Impact of External Public Debt:

External borrowing in the economic development of developing countries have made possible the import of high priority goods or (capital goods) or goods to be used to create and build capacity for accelerating the rate of growth of the economy. It effects both consumption and investment favourably.  Again, imports of foreign goods raises the total available supply of commodities so also the national income and ultimately helps in the betterment of people's standard of living. Further, these imports on the one hand, reduce the demand of similar indigenous goods in the present and on the other their investment would increase output in future. Thus these imports are anti-inflationary, though; this effect may be felt more in future. Again, if the goods and services are imported by the Government and sold to the public then it reduces currency circulation in the economy. Hence, it enables the state to increase the extent of deficit financing which can further be used for accelerating the growth and development of the economy.

Foreign capital supplements the national resources and makes possible a higher rate of investment than otherwise would be possible. If this higher investment raises the rate of growth of the economy, the increasing external liabilities need not cause any concern. Increase of external indebtedness and debt servicing liabilities even when large, do not necessarily create difficulties for borrowers The increases of debt servicing payments have to be measured against the development which has occurred in the borrower's economy. The basic condition of debt servicing capacity is the continuing increase in per capita production. It means the capacity to pay debt- servicing charges depends upon the continuing increase in per capita production.