Home Economics National Debt: Meaning and Types

National Debt: Meaning and Types

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National or public debt refers to the sum total of debts owed by the government of a country both internally and externally. The debts may or may not be with interest.

national-debt

Loans or borrowings constitute some of the sources of fund or revenue to the government of a country. Government may use these two instruments; treasury bills (short-term borrowing) and government stock also referred to as development stock (long-term borrowing) in raising funds.

Types of National or Public Debts

1. Internal Debt

This is the total sum of debts owed to the people, firms and organisations within a country by the government. Internal debts are borrowed and repaid including the interests in local or domestic currency.

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2. External Debt

If the debts are obtained from foreign citizens and other countries by the government of a country, they are called external debts. External loans are obtained and repaid including the interests in foreign currency.

3. Bilateral Debt

This is government to government debt. This kind of debt involves a government obtaining loans from the government of another country.

4. Multilateral Debt

This is a loan government of a country obtains from multilateral institutions like International Monetary Fund (IMF), International Bank for Reconstruction and Development (IBRD) otherwise known as the World Bank.

5. Short-Term Debt

This is the debt that arises as a result of borrowings in order to meet immediate financial needs of the government. Short-term debt which last for a very short period of time is incurred by the government with the hope of generating revenue and repaying it within that period of time.

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6. Long-Term Debt

This is a debt that is used in financial capital projects meant for development purposes. Long-term debt lasts for a period of years within which it will be paid.

7. Reproductive Debt

This is a debt incurred in for the purpose of acquiring or building real assets such as hydro-electric projects, iron and steel industry, air and sea ports, express roads, railways etc. The purposes for which reproductive debt is incurred is the one that yields income that will be used for the repayment of its interest and its repayment which reduces its burden. This kind of debt is also called living debt.

8. Dead-Weight Debt

This is a debt incurred in the areas that are not directly productive. This type of debt is used on many occasions to finance the profligacy or ostentatious consumption of individuals, companies or government. Dead-weight debt is incurred in order to procure war materials, provision of social amenities such as housing, education, free health care etc.

Burden of National or Public Debt

The extent of the burden of national or public debt is determined by the type of debt whether external or internal, the purpose for which the debt was used and the period of repayment.

Unlike external debts, the burden of internal debt tends to be minimally felt. This is as a result of the fact that payment of interests and repayment of internal debts come from the tax revenue of which the debt holders contributed proportion of the revenue.

However, such transfer of payment or income may increase inequality in the country but there is no way the whole economy of the country will be affected. Therefore, apart from the changes of distribution of income, saddling future generations with more financial responsibilities etc, which internal debts may cause, there is really no major serious economic burden the debts will cause to the whole economy of the country.

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On the other hand, in the case of external debts, the burden is directly felt on the economy though the purpose for which such debts is used will either lessen such burden or exacerbate it. The balance of payments of a country is overburdened as a result of payment of interest and repayment of external debts to foreign countries, especially external Dead-weight debts.

Since foreign currencies are involved in external debts servicing, export surplus will have to be created and the country’s importation ability will be weakened. Also, another direct real burden of external debts is that servicing of such debts will amount to real deduction from the country’s national product. The management of external debts through the adoption of articulate monetary and fiscal policies will however reduce the burden of such debts.

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