This thesis consists of three essays related to balance of payment or the externalsector issues. These three essays include an analysis of a country’s current accountand fiscal sustainability position, the role of external debt in economic growth, andthe reserves and debt management.The main intention of the first essay (comprising Chapter 2) is to analyze thesustainability of the current account and fiscal position for high, middle and lowincome countries. This empirical analysis makes use of various panel unit root andcointegration tests, as well as fixed and random effects estimators. The resultsindicate that there is evidence of current account sustainability only for high-incomecountries indicating that the intertemporal budget constraints are being maintained.In contrast, the middle-income and low-income countries are found to be in anunsustainable current account position. In addition, this paper also finds that allgroups of countries have a slow phase of convergence towards equilibrium whichsuggests that all countries are vulnerable to any sudden shock or stop. Besides that,there is evidence of sustainability on fiscal policy for the high and middle groups ofcountries.Chapter 3 investigates the issue of whether external debt contributes to expansion ineconomic growth. This chapter attempts to answer this question by analyzing 31developing countries over a period of 36 years (1970-2005). The results reveal thatthe accumulation of external debt is associated with a slowdown in the economies ofthe developing countries. Besides this, we find evidence that debt service ratio doesnot crowd out the investment rate in developing countries. In other words, eventhough the external debt is negatively associated with economic growth, countriesare found to be safe from being in the debt overhang hypothesis. However, thenegative effect could be interpreted as the main symptom of a country before itbecomes involved in the debt overhang problem. In addition, fiscal balance,iiigovernment revenue, openness, and domestic credits are found to have a positiveeffect on investment and, to a lesser extent, economic growth. Furthermore, there isevidence to support the existence of spatial dependence in the growth model,suggesting the existence of positive spillover effect of growth among theneighbouring countries. This suggests that countries are found to have positivecorrelation with their neighbours’ economic growth.The main analytical contribution of the final chapter, which is chapter 4, is to analyzethe cost of jointly holding reserves and sovereign debt decision. By analyzing theimpact of holding reserves and sovereign debt on sovereign credit ratings, thisprovides the evidence of the costs of holding reserves and debt with respect to creditrisk. As predicted by theory, the international reserves-holding is associated withgood sovereign credit ratings as well as lower credit risk while the sovereign debtholdingleads to a lower sovereign credit rating and high credit risk. This implies thatreducing (repaying) their sovereign debts is the best decision for countries to keepand maintain a good credit risk reputation. Meanwhile, the benefit of holdingreserves has crowded out the cost of holding short-term debt, resulting in a netpositive effect on sovereign ratings. This could imply that a country should holdmore reserves with regard to the level of short-term debt which is a highly vulnerableliability for a country. The results reveal that the adequate level of internationalreserves in month of imports is slightly higher than with the conventional rule whichat 3 month of imports.