What Is Internal Debt?

Malcolm Tatum

Internal debt is a class of national debt that has to do with the money owed by the government to lenders based in that same country. The debt encompasses any obligation that is taken on by any agency of the national government, including funds that are borrowed in lieu of printing additional currency. While many nations carry at least some internal debt, there is usually some effort to balance this portion of the overall country debt with obligations that are owed to lenders outside the nation.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

Along with internal debt, countries are also likely to carry at least some external debt. This form of financial obligation encompasses any and all funds borrowed from lenders that are based outside the borders of the country. Debt of this type may be assumed in order to stabilize the economy within a nation, with the effort sometimes helping to protect the value of that nation’s currency on the world market. Both internal and external debt may be taken on as a means of dealing with some sort of emerging economic crisis, such as rapidly growing inflation or a period of recession.

Managing both external and internal debt is something that is important to any nation. Typically, the idea is to retire certain debts as soon as possible, often before the actual settlement date for the obligation arrives. By structuring a viable debt management plan, governments can control the total amount of debt as well as retire certain obligations even as new debts are created. When managed properly, the turnaround on debt is such that the total national debt decreases over time without creating any type of hardship for the internal economy or any of its citizens.

There are benefits to utilizing internal debt versus simply printing more currency for the government to use. Taking into consideration some of the basics of macroeconomics, going with this strategy can often allow the government to at least partially avoid the increase in inflation that is more likely to occur when more money is printed and released into circulation. In addition, the internal debt incurred does not necessarily have to be used for the purchase of goods and services. One strategy is to borrow the money from private lenders as a means of creating securities that can in turn be purchased with the potential of a certain level of returns to investors. The government is then able to generate funds from the purchases and over time retire the debt while using this process to allow investors to stimulate the economy.

While there are positive aspects of carrying a certain amount of internal debt, nations tend to monitor the activity closely. Should the debt increase beyond a certain point, steps are usually taken to restore more of a balance between external and internal debt, usually by settling obligations and reducing the overall country debt. Doing so ultimately helps to keep the economy stable while also protecting the value of the nation’s currency on the open market.

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