africa; West Africa; government financing option; financing choice; public sector financing instrument; sustainability analysis; financing requirement; financing source; Government debt management; Budget planning and preparation; Debt service; Sub-Saharan Africa (search for similar items in EconPapers)
Pages: 30
Date: 2002-05-01
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Citations: View citations in EconPapers (24)

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