Introduction:

Public debt refers to the total amount of money owed by the government to creditors, both domestic and foreign. It is the accumulation of past borrowing by the government through issuing bonds, bills, and other securities to finance its expenditures when its revenue falls short of its spending. Governments often borrow money to finance infrastructure projects, social programs, defense, and other public services. The methods of redemption of public debt is normally follows by central bank.

Redemption means repayment of a loan, thus in reference on public debt means repayment of the public Debt. Normally the government needs to repay the loan that it takes from the general public or from international institution and for this purpose it uses various methods. They are as follows.

Methods of Redemption:

1. Budgetary surplus: Sometimes the government is able to generate surplus in the budget and it can utilize these surplus to repay the debt. but  this is rare phenomenon as modern Government follow a deficit budget policy more over if a surplus is generated it is insignificant and cannot be used to reduce the burden of public debt.
2. Purchase of Government bonds: The government may purchase its own bonds and security from the market. This results in automatic liquidation of the debt liability of the government.
3. Refunding: It is the process by which the government raises new bonds to pay of the maturity bond. Simply stated, it means that the government takes a fresh loan to repay an older one, in this way the money burden of the public debt is not liquidated but is postponed to some future date.
4. Debt conversion: This method is used to reduce the burden of the debt. The process of conversion consists of converting a higher interest debt into a lower interested debt. The government may have borrowed during a time when the rate of interest was high but if the general rate of interest in the market falls, then the government may convert old High interest loan into a new low interest loan. This reduces the debt burden of the government but is possible only when the government enjoy good credit.
5. Terminal annuities: Under this method the government pays its debt in equal annual installment, in which includes interest and principle amount this annual payments are called annuities. This method reduces the burden of debt every year and by the time of maturity of the debt it is already fully paid off.
6. Sinking fund: Sometimes the government creates separate fund known as sinking fund. For the purpose of repaying  its debt .The government credit certain amount of its revenue every year for the repayment of outstanding. The sum which is set a side is calculated that over a certain period, that total some accumulated along with its interested is enough to pay off the loan. Sinking fund method is the most important and system method of debt redemption.
7. Export surplus: Generally the method discussed above is used to repair internal debt. But external debt needs to be prepared in foreign exchange and this is possible by creating an export surplus.

also read: explain the causes of increasing public debt.