(a) What is public debt?
(b) Outline any three reasons why countries borrow.
(c) Highlight any three effects of a huge national debt on the economy of a country.
Explanation
(a) Public debt is the total amount owed by a country which is made up of internal and external debts.
(b)(i) To finance emergencies like flood, earthquakes etc.
(ii) To finance wars.
(iii) To service loans.
(iv) To finance huge capital projects.
(v) To finance balance of payments deficit.
(vi) To support a country’s budget.
(c)(i) A large external debt can make a country susceptible to the whims and caprices of external creditors.
(ii) If a large internal debt is sustained by high rate of interest, it will reduce private investment that is needed to accelerate growth and development.
(iii) A large domestic debt will influence the distribution of income in a country
(iv) Reduced availability of foreign exchange.
(v) The servicing of an external debt will involve an outflow of resources which can otherwise be used for economic development.
(vi) Servicing of debt will limit the government’s ability to provide social capital.