The act of borrowing
create debt. Debt, therefore, refers to the resources of money in use in an organization
which is not
contributed by its owners and does not in any other way belong to them.
It is a liability
represented by a financial instrument or other formal equivalent.
When a government
borrows the debt in a public debt. Public debt, internal and external are debt
incurred
by government through
borrowing in the domestic and international markets in order to finance
domestic
investment.
Therefore, public debt is seen as all claims against the government held by the
private sector of
the economy or by
foreigners whether interest bearing or not (and including bank held debt and
government
currency, if any),
less any claims held by the government against the private sector and
foreigners. It is the obligation of a public debtor including the national government,
a political subdivision (or an agency of other) and autonomous public bodies.
In broad terms, all
kinds of obligations of a government (including the currency obligations) are
included in
the public debt such
obligations include the currency short- term debt, floating debt, and funded
debt and
unfunded debt.
Public debt can be
internal or external gross or net, marketable or non- marketable, short-term,
medium term
or long-term,
interest bearing or non-interest bearing and/or project or jumbo.
The classical
principles of loan finance rationalize loans to provide inter-generation equity
pray as you use
capital formation,
old-age insurance, self-liquidating projects, adjusting distribution, and
reduction often friction.
Borrowing may be
considered as a second-best alternative to money creation during periods of
unemployment.
In this way, it is
seen as an instrument of managing the economy.
Foreign loan, in
particular is seen as a means of filling domestic savings gap, especially in
the face of
dwindling government
revenues from domestic sources. It is particularly so in the face of
fluctuating prices of
primary commodity
exports and hence dwindling foreign exchange earnings.
External borrowing is
also seen as enabling a developing country increase its rate of real investment
just as
it is seen as an
engine of growth. In this sense, it increases per capital GNP or its component
measures.
Thus, debt acts as a
source of capital formation.
Public internal
borrowing acts as an anti-inflationary measure by mobilizing surplus money in
people’s
hands.
The Meaning of Public Debt
Public debt can be
defined as the total indebtedness of the Federal government, state government
and local
government in any
country. This is quite different from national debt which is the total indebtedness
of the
national or Federal
government alone. From the above definitions, we can see that the national debt
is smaller
than public debt.
In Nigeria, the
national debt refers to the accumulated borrowing by the Federal government and
it represents
the money owned by
the Federal government to its citizens and the oversea governments and
residents.
The Central Bank
undertakes the administration of both national debt and public debt on behalf
of the Federal
government.
The structure of the
public debt needs to be looked into. As already stated, the public debt is made
up of all
the total
indebtedness of the Federal government, the total indebtedness of states as
well as those of the local
government. So the
three-tiers of the government contribute to the continuing growth of the public
debt in our
country as well as
other countries.
The Reasons for Public Debt
Infact, there are
many reasons why some countries accumulated public debt. Some of the reasons
are to be
discussed here. In
the first place, the Federal government usually borrows from foreign countries,
agencies
or individuals as
well as from the public within the country in order to meet its expenditure
plan. Although the
government can always
increase the unit issue to meet its own expenditure plan, such policy is likely
to be
inflationary.
Some governments
engage in wars with other countries and this will necessitate an external loan.
Such governments
cannot help going for such external loan or they will definitely pay the price
of not getting
the loan which is
losing the war.
There are some
projects which are likely to yield revenue to the government when completed and
the
government will like
to borrow money to execute them. There is no doubt that some heads of
government
involve themselves in
an external borrowing for personal benefits and not necessarily to embark on a
useful
venture.
It is important to realize
that both the wealthy countries as well as the poor ones accumulate public
debts.
In 1945, the national
debt of the United States of America stood at $258.7 billion while the Gross
National
Product figure stood
at $258.9 billion.
Nigeria is one of the
countries whose national debts figure is alarming. Nigeria’s national dept in
1966 was
N3,044.6 billion and
N5,002.1 billion in 1977. This then means that the substantial part of
Nigeria’s G.N.P. will
be used for the
servicing of the national debt. It has to be noted that in each of the
countries mentioned, the
public debt was
greater than the quoted national debt figures of the mentioned years.
