What are the Sources of Public debt?

Definition of Public debt: 

Generally, public debt refers to loans raised by a government with in the country or outside the country. Every government like individual has to borrow when it expenditure exceeds it's revenue.

Sources of public debt: 

Government may rise public debt from both the internal and external sources. The effects of public debt are determined also by the sources and it's size. The sources of public debt are as follows-

Sources of Public debt

Internal sources:

(i) Individual and private organization: Individual and private organization provides loans to government with the purchase of securities like bonds and treasury bills. This source of public debt normally does not exert inflationary pressure, it is just a transfer of purchasing power from public to the government.

(ii) Financial Institution: Financial institution like- provident fund, insurance companies, mutual funds etc. the important sources of public debt. These institution normally provides loans to the government to reduce the cash-holdings to earn some safe interest. Borrow from this source is likely to inflationary as the funds would not have been spent if it was not loan to government.

(iii) Commercial banks: Commercial banks provide loan to the government out of the excess cash reserve and by credit creation. Borrowing from Commercial banks increase money supply in the economy and is likely to excess inflationary pressure in the economy.

(iv) Central Bank: The Central Bank is the lender of the last resort to the govt (Government). The Central Bank is being the monetary authority of the government is responsible to manage public debt out of its reserve funds and by credit creation. Credit creation leading to excess money supply in the economy lead to inflation.

Eternal sources:

(i) Foreign, nationals and private organization: Government may borrow from this source by issuing it's securities in the international financial market.

(ii) Donor Government: Normally the developed countries governments provide loans to the developing countries for the development projects in the form form of foreign aid.

(iii) International financial institutions: The international of financial institutions like world bank, IMF, etc. provides loans to government.

(iv) Funds from some countries and business forums: Government may borrow from the funds created by some countries and business or economic forums like Saudi, Kuwait and OPEC funds.

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