Saturday, 7 February 2015

Write a short note on DOMESTIC DEBT

Internal debt. Internal also called domestic debt is the borrowing of the central government from domestic financial resources. The government of Pakistan is raising domestic debt for financing development expenditure in the country. Domestic and which is borrowed from within the country is payable in rupees. Domestic debt is a charge on the budget. The root cause of borrowing from within is that the domestic rate of saving is very low (average 10%) in addition to this government is facing fiscal and current account deficits over the year which can be covered either borrowing from domestic sources or foreign sources or both.

Domestic debt of the government was RS7. 206 billion by end of march 2012. it is 34.9% of GDP the internal debt consist of :

permanent debt ( medium and long term )
floating debt ( short term )
unfunded debt ( medium and long term)

The debt which may be domestic or foreign or both are a burden on the economy the problems or public debt in brief are.

the volume of public debt increase as the year pass. It threatens the country’s ability to repay.
The raising of loans both domestic and foreign are full of uncertainties. Therefore, proper planning for development cannot be carried out.
The debt servicing burden increase with the passage of time. The country therefore has no other alternative but to borrow for the payment of of principle amount and interest to the lending agencies.
The debt overhang depresses growth by increasing investors uncertainty.
The debt burden discourages efforts on the part of the government to carry out bold structural and fiscal reforms for economic growth.
If there is unwise use of borrowed resources. It raises real cost of borrowing.
The borrowed money reduces the ability of the government to invest in important development transfer program such as health, education, planning, population.
Heavy reliance on external resources create debt servicing problems. Net transfer of loans declines with higher debt servicing.


There is a saying that once you are in debt, you are always in debt. The retirement of public debt thus needs strenuous efforts on the part of the government, briefly.

the provisions of the fiscal responsibility. Act, 2005 should be strictly followed.
The gap in the current deficit should be narrowed to the minimum rather efforts should be made to make it positive for reducing the public debt.
Efforts should be made to maintain stability in exchange rate.
Money should be borrowed only for essential development purposes and that too at low rate of interest.
The government should follow prudent fiscal and monetary policies for reducing the fiscal deficit and containing inflation within limits.
Short term loans may be taken at low rate of interest to repay the expensive loans.
Writing off loans from donor agencies is another option for reducing debt burden .

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