- Public debt: Debt owed by a government to external or internal creditors
- Private debt: Debt owed by private entities such as corporations or individuals
External vs. Internal Debt
- External debt: Debt owed to foreign creditors, denominated in foreign currency
- Internal debt: Debt owed to domestic creditors, denominated in local currency
Impact of Debt
Debt Impact
- Purchasing Power: High levels of debt can reduce purchasing power for citizens and government
- Productive Activities: Debt can be used for productive or unproductive activities, affecting economic growth
- Inflation: Debt can contribute to inflationary pressures, raising the cost of goods and services
Debt Management
- Accountability: Governments must ensure accountability and transparency in managing debt
- Self-Liquidating Funds: Using these can help finance small-scale projects and repay debt
- Development Projects: Prioritizing development projects can contribute to economic growth and reduce debt burden
Burden of External Public Debt
- Economic Instability: Excessive external debt can cause economic instability, including foreign exchange reserve shortage
- Productive Sectors: Burden of debt repayment can have indirect effects on productive sectors
- Loan Purpose: Debt used for unproductive activities instead of development projects increases the burden
Circular Effect of Public Debt
- Overall Economic Growth: High levels of debt burden can negatively affect a country's overall economic growth and development
- Compounding Debt: Public debt becomes a burden that leads to more debt accumulation, creating a cycle of debt
Contention Effect on International Trade
- Financial Crisis: A country facing a financial crisis due to high debt levels can spread to other countries with similar trade partners and financial relations
- Ripple Effect: This contention effect can cause a ripple effect on international trade
Budget Constraints
- Direct & Indirect Taxes: Governments face budget constraints, requiring the use of direct and indirect taxes for debt repayment
- Public Expenditure: Debt repayment can impact public expenditure on essential services and infrastructure
Foreign Currency Outflows
- Economic Welfare: High levels of external debt can lead to negative effects on a country's economic welfare and production capacity
- Foreign Exchange Reserves: Countries with high levels of external public debt face potential implications on their foreign exchange reserves
Burden of Internal Public Debt
- Interest Payments: Internal public debt burden includes interest payments, repayment of principal, and increased burden on productive sectors
- Development Investment: High levels of internal public debt can lead to a country's inability to invest in development projects and infrastructure
Domination by Creditor Countries
- Influence: Creditor countries often use their influence to shape the terms and conditions of loans, which can lead to a country becoming overly reliant on foreign aid or facing excessive conditions
- Over-Reliance: This domination can cause over-reliance on foreign aid, which may not always align with a country's development goals
Effects on Exchange Reserves
- Foreign Currency: Countries with high levels of external public debt face potential implications on their foreign exchange reserves, as they need to return the loan in the borrowed foreign currency
- Fluctuations: This creates challenges in managing foreign exchange fluctuations, affecting economic stability
Potential Economic Inequality and Suffering
- Financial Burdens: High levels of public debt can lead to financial burdens for citizens, reduced public services, and further inequality between wealthy and poorer segments of society, exacerbating social problems
