Government Borrowing, its importance and sources

Government Borrowing

The fund or capital received in the form of a loan by the government of a country from various sources is called government borrowing. It is also called public borrowing or public debt. The government borrows internal loans from individuals, firms, and banking or financial institutions within the country. An external loan is taken from foreign governments and international institutions.

Since the government activities have increased in recent times, the income of the government may not be adequate to fulfill its expenditure. When the expenditure becomes more than the revenue, it is called a deficit budget. At that time, the government should borrow money from different sources. The objective of government borrowing is to launch development programs or to face the crisis of the country.

Importance of Government Borrowing

The importance or objectives of the government borrowing are as follows:

1. To implement development plans: In underdeveloped countries like Nepal, the government needs to run different projects. To run such projects, the income received from the revenue is insufficient. Therefore, it is necessary for the government to take loans from internal and external sources.

2 . To meet the budget deficit: In the modern age, the function of the government has become very wide. Consequently, the government expenditure is larger than its revenue. In this situation, a deficit budget is needed. To Fulfill the deficit budget, the government has to borrow from internal and external sources.

3. To meet war expenses: If a country is involved in an internal or external war, it needs finance for large expenditures. Such a large expenditure is not possible from the government revenue. In such a situation, the government has to borrow from internal and external sources.

4. To control economic depression: Economic depression is the situation of very low income, employment, and output in the economy. During this period, private investment decreases and becomes very low. In such a situation, the government should spend its revenue to increase the level of income, employment, and output in the economy. For such large investment expenditure, the government needs a large amount of money which is fulfilled by borrowing.

5. To control inflation: Inflation is the continuous rise in the general price level. It occurs in the economy when the money supply is increased. In such a situation, the government and the central bank raise money from the private sector through internal public borrowing. This reduces the money supply. Consequently, private expenditure is reduced and inflation is controlled.

Sources of government Borrowing

There are two sources of government borrowing. They are as follows:

Internal Borrowing

The loan borrowed by the government from internal sources like individuals, public or private organizations, central banks, commercial banks, and other financial institutions within the country is called internal borrowing. In other words, internal borrowing is raised within the country. The internal loan is received in terms of national currency and it may be raised voluntarily or compulsorily. There are two sources of internal borrowing which are as follows:

a. Market borrowing: 

Market borrowing refers to that loan that is raised by selling transferable securities like treasury bills and development bonds. These credit instruments are issued and floated in the market and sold to individuals, firms, or financial institutions. A short-term loan is received by means of treasury bills and a long-term loan by means of development bonds. A certain rate of interest is provided to the lenders. Purchasing of government securities means the loan provided to the government, which is returned with interest after the maturity period.

b. Non-market borrowing: 

The loan received by means of nontransferable credit instruments is called non-market borrowing. The credit instruments are issued in the name of different sources and the loan is received from these sources. The sources are of two types. They are described as under:

1. Public sector: Government can receive loans from public financial institutions, insurance companies, postal saving banks, provident funds, etc. The idle funds remaining with these public institutions can be transferred to the government in terms of loans.

2. Private sector: Private institutions like commercial banks, finance companies, or other firms can provide loans to the government. Government can draw non-transferable credit instruments in the name of such private institutions and can receive loans from them.

2. External Borrowing

The loan received by the government of a country from foreign individuals, foreign government, and foreign or international institutions is called external borrowing. This source is used when borrowing from an internal source is insufficient. The sources of external borrowing can be divided into two types which are as follows:

a. Bilateral borrowing: If the government of a country borrows a loan by making an agreement with the government of another country, it is called bilateral borrowing. For example, the loan taken by the Government of Nepal from the Government of USA, UK, Japan, etc. is bilateral borrowing.

b. Multilateral borrowing: If the government of a country borrows a loan from international organizations like UNDP, World Bank, Asian Development Bank, European Union (EU), International Monetary Fund (IMF), etc then it is called multilateral borrowing.