The Effects of Public Debt on the Public and Economy
Many countries are
worried over the increasing size of their public debt because of many reasons.
Some of
such reasons include:
1 . The increasing
burden of public debt is being passed on in the future generation: There is no
doubt that the
increasing burden is being passed on the future generation but if the
government totally
avoids the public
debt, it may distort the economic behaviour of the firms and individuals.
In most cases honest
government increases the national debt in order to ensure proper public and
private spending. In
order to avoid depression or recession, a lot of money is required to be pumped
into the economy for
greater economic activities.
2 . Interest Payment
Continues of Increase: As the public debt or even the national debt gets higher,
there is tendency for
more interest to be paid on it. The lender then gets more and more purcashing
power than the
debtor. If the debt is allowed to grow very high, it may require more proportion
of the
G.N.P. to pay the
interest on the debt and this will affect both the people and economy.
3 . The Increasing
public debt may lead to bankruptcy on the part of the government: This may
adversely affect the
economy so much and the government may find it difficult to get future loan for
developmental
projects.
4 . It may
necessitate higher tax rate: In an attempt to pay the interest on the debt, there may be need
for higher interest
rate which means more tax for the public. The higher tax will affect the
disposable
income of the
individuals and this will equally affect the standard of living of the people.
It has to be noted
that in 1988 budget, the President of the Federal Republic of Nigera, General
Ibrahim
Babangida stated that
the sum of N3.915 billion is allocated for the payment of interest charges on
external
loans while N3
billion is for the payment of interest on the domestic loans. This will give a
clear idea of the
amount of money
involved in payment of interest charges only and the impact of the huge amount
of money
on the public.
The big question
which many people usually ask is whether public debt can be avoided. The answer
to that
question is that it
is not really possible to avoid public debt. Every country of the world owes
another or is
being owed. A country
which always fears owing other countries will never take a bold step towards
economic
development. It is
not always bad if a country owes, provided the money borrowed was optimally
utilized.
The best thing the
planners of the economy should do is not to avoid borrowing but to make sure
that
borrowed money is
invested in a viable projects that will be capable of generating enough fund
for the
repayment of the
debt.
Limit to Rising Public Debt
In most countries
today, public debt has shown a continuous upward trend during the last few
decades. There
have been various
reasons or factors responsible for this mentioned above. But the question now
is whether
there is a limit
beyond which a government cannot increase its public debt.
In order to answer
the question, we should distinguish between the will and capacity to raise
loans on the
part of the
government and both of them should be considered in the context of short-run
and long-run
possibilities.
It has to be borne in
mind that a modern government would not resort to borrowing for the sake of it.
It
does not have a
tendency to borrow and squander it away on wasteful consumption beneficial to
the section
of the rulers. A
reasonable government borrows for only such consumption purposes which are
considered
absolutely necessary
for the economy such as defense, protection against national calamities and
some
important other
welfare activities.
In a normal
circumstance, the government of a country might borrow as a part of its
anti-cyclical operations
i.e. for stabilization
purposes while in the developing countries, the government may borrow for
capital
accumulation and
economic growth and development. At times there is self-imposed limitation by
the government which stipulates that the borrowing must be for public purposes.
In some cases, specific legislature
provisions may
prohibit the government from borrowing under certain circumstances or beyond
certain limits.
Government borrowing
reduces the supply of funds available to the authorities to borrow too much and
unnecessarily. Only
short-term loan will attract low interest rate for the government.
In the long-run,
however, the situation is different. Total volume of public debt can increase
gradually in
harmony with the
growth in the National income. Therefore, no definite limit may be stated to
exist for the
volume of public debt
in the long-term. Furthermore, the borrowing power of the government can be
assumed
to be unlimited.
Public Debt and Inflation
Most government while
raising loan for their investment and even for consumption purposes, will claim
that
such activities will
not be inflationary. They claim that such borrowing will divert funds from the
market into
the hands of the
government and that they are spent by the government instead of the market.
