When a government’s total expenditure exceeds its collected tax and non-tax revenues within a financial year, it runs a fiscal deficit. This deficit must be funded by borrowing, creating public debt.
Types of Public Debt
  • Domestic Debt: Money borrowed from lenders inside the country’s borders, such as commercial banks, institutional investors, and citizens. It is raised by issuing short-term Treasury Bills (T-Bills) and long-term Treasury Bonds (T-Bonds).
  • External (Foreign) Debt: Money borrowed from international lenders outside the country. This includes multilateral loans from organizations like the World Bank or IMF, bilateral loans from foreign governments, or commercial loans raised by selling Eurobonds on international capital markets.

Debt Sustainability Metrics
To protect the economy from default or balance of payments crises, debt levels are monitored using key financial indicators:
\(\text{Debt-to-GDP\ Ratio}=\frac{\text{Total\ Sovereign\ Debt}}{\text{Gross\ Domestic\ Product\ (GDP)}}\times 100\)
\(\text{Debt\ Service-to-Revenue\ Ratio}=\frac{\text{Annual\ Principal\ +\ Interest\ Payments}}{\text{Total\ Annual\ Tax\ Revenues}}\times 100\)
A high debt service-to-revenue ratio indicates that a large portion of tax collection is diverted to paying off past debts, crowding out vital public services like education, healthcare, and infrastructure.
 
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