Sources of Government Borrowing and Reasons Why Government Borrows
Sources of Government Borrowing
As government debts were divided into external and internal debts, sources of Government borrowing is also divided into external and internal. External sources are loans that come from foreign countries while internal sources are loans that come from within the country.
External sources of government borrowing include; multinational financial institutions like International Bank for Reconstruction and Development also known as World Bank and the International Monetary Fund (IF); other countries, foreign private fund, organisations, foreign state enterprises like British Airways, etc.
Internal sources of government borrowing include rich individual citizens, organisations, financial institutions like the Central Bank, Commercial banks, Development banks, Merchant banks, Mortgage banks, insurance companies, etc.
Reasons Why Governments Borrow
1. To Finance Deficit Budget
When a government plans a deficit budget, it resorts to borrowing in order to finance it.
2. Fluctuation of National Income
Government may decide to borrow when its total income earned over a period of time falls below expectation.
3. To Finance A Huge Capital Project
Government of a country borrows in order to finance a huge capital project which the recurrent expenditure cannot finance.
4. To Procure War Materials
There may be a need for government to borrow in a war period in order to procure materials with which to go to war.
5. Servicing of Loan
Government sometimes borrows to enable it pay interest loans it obtained and to repaid debts that are due which is called funding operation. This is a process whereby a short-term debt is converted into a long-term debt.
6. To Provide Employment Opportunities
Provision of employment opportunities may drive government of a country to borrow either from local or foreign sources.
7. Emergency
Loans may be obtained by government in order to combat natural disasters such as flood, drought, outbreak of diseases, etc.
8. Balance of Payments Disequilibrium
Many nations especially developing ones who suffer from deficit balance of payments borrow from IMF which is one of the aims for establishing the institution.
