The mystery behind public debt

Public debt is the debt obligation owed by a government either to domestic or external creditors. External debt in this case refers to loans contracted from outside the country to cover the government financing requirements, while domestic debt is the government obligation to domestic investors as a result of selling of government securities whether Treasury bills or Treasury bonds.

Public debt is the debt obligation owed by a government either to domestic or external creditors. External debt in this case refers to loans contracted from outside the country to cover the government financing requirements, while domestic debt is the government obligation to domestic investors as a result of selling of government securities whether Treasury bills or Treasury bonds.

Very often the level of debt obligations owed by the governments in Sub-Saharan Africa does not match the levels of economic development and socio-economic transformation of the general populace.

In fact, the increased volumes of external loans to African governments has done more harm than good to the peoples welfare, as it has consequently led to draining of the even- little available domestic resources  in the context of servicing these contracted loans-sometimes with less concessional terms to the borrowing nation.

This technically means that the money that would be channeled to improving social infrastructure like schools, hospitals and public amenities will be now be used to pay back these expensive loans leaving the common man crying foul.

However, one should understand that external debt should not in it self be taken to be abominable.

I am trying to send a message that there should be prudence regarding the nature and purpose of borrowed funds, for these funds to generate more or equal returns to service the contracted loans.

It is very important therefore that governments in Africa and elsewhere in the world should always think of borrowing if they have to only and only to finance development ventures, the returns from which will increase the capacity of the respective economies to finance such debt obligations.

If we for instance borrowed to finance a power generating project, this will increase power generation, reduce the cost of electricity, attracting domestic and foreign investors to invest in our economy.

This undoubtedly increases the government tax and non tax revenues and subsequently enhances our capacity to pay back the borrowed funds in time and reduces the probability of default.

If this was the guiding principle for all the African governments, the problem of indebtedness that is straining African economies would be minimized or contained.

The challenge here is that some African governments will borrow to finance imprudent state expenditures which will have no direct link with their national development agenda, making it hard for them to service these loans.

Such kind of borrowing nations will be forced to either obtain other loans to service the maturing debt or resort to creating arrears and you find the whole economy trapped in a viscous cycle of indebtedness.

tbenon132@gmail.com

The Writer is an Economist in the Ministry of Finance and Economic Planning

 

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