Is national borrowing wrong practice?

By Juliet Akello

Borrowing is a topic which usually attracts great attention hence reflecting its relevance, especially because it relates to the current and future welfare of citizens and the fact that this debt has to be repaid. 

National borrowing (both domestic and external) is expected to contribute to the achievement of a country’s agreed national development agenda. Certainly, only responsible borrowing can lead to pro-poor development. Loan contraction should also comply with relevant national laws and should be consistent with development priorities. Short of this, the recipient nation’s citizens may grudgingly receive the loan with limited or lack of support.  So is national borrowing bad practice?

Whether borrowing is bad or good greatly depends on the prevailing situation. Borrowing to finance projects with a high economic rate of return is rational since it will generate more income to repay the loan (to allay repayment fears of citizens) and cause economic growth and development. Social benefits could in the long run also be realised. Ideally, the cost of such a public investment should then exceed the cost of borrowing.

On the other hand, loans acquired to finance recurrent expenditure like employees’ expenses, operational cost or repairs and maintenance costs would escalate debt problems because then, the Government would have to tax citizens more to service the debt to avoid the accumulation of arrears.

High arrears accumulation which could turn into a debt unsustainability issue can force the Government to explore other means of servicing the debt including seeking debt restructuring from the creditor. However, debt restructuring may, among others, take the form of debt rescheduling where the terms of borrowed resources are reviewed and payment re-modeled; debt reduction or debt relief; debt cancellation that is, complete write off of debt; the creditor can also decide to buy back its own debt.

These approaches may be used especially for external debt; however they can be costly for both the Government and the creditor. Yet, large borrowing by Government could also undermine macroeconomic stability, lead to unsustainable public debt burden and eventually to default. To avoid the scenarios, the Government should have the capacity to meet its debt obligations while maintaining the quality of service delivery to citizens - debt sustainability.

The Government, therefore, needs to take precautions in acquiring debt by ensuring that debt sustainability levels are observed. That is, having enough revenue to repay borrowed resources without accumulating it and ensuring that debt doesn’t grow faster than the economy. Hence, the annual national budget should be able to take care of repayment expenses (debt servicing) for all borrowed resources domestically and externally. 

The Government needs to institute a joint monitoring plan and unit for monitoring the implementation of a proposed loan comprising of representation from Parliament, line Government agency, MoFPED, creditor and civil Society as an interest group. This will be in an effort to ensure the achievement of project objectives.

Borrowing per se, is essentially not bad as long as the size doesn’t escalate so as to cause severe hardships for the population. How the resources are utilised also justifies the relevance for borrowing.

The writer works with Uganda Debt Network