Sources of Public Debt:

Public debt is the debt which State owes to it subjects or to the nationals of other countries. Public debt arises due to borrowing by the government The government may borrow from banks, business organisations, business houses and individuals. The borrowings of the government may be within the country or from outside the country or both. The public debt is generally in the form of bonds (or treasury bills, if the loans are required for a short period),which carries with them the promises of the government to pay interests, to the holders of these bonds at stipulated rate of interests at regular intervals, or lump sum at the end, in addition to the principal which has to be repaid at the stated time. 

The borrowings of the government may be from within the country or from outside the country or both. Government debt can be categorized as internal debt, owed to lenders within the country, and external debt, owed to foreign lenders. Thus, there are two major sources of public borrowings: (i) Internal and (ii) External.

Internally, the government may borrow from citizens, commercial banks, other financial institutions in the money market and from the central banks. Normally the government of the country has a large variety of debt obligations. Therefore public debt may be defined in several different ways covering their attractive combinations and to suit the purpose of the definitions. Thus, at one extreme it may include all financial liabilities of a government (including its currency) while at the other extreme, it may include only a few of them. A clear-cut stand has also to be taken regarding inter-governmental obligation like loans from the central government to the states.

Similarly, a decision is required as to whether the central bank of the country is to be considered a part of the government or not for the purpose of estimating the volume and composition of public debt.

It would be helpful if we have a brief idea of the type of obligations, which the government of a country usually incurs.

Firstly - there is the currency itself generally, however the government creates a part of the currency; the rest is created by the central bank of the country. Therefore, the entire currency circulating in the market can be a part of public debt only if the central bank is classified as a part of the government sector. In any case, currency obligation normally remains dormant or inactive and the government does not 'pay them off' - at the most one set of currency is replaced by another set and that is all.

Secondly - Other set of obligations of government constitutes it short-term debt; these obligations are normally of maturity of less than one year at the time of issue and consist of items like the treasury bills.

Thirdly - some obligations do not have any specific maturity but may be repayable subject to various terms and conditions. They are referred to as floating debt.

Fourth category of government obligations consists of the permanent or funded debt such loans have as maturity of more than one year at the time of issue. In practice their maturity is usually between three and thirty years. Some of them may even be non-terminable (or perpetuities) so that the government is only to pay the interest on such debt without ever repaying the principal amount.

Fifthly - obligations owned to foreigner's government, institutions, firms and individuals are called external loans. They may have a variety of terms and conditions. Thus, depending upon the purpose and contact, institutional arrangements and so on, different people could define public debt differently. At one extreme all financial obligations of the government including the demand debt (that is currency obligations) are sought to be included in the definition of public debt, while in other cases only some of the above-mentioned categories of obligations are considered. In general, however, the currency obligations of the government are usually excluded from the definition of the public debt and only the floating, funded, external and other obligations are included in it.

External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the IMF and World Bank. IMF defines it as "Gross external debt, at any given time, is the outstanding amount of those actual current, and not contingent, liabilities that require payment(s) of principal and/or interest by the debtor at some point(s) in the future and that are owed to nonresidents by residents of an economy."