This according
to the argument is
only a diversion of demand but no net addition to it.
The logic is wrong
since the economy’s resources will be divided from production of consumption
goods
into those of capital
goods, therefore, making the demand for consumer goods to be greater than
supply,
thereby leading to
inflation.
Whenever effort is
made to increase economic activities so as to ensure greater employment opportunity
for the citizens, it
is likely to be inflationary. In fact, inflation is the cost of full
employment. It can, therefore,
be concluded that
public debt if continuous will likely cause inflation but that will not make
the government
avoid public debt but
to guard against its adverse effect.
Management of Public Debt
The term debt
management refers to the debt policy designed to achieve certain objectives and
actual
implementation of the
policy. According to the traditional philosophy, the debt management consisted
of
raising the necessary
debt at the cheapest interest cost and paying it off as early as possible.
However, with
the development of
the concept of welfare state, various objectives are being considered as the
cornerstones
of a sound debt
management policy.
There is no doubt
that every government is still interested in keeping the interest cost of its
debt at the
minimum possible, but
when this objectives comes into conflict with other objectives, it may be
sacrificed.
Other Important
objectives attracting the attention of the government authorities include anti-cyclical
measures
or stabilization
objectives, economic growth and development.
It is expected that
debt management policy has to be in harmony with the monetary policy of any
country.
They both should
influence the stabilization and economic growth. Through general and selective
credit
controls, monetary
policy tries to influence the volume and the direction of the flow of funds and
thereby
guide the working of
the economy. The ways in which debt management can also contribute to the
monetary
policy objective have
been stressed. We cannot lose sight of the fact that the objective of reducing
the
interest cost on debt
can come into conflict with the stabilization policy of the country.
It is important to
bear in mind that the aggregate volume of debt is as a result of fiscal action,
that is the
budgetary policy of
the government. The volume of debt will increase or fall in line with the
deficit or surplus
budgeting.
In monetary policy,
there is no such limitation. The volume of money and credit in the market may
be
regulated quite
independently to a large extent. In the case of public debt, the management
part would mainly
consist of changing
the maturity composition so as to effect its yield structure and the liquidity
content. But
the emphasis is still
that the monetary policy and the public debt are closely linked.
Public Debt and Fiscal Policy
When the government
finances a budget deficit by borrowing from the public, it creates a public
debt. This
raises a fundamental
macro-economic issue. What is the effect upon the economy of the existence of a
large
public debt?
Classical economists
believed that any amount of public debt was harmful to the economy. They
insisted
that the government
budget should always be balanced, implying that it was practically sinful for a
country to
be in debt to its
citizens. The balanced budget was considered to be a necessary right up till
the 1930s.
The experiences of
the depression and the conclusion drawn from them by Keynes changed economists
attitude toward the
balanced budget. Economists began to see the difference between private and
public
finance and to
realise that the balanced budget that was desirable for a household was not
necessarily
desirable as an
annual practice for the government.
Keynes demonstrated
that effort to balance the budget when NNP is changing rapidly in either
direction
will intensify
economic instability. According to him, if NNP is falling, government can
balance the budget
only by increasing
taxes or by reducing expenditure as either of them will lead to recession. If
NNP is rising,
the government will
have to cut taxes or increase spending to achieve a balanced budget as such a
policy will
add to the
inflationary pressures.
It is currently
accepted that an annually balanced budget may do more harm than good to a
dynamic
economy, depending on
how close the economy is operating at full employment. While some economists
are
of the opinion that
long-term balance is necessary, others are of the view that any magnitude of
national debt
is acceptable as long
as the rate of growth of the debt is less than the rate of growth of Net
National product.
Categories of Public Debts
Public debts are
mostly of two kinds or types, depending on the purpose for which the money was
borrowed.
(1) Reproductive Debt: In a situation
where a particular loan has been obtained to enable the government
to purchase some real
asset, the debt is said to be a reproductive one. A good example may make
this more
understandable. Assuming that the Federal government embarks on natinalisation
of industries
owned by private
companies and some foreign nationals instead of the current privatization
excise,
the former owners may
receive compensation in the form of government stock. In this example, the
Federal government has
just inquired debt in order to acquire some real assets. In other words, the
Federal government
has just increased its debt by the amount of compensation paid, but has
acquired in
exchange of real
assets in form of more industries.
(2) Deadweight Debt: The second type of
public debt known as “deadweight debt” is public debt that is
not covered by any
real asset. This is a situation where the government borrows money and spends
it
in something that is
not tangible. Greater proportion of many countries public debt is in this
category and
this makes the burden
of the debt much on the people.
Most countries
borrowed huge sum of money in order to prosecute one war or the other. During
the
Nigerian civil war of
1967-1970 the public debt of this country increased but after the war the then
Head of State,
General Yakubu Gowon paid completely the national debt owed Britain against the
wishes of many
people. Many countries of the world accumulated huge public debt in the way of
the
deadweight debt.
Conclusion
Before analysing the
issues involved in public or national debt, it is important to distinguish
between a national
debt and a budget
deficit. A budget deficit is the difference between a particular year’s total
government
receipts and the
year’s total government expenditure.
The national or
public debt on the other hand is the accumulated total of past deficits less
pass surpluses.
Public debt may also
be categorised as to whether it is internal or external. In the case of
internal public
debt, payment of
interest or repayment of principal involves a transfer from tax payers to
security holders.
External debts on the
other hand are debts owed by a country to institutions or countries abroad. To
the
extent that interest
payments are made abroad and principal repaid, there are implications for the
country’s
balance of payments.
There are a number of
causes which has led Nigeria and other developing countries into the debt
crisis
now facing them.
These factors include the following:
- Huge Budget
Deficits.
- Heavy Dependence on
oil Revenue.
- Short-term loans
being used in Financing long-term projects.
- Reckless
contraction of loans.
- Rise in interest
Rates on Commercial loans.
- Poor performance of
Non-Oil Export.
- Structural
in-balance in the Economy.
- The effects of the
public debt depends on whether it is internal debt or external debt that we are
talking
about.
The more important
effects on the economy as far as internal debt is concerned include the
following:
- Large internal debt
tends to “crowd out private investment.
- Internal debt may
create income Distribution problem.
- Internal debt may
Aid Government Stabilization programme.
- Debt Financing may
create inflationary Effects.
The effects of
external debt on an economy shall be examined in the context of the Nigerian
situation. The
effects of the debt
and its financing continue to generate debate on the Nigerian economic scene.
Although
people tend to
concentrate on the negative effects of the debt in their discussion, there are
positive consequences
as well. The more
important positive effects include the following:
- External Debt has
made the financing of certain projects possible.
- The Debt helped in
Balance of payments support.
The negative effects
includes:
(a) The debt and its
servicing are draining away resources which could be used to finance
development.
(b) The debt and
difficulties being encountered by Nigeria in its servicing have created the
problem of
Foreign Investors
confidence in the Nigerian Economy.
(c) Greater control on the direction of the
economy by foreign creditors
The question of the
debt burden of the public debt is a complex one since it raises question about
the nature
of the burden and its
intertemporal incidence. That is which future generation that bears the burden.
The term debt
management is used to describe strategies adopted by a government to minimise
the
negative impact of
debt on the economy as well as the burden of the interest charges. The methods
used in
managing the internal
debt are important since they have implications for both the money supply and
the
structure of interest
rates.
The policy aims of
debt management strategies of government including the Nigerian government
include
policies designed to
regulate monetary variables maintenance of stable market in securities and
minimisation
of debt service
charges.
Debt management
strategies being used to tackle Nigeria’s External debt obligation are a number
of
policies put in place
to tackle Nigeria’s external debt problems.
The policies
includes:
- Debt rescheduling
strategy
- Debt conversion
strategy
- A lid on External
Borrowing
- Economic
Restructuring
- Brady plan
- Debt Repudiation
Summary
In this unit, we have
succeeded in examining the meaning, nature, the structure, trend and
consequences of
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