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What Is Public Debt?

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Illustration showing public debt

Key Takeaways

  • Public debt is the amount of money owed by a government to its creditors, including individuals, corporations, and other governments.
  • Public debt is one way for a government to get extra funds for economic development.
  • Public debt can lead to severe economic problems when not properly managed.
  • Nigeria has a public debt of about N44.06 trillion ($101.91 billion) as at the third quarter of 2022.

Jump to a section

  1. What is Public Debt?
  2. Public Debt in Nigeria
  3. Sources of Public Debt
  4. Types of Public Debt
  5. Advantages and Disadvantages of Public Debt

What is Public Debt?

Public debt is the total amount of money a government owes. It is the total sum of debts and liabilities the government has incurred from people, organizations, or other countries. The amount of public debt a government owes indicates how much it can handle future obligations.

Public Debt in Nigeria

The need to meet up with financing the rising expenditure by the government has led to a public debt of about N44.06 trillion ($101.91 billion) in the third quarter of 2022, according to the National Bureau of Statistics.

This implies that Nigeria like some other countries is in public debt. While for some countries, public debt has helped in aiding economic growth, the same cannot be said for Nigeria. Public debt in Nigeria has led to restrictions on economic growth and development.

Sources of Public Debt

Public debt results from accumulation. This implies that the government borrows from many sources which can be local or international.

  • Individuals 
  • Organizations, 
  • Banks
  • Other countries. 

Nigeria, for instance, has collected loans from foreign countries like China (owing about $4 billion) and international organizations such as the IMF, and World Bank.

Types of Public Debt

  1. Internal public debt: Internal public debt, as the name implies, is incurred locally within the country from individuals, organizations, or banks. For instance, Nigeria is owing the Central Bank of Nigeria (CBN) about N23 Trillion.
  1. External public debt: External public debt is incurred from international sources outside the country.

Advantages and Disadvantages of Public Debt

Advantages

Though it may seem bad but public debt actually has some advantages.

  1. Extra funds for the country: Public debt is one of the ways for a country to get extra funds for economic development. This way, a country can plan and undergo bigger projects that can aid its development.
  1. Access to Investors: The concept of public debt gives room for investors to invest in countries because it involves the government thereby giving them a sense of security.
  1. Economic Growth: When the money is used correctly, public debt can improve the standard of living in a country which will further lead to economic stability and growth.

Disadvantages

Despite having some advantages, public debt can also have negative effects on a country.

  1. Economic Recession: Public debt can cause an economic recession when not properly managed. A country in huge debt will barely have enough to meet up with the rising demands of governance. 
  1. Loss of Credibility: When a government cannot pay its debt, it begins to lose trust and credibility and will have a hard time collecting loans subsequently either locally or internationally.
  1. Loss of Investors: A huge public debt can deter investors from investing in the country. It also amounts to higher interest rates for subsequent loans and transactions.
  1. Loss of Assets: When a country cannot repay its debt, it can lead to the loss of government assets locally and internationally.

How can a government repay public debt?

The government should pay public debt according to the terms of agreement with the lenders. A major way for them to repay public debt is through taxes. 

Is public debt a bad thing?

While public debt has some pros, it can also affect the country adversely when it’s not managed properly, becomes too high, or is difficult to repay. 

Can public debt be avoided?

If a country has enough resources to generate revenue that’s needed to develop itself, public debt can be avoided. 

What happens when a government cannot pay its debt?

When a government cannot pay its debt, it can lead to:

  • Exclusion from further credit
  • Reduced/lack of investors
  • Forfeiture of international properties

Bottom Line

A country needs to do what it can to develop itself but it should not be at the expense of its economic growth and stability. Public debt, especially in Nigeria, has negatively impacted economic growth. Hopefully, with a good debt management plan, Nigeria will be able to come out of debt and build a strong economy.

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