WHAT IS THE DIFFERENCE BETWEEN FOREIGN DEBT AND CURRENT ACCOUNT DEFICIT?
There are three main objectives of external stability. One, have a sustainable level of foreign debt (less than 40% of GDP). Two, have a positive balance of payments. Three, have stable exchange rate. Foreign debt refers to the liabilities that are owed to other countries and foreign companies from Australia and Australian companies. Foreign debt is in two types – direct (think foreign company buying an Australian company or setting up business in Australia). This allows a foreign company/country to have direct ownership over Australian resources. Indirect means that they have ownership but not direct control (think investing in the Australian share market). Foreign investment leads to foreign debt as we need to send profits back to these investors. This level should be less than 40% of GDP to be sustainable. In Australian most foreign debt is private debt. The Balance of Payments has two accounts – the capital and current account. The current account has a few parts to it – balance of
