Unemployment

Q1. In the theory of public debt management, reference is made to debt financing, critically discuss debt financing and further establish why debt financing may be problematic in the long term.

ANS

Government or Public debt is the debt owed by a central government. It could either be categorised as internal debt (obtained locally from banks, businesses or firms of a country) or external debt obtained from donors through loans and grants. The various instruments of internal debt include market loans, bonds and treasury bills. Internal debt is repaid only in domestic currency. It implies a redistribution of income and wealth within the country and, therefore, has little or no direct money burdens .External debt is usually raised in the form of loans and grants and is repaid in foreign currency. Government debt includes all government liabilities, future pension payments, payments for goods and services the government has contracted but not yet paid for.

Public debt is one method of financing government operations if revenue collected through taxes and other sources is not adequate to cover. Governments usually borrow by issuing securities, government bonds and bills or by borrowing from international organisations such as the World Bank or International Institutions like the IMF.

The debt could be short term i.e. for duration of one year or less or it could be long term; taking duration of ten years or longer before repayments are due. Medium term debts fall between long and short term debts.

Debt can be classified as productive or unproductive. Productive debt is raised for productive purposes and is used to add to the productive capacity of the economy e.g. construction of railways; irrigation projects. It adds to the productive capacity of the borrowing government’s economy and also provides a continuous flow of income to the government. Eventually productive loans become self-liquidating and do not cause a lot of net burden on the community. Unproductive...