In April 2022, Sri Lanka defaulted on its external debt after years of unsustainable borrowing, triggering a nationwide economic crisis. Fuel shortages, power cuts, and food inflation followed, proof of how fast debt can turn from an engine of growth into a wrecking ball.

So how does a country reach that point? And if debt can destroy economies, why do almost all nations still borrow?

Here’s the truth: debt isn’t always bad. In fact, it’s how the modern world functions. Highways, hospitals, universities, and clean energy systems all exist because governments borrowed money to build them. From India and Germany to small, wealthy places like Qatar and Switzerland, no country is debt-free. Even rich nations borrow. Japan owes nearly twice the value of everything it produces, and the United States owes more than 36 trillion dollars and counting.

The world economy runs on a never ending cycle of borrowing, lending, and reinvesting. It keeps money in motion but also keeps countries on edge.

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The New Debt Dilemma

Across the world, public debt levels have reached historic highs, and economists warn that the system is becoming harder to sustain. According to the United Nations, over 50 developing countries spend more than 10% of their total revenues just on interest payments. Even more alarming, 3.3 billion people now live in countries that spend more on debt than on education or healthcare.

The strain is already visible as seen in Sri Lanka’s collapse. Economists fear this is just the beginning. A World Economic Forum survey found that 64% of economists see debt as a major threat to stability in developing economies, and nearly 40% expect more defaults in the next year. When governments spend most of their budgets on debt, they cannot invest in the future in clean energy, education, or healthcare. It traps nations in survival mode instead of progress mode.

What Is National Debt?

When a government owes money, it is called national debt, also known as public or sovereign debt. It is the total amount a nation’s central government has borrowed to keep things running. Just like you might take a loan when your income isn’t enough, governments borrow when spending exceeds tax revenue. But they don’t borrow from one source; they borrow from other countries, global institutions, and even their own citizens.

Why Not Just Print Money?

Printing money sounds like an easy fix but it destroys trust. When too much new money floods the economy, it causes hyperinflation, prices soar, savings disappear, and currencies collapse. That is what happened in Venezuela and Zimbabwe, where paper money became cheaper than toilet paper. Borrowing instead of printing keeps governments accountable. Debt comes with interest, forcing countries to prove they can repay. It creates discipline and confidence in the currency.

Why Governments Borrow

1. To Cover Budget Gaps
Taxes fund most public spending but rarely cover everything. Healthcare, defense, education, infrastructure, and welfare all cost more than tax revenue. If a government collects 3 trillion dollars but needs 4 trillion, it faces a budget deficit. Borrowing fills that gap without raising taxes or cutting essential services.

2. To Build for the Future
Borrowing lets nations invest now and pay later. Roads, airports, and green energy projects boost jobs and productivity today, while expanding the tax base tomorrow. In this sense, productive debt is an investment in long term prosperity.

3. To Handle Crises and Emergencies
Wars, pandemics, and natural disasters demand instant funding. During COVID-19, the United States borrowed about 3.8 trillion dollars, 18 percent of its GDP, to support citizens and prevent economic collapse. Debt acts like an economic airbag, cushioning the impact of shocks.

4. To Refinance Old Debt
Governments often take new loans to repay old ones, similar to refinancing a mortgage. If done carefully, this maintains stability. But when borrowing outpaces growth, interest costs can consume national budgets, leading to a debt trap.

5. To Manage the Economy
Debt is also a policy lever. By selling or buying bonds, governments can control inflation and interest rates. Selling bonds pulls money out of circulation to slow inflation; borrowing injects money to stimulate growth. Economists call this fiscal tuning.

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Who Lends to Governments

Governments borrow from three main sources.

1. Domestic Lenders
Citizens, banks, pension funds, and agencies buy government bonds because they are considered safe investments. Even governments lend to themselves. For example, the U.S. Social Security Fund holds about 7.3 trillion dollars in Treasury bonds.

2. Foreign Lenders
Other nations and global institutions also lend to stable economies. Japan and China together hold over 1.7 trillion dollars in U.S. debt. Developing countries often rely on the World Bank, the Asian Development Bank, or the IMF for loans. These come with low interest rates but strict conditions such as raising taxes or cutting subsidies, which can fuel unrest, as seen in Greece and Argentina.

3. Central Banks
Governments can borrow from their own central banks through debt monetization, where new money is created to buy government bonds. Most avoid doing this directly because it can weaken their currency. Instead, central banks operate in bond markets to manage inflation and interest rates.

Is National Debt a Bad Thing?

Not necessarily. Debt can be helpful or harmful, depending on how it is used. Borrowing for growth or crisis recovery builds resilience. Borrowing just to repay old loans or to fund corruption drains it. When investors lose confidence, they demand higher interest rates or stop lending altogether. The country’s credit rating drops, borrowing becomes expensive, and in the worst case, the nation defaults, like Sri Lanka did in 2022. There is no single safe level of debt, but economists often track the debt to GDP ratio, how much a country owes compared to how much it produces. Below 60 percent is generally considered stable, though many advanced economies exceed that.

Can a Country Ever Be Debt-Free?

Technically, yes, but in reality, almost none are. Debt helps economies grow and provides safe investment options. The closest example is Macau, a small region of China with fewer than a million people and enormous casino profits. But most countries cannot replicate that model. Eliminating debt would require huge tax hikes or spending cuts, both of which could stall growth and spark protests. Debt-free governments also could not issue bonds, which means no safe investments for pensions or insurance funds.

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Why You Should Care

Debt might sound like something that only governments and economists worry about, but it affects everyone. When countries borrow wisely, they can build schools, hospitals, and clean energy systems, create jobs, and recover faster from crises. Borrowing helps countries grow and improve life for their people. But when debt grows too large, it starts to hurt instead of help. Governments end up spending more money paying interest than improving services, taxes go up, and important projects slow down.

In many developing countries, debt payments now take priority over education, healthcare, or climate action. Economists warn that this growing debt problem is making it harder for countries to boost growth and prepare for the next global downturn. With shrinking budgets, many nations will struggle to handle big challenges like the shift to renewable energy, aging populations, and rising security needs. Debt decides what a government can afford to do — and what it has to delay — shaping the future for millions of people.