External Finance and Foreign Debt in Central and Eastern European Countries

Abstract

External finance can provide a positive contribution to the transition process and can enhance welfare in former centrally planned economies, especially when domestic saving has not fully recovered after the contraction of the early post-communist period. However, it has been pointed out at the beginning of the transition that foreign debt could exert a strong constraint on the borrowing capacity of some Central and Eastern European countries. In this paper, we analyse the determinants of net external borrowing in ten transition economies over 1990-1995, and assess the impact of the outstanding stock of foreign liabilities on net financial inflows.

JEL Classification: F21, F32, F36