Debt Trap: When external debt of a country is more than its interest obligation

Introduction:
When a country's external debt becomes higher than its interest obligations, it falls into a debt trap. This situation can lead to severe economic consequences and make it challenging for the country to repay its debt. Let's understand the concept in detail.

1. External Debt:
External debt refers to the total amount of money that a country owes to foreign creditors. It includes both public and private debt and is typically denominated in a foreign currency, such as the US dollar.

2. Interest Obligation:
Interest obligation is the amount of interest that a country has to pay on its external debt. It is a regular payment that countries make to service their debt and is usually expressed as a percentage of the outstanding debt.

3. Debt Trap:
A debt trap occurs when a country's external debt surpasses its interest obligation. This means that the country is accumulating more debt than it can afford to repay, leading to a vicious cycle of borrowing and increasing debt burden.

4. Consequences of a Debt Trap:
When a country falls into a debt trap, it faces several challenges and negative consequences, including:

- Financial Instability: Excessive debt can lead to financial instability, as the country struggles to make interest payments and risks defaulting on its debt obligations.

- Economic Slowdown: High levels of debt can hamper economic growth and development. The country may have to divert a significant portion of its resources towards debt servicing, leaving fewer funds for investment and infrastructure development.

- Reduced Investor Confidence: A debt trap can erode investor confidence in the country's economy. This can lead to capital flight, declining foreign direct investment, and a decrease in credit ratings, making it even more challenging for the country to borrow at favorable interest rates.

- Dependency on Creditors: When a country is trapped in debt, it becomes increasingly dependent on foreign creditors for financial assistance. This can compromise the country's sovereignty and limit its policy options.

- Poverty and Social Issues: The burden of debt can result in reduced government spending on social welfare programs, leading to increased poverty and inequality.

Conclusion:
When a country's external debt exceeds its interest obligation, it falls into a debt trap. This situation has severe economic consequences, including financial instability, reduced investor confidence, and increased dependency on creditors. It is crucial for countries to manage their debt levels prudently and implement sound economic policies to avoid the debt trap and ensure sustainable economic growth.