Public dept

1. Internal debts. Is the total money which the government borrows from individual and institutions within the country.

2. External debts. Is the borrowing of a money outside the country e.g. from WB, IMF, ADB (African development bank)

3. Reproductive debts. These are debts which the government uses for productive activities that will generate revenue to repay back the debts.

4. Non-reproductive debts (dead weight). This are debts used to finance activities that do not give the return e.g. weapons.

5. Short term debts. This is debts paid within short time.

6. Long term debts. These are debts paid after a long period of time for example 10year – 50year.

7. A funded debts. These are debts in which a specific time of repaying debts is not fixed to get the loan.

8. Un-funded debts. These are debts in which date of redemption is stated while receiving the loan.

9. Voluntary and compulsory debt.

Redemption of public debt refers to the payment of public debts.

Ways used in redemption of public debt

1. Repudiation. Repudiation is form of debt redemption where the government refuse to pay debts.

2. By conversion. Is the form of debts redemption where the government takes new loan with low interest and paying the previous loan with higher interest.

3. Negotiations on debts. This refers to cancellation of a debt.

4. Use of surplus budget. Where the expenditure is less than revenue and extra amount of money is left for paying debt.

5. Capital levy. Is where the government imposes taxation on asset like building and the revenue is used to pay the debts.

6. Sink fund. Is the situation where the government invest a given amount of money in the bank to get compound interest and hence use the amount obtained to pay a debts.

7. Privatization of public goods. The money obtained from privatization is used for debts repayment.

8. Use of grants and gifts received.

9. Selling security to the government.

10. Use of accumulated foreign reserves.

Why do LDC's government depend on borrowings?

Governments in Less Developed Countries (LDCs) often face challenges in financing their activities due to limited domestic revenue sources. Borrowing becomes an essential tool for overcoming these challenges and ensuring economic stability and growth.

1. To increase revenue.
   Tax revenue alone may not be sufficient to finance government activities in LDCs due to a limited tax base, low income levels, and a high proportion of the population engaged in informal sectors. Borrowing helps fill the gap and enables the government to meet its financial needs.

2. To reduce the tax burden on taxpayers.
   Borrowing allows the government to avoid increasing taxes, which could be a burden on citizens, especially in low-income countries where people are already struggling to meet their basic needs. This helps maintain social stability by not overburdening the population with higher taxes.

3. To correct balance of payment deficits.
   LDCs often face balance of payments problems, where the value of imports exceeds exports. Borrowing can help bridge the gap between the foreign currency reserves and the amount needed for imports, allowing the country to meet international obligations without depleting its reserves.

4. To avoid printing more money (inflation control).
   Governments may resort to printing money to finance their expenditures, but this leads to inflation. Borrowing helps avoid excessive money creation, which can keep inflation under control while providing the necessary funds for development projects.

5. To overcome natural calamities.
   LDCs are often vulnerable to natural disasters like droughts, floods, or earthquakes. Borrowing enables the government to mobilize resources quickly to provide emergency relief, rebuild infrastructure, and support affected communities.

6. To help achieve economic growth.
   Borrowing can help finance investments in infrastructure, education, healthcare, and other sectors critical for economic development. These investments can stimulate economic activity, create jobs, and promote long-term growth.

7. To support development plans.
   Borrowed funds can be used to implement government development plans and projects. LDCs often need additional financial resources to develop infrastructure, improve public services, and promote industrialization, which is key to economic progress.

8. To balance the budget and cover budget deficits.
   When government expenditures exceed revenues, borrowing helps fill the gap. This allows the government to maintain essential services and activities while balancing the budget, even when revenue is insufficient.

9. To enable loan repayment.
   Borrowing can also be used to refinance or repay previous loans. This helps manage the government's debt obligations without defaulting, which could harm the country's financial reputation.

10. To control economic depression.
    During periods of economic depression, borrowing can help stimulate demand by financing public works, creating jobs, and investing in sectors like infrastructure, thereby reducing unemployment and boosting the economy.

Discuss the roles played by public borrowing in LDC.

Public borrowing plays an important but complex role in the economies of LDCs. While it can support development, it also brings about challenges that need to be carefully managed.

1. Leads to over-dependency.
   Heavy reliance on borrowing can create a culture of dependency, where the government continually borrows rather than focusing on generating sustainable income from taxes or creating a self-reliant economy. This dependency can undermine long-term economic stability.

2. Reduces money available for consumption and investment.
   Borrowing involves future obligations to repay, which means a large portion of government revenue must be allocated for debt servicing. This reduces the amount of money available for public consumption, welfare, or investment in productive sectors like education and healthcare.

3. Worsens balance of payments.
   Borrowing, particularly from foreign lenders, can worsen the balance of payments position. While borrowing provides immediate resources, it increases the country's external debt and interest payments, potentially leading to a further deterioration of the balance of payments in the long term.

4. Debt becomes a burden if not used productively.
   If borrowed funds are not invested wisely—such as in productive infrastructure or development projects—then the debt becomes a burden on the government and its people. This can create a vicious cycle of borrowing to repay old loans, leading to further economic distress.

5. Tied aid (debt with conditions).
   Many loans and borrowings in LDCs come with conditions attached, known as "tied aid." These conditions often require the government to implement specific economic or political reforms that may not align with the country's needs or priorities. This can limit the country's policy autonomy and economic freedom.

6. Burden on future generations (long-term debt).
   Long-term debt obligations can be passed on to future generations. This can result in higher taxes or reduced public services in the future, as governments must focus on repaying loans instead of investing in the welfare of their citizens.

7. Cost of debt servicing (interest and administration).
   Borrowing comes with the cost of paying interest and administrative fees. For many LDCs, these costs can consume a significant portion of government revenue, reducing the amount available for public investment and essential services. High debt servicing costs can further constrain economic growth.

This is the use of taxation, government expenditure and public borrowing to influence the economic activity of a given country.

How fiscal policy works (mechanism of fiscal policy)

It works in two ways i.e. expand economic and to contract economy.

Expansion fiscal policy

This is a situation where there is increase of government expenditure and decrease in tax. It is aimed at increasing aggregate demand.

Contraction fiscal policy

It aimed at reducing aggregate demