(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 cou...

Answer Details

(a) Public debt is the total amount of money owed by a government to its citizens, institutions and to foreign countries or international organisations. It is made up of internal debt (owed within the country) and external debt (owed abroad).

(b) Three reasons why countries borrow:

1. To finance budget deficits when government expenditure exceeds its revenue.
2. To finance capital (development) projects such as roads, electricity, schools and hospitals.
3. To meet emergencies such as war, natural disasters or economic crises.

(Other valid reasons: to service or repay existing debts, and to correct a balance of payments deficit.)

(c) Three effects of a huge national debt:

1. Heavy debt-servicing burden. Large sums are spent yearly on interest and repayment, leaving less money for development.
2. Increased taxation. Government may raise taxes to service the debt, reducing citizens' disposable income.
3. Reduced investment and slower growth, as scarce funds are diverted to repayment and external debt drains foreign exchange, weakening the currency.

(Other valid effects: loss of economic sovereignty where lenders impose conditions, and inflationary pressure if the debt is financed by printing money.)