PUBLIC DEBT
General objectives
By the end of the lesson the learner should be able to explain the economics of public finance
Specific objectives
By The End Of The Lesson The Learner Should Be Able To
a) Explain The Meaning Of Public Debt
b) Explain The Sources Of Public Borrowings
c) Classify Public Debt
d) Explain The Burden Of Public Debt
e) Explain The Effect Of Public Debt Burden On Future Generations
f) Explain The Techniques Of Debt Management
g) Explain The Role Of Public Debt On Economic development
Introduction
National debts are debts which a state owes to its own subjects or to the nationals of other
countries. Public debt is a source of government revenue. In the case of public debt the
government has to pay interests and repay the principal to the public.
NB Nothing is required to be paid by the government in respect to all other sources of revenue.
Sources
There are two major sources of public borrowings namely internal and external.
Internal sources:
Internally the government borrows from individuals, corporations, non-banking financial
institutions, commercial banks or from the central bank. These lend to the government through
buying of treasury bills or government bonds. The treasury bills and bonds sold by the
government are relatively safe. May cause crowding out effect---
External sources:
Externally, the government borrows in the form of foreign capital which can enter a country as
private capital and/or public capital. Private foreign capital may take the form of direct or
, indirect investments in the borrowing country. Public foreign capital may consist of bilateral
hard loans e.g. giving of loans by the British government in Sterling Pounds to Kenyan
government, bilateral soft loans and multilateral loans (e.g loans from IMF, World Bank, UNDP)
and Intergovernmental grants.
Classification/ Types of public debt
Public debts are of various kinds and include:
a) Voluntary debt and compulsory debt.
Voluntary Debt is that debt which is taken by the government without any force or
coercion. People lend it to the government voluntarily. Actually all public debts are
voluntarily. However, sometimes the government compels the people to buy
governments bonds. e.g. incase of a war or a national emergency. These are the
compulsory debts.
b) Funded debts and unfunded debts
Funded debt is a long term debt for a definite period. The interest rate to be paid, with
terms and conditions of repayment are clearly stated in the debt instrument
(certificate). In order to repay the debt, a debt fund is created in which some money is
deposited every year by the government. The debt is repaid out of this fund on
maturity. Unfunded debt is for a short period of less than a year. The government does
not create any separate fund to repay the debt. Such a debt is repaid out of its current
receipts often by floating additional bonds in the market. Thus it is also called a floating
debt.
c) Productive debt and unproductive debt.
Productive/ reproductive loans are debts/ which are fully covered by assets of equal or
greater value and the source of the interest is the income from the ownership of these,
such as railways, oil pipeline e.t.c. Thus a debt is productive when its amount is spent to
finance a project which in long run brings revenue to the government, out of which
interest is paid on the debt. Unproductive debt does not increase the productive
capacity of the economy because it is not backed by any existing assets e.g. loans taken
General objectives
By the end of the lesson the learner should be able to explain the economics of public finance
Specific objectives
By The End Of The Lesson The Learner Should Be Able To
a) Explain The Meaning Of Public Debt
b) Explain The Sources Of Public Borrowings
c) Classify Public Debt
d) Explain The Burden Of Public Debt
e) Explain The Effect Of Public Debt Burden On Future Generations
f) Explain The Techniques Of Debt Management
g) Explain The Role Of Public Debt On Economic development
Introduction
National debts are debts which a state owes to its own subjects or to the nationals of other
countries. Public debt is a source of government revenue. In the case of public debt the
government has to pay interests and repay the principal to the public.
NB Nothing is required to be paid by the government in respect to all other sources of revenue.
Sources
There are two major sources of public borrowings namely internal and external.
Internal sources:
Internally the government borrows from individuals, corporations, non-banking financial
institutions, commercial banks or from the central bank. These lend to the government through
buying of treasury bills or government bonds. The treasury bills and bonds sold by the
government are relatively safe. May cause crowding out effect---
External sources:
Externally, the government borrows in the form of foreign capital which can enter a country as
private capital and/or public capital. Private foreign capital may take the form of direct or
, indirect investments in the borrowing country. Public foreign capital may consist of bilateral
hard loans e.g. giving of loans by the British government in Sterling Pounds to Kenyan
government, bilateral soft loans and multilateral loans (e.g loans from IMF, World Bank, UNDP)
and Intergovernmental grants.
Classification/ Types of public debt
Public debts are of various kinds and include:
a) Voluntary debt and compulsory debt.
Voluntary Debt is that debt which is taken by the government without any force or
coercion. People lend it to the government voluntarily. Actually all public debts are
voluntarily. However, sometimes the government compels the people to buy
governments bonds. e.g. incase of a war or a national emergency. These are the
compulsory debts.
b) Funded debts and unfunded debts
Funded debt is a long term debt for a definite period. The interest rate to be paid, with
terms and conditions of repayment are clearly stated in the debt instrument
(certificate). In order to repay the debt, a debt fund is created in which some money is
deposited every year by the government. The debt is repaid out of this fund on
maturity. Unfunded debt is for a short period of less than a year. The government does
not create any separate fund to repay the debt. Such a debt is repaid out of its current
receipts often by floating additional bonds in the market. Thus it is also called a floating
debt.
c) Productive debt and unproductive debt.
Productive/ reproductive loans are debts/ which are fully covered by assets of equal or
greater value and the source of the interest is the income from the ownership of these,
such as railways, oil pipeline e.t.c. Thus a debt is productive when its amount is spent to
finance a project which in long run brings revenue to the government, out of which
interest is paid on the debt. Unproductive debt does not increase the productive
capacity of the economy because it is not backed by any existing assets e.g. loans taken
