National or public debt

NATIONAL OR PUBLIC DEBT AND WHY GOVERNMENT BORROW MONEY. Meaning: National or public debt refers to the debt a country owes to its citizens or other countries or organizations such as the International Monetary Fund (IMF) and the World Bank.The debt which a country owes i its citizens is known as internal debt while the debt owed foreign governments and organizations is known as external debt.

National or public debt and sources of government borrowing

The government of Nigeria can use the following instruments to borrow money. These include:

1.  Treasury certificate: These are securities for medium term borrowing. They are for a period of one to two years and they carry higher rate of interest than treasury bills.
2. Treasury bills: These are securities used for short-term borrowing for about 90 days. This carries low rate of interest.
3.  National savings scheme: Government can also borrow money from the national savings scheme to finance its projects.
4. Development stock: These are referred to as government stock and they are used for long term borrowing of up to five years and above.

NATIONAL OR PUBLIC DEBT AND WHY GOVERNMENT BORROW MONEY

            PERFORMANCE OBJECTIVES on National or public debt and why government borrow

Explain the concepts of budget surplus balanced budget and the component of national debt.

Explain the concept of and criteria for revenue allocation (including resource control) in Nigeria and associated problems

Negotiations: The government can borrow from external financial institutions such as the Paris Club, international Monetary Fund (IMF), and World Bank

d

REASONS WHY GOVERNMENT BORROW MONEY

1. To finance budget deficit: When a government suffers deficit budgeting, it may borrow money in order to finance such budget.
2. To finance huge capital projects: Money can be borrowed by government to enable it to finance some huge capital projects.

To meet cost of national emergencies: Government can embark on borrowing to enable it to meet the cost of national emergencies such as war, drought, famine, hurricane, etc. NATIONAL OR PUBLIC DEBT AND WHY GOVERNMENT BORROW MONEY

To reduce economic burden on taxpayers: Government can decide to reduce the economic burden on tax payers by borrowing money to execute proposed projects.

• To meet balance of payment disequilibrium: Government can borrow money to enable it to correct or execute balance of payment deficit.

• To provide employment opportunities: Government may equally borrow to establish certain projects capable of generating employment opportunities for the people.
• To service some loans: Government can borrow money in order to service another loan earlier taken, either from internal or external sources.

• To control fluctuations in national income: A fall in expected income may warrant a government to borrow in order to meet up the required fund to finance its projects.

Some terms associated with budget

Debt servicing

Debt servicing refers to the payment of interest on loans taken by the government and the payment of the capital sum at a future date.

Debt management: Debt servicing refers to a process or situation whereby the government structures the country’s debts, which are denominated in foreign currency, with the fundamental aim of reducing the total external debt stock.

Burden of national or public debt

The extent of the burden of national or public debt is determined by the type of debt, whether internal or external, the purpose of the debt and the period of repayment.

How national debt can affect the economy of a country in the following ways:       

1.  The servicing of an external debt will involve an outflow of resources, which can otherwise be used for economic development.
2. It can reduce the availability of foreign exchange in the form of depleted foreign reserves.
3. The servicing of a large internal debt will limit government’s ability to provide social capital and services for the people.

 how a domestic debt will influence the distribution of income in the country.

• If a large internal debt is sustained by a high rate of interest, it will reduce private investment on capital goods.
• A large external debt can make a country to be susceptible to the whims and caprices of external creditors.

NATIONAL OR PUBLIC DEBT AND WHY GOVERNMENT BORROW MONEY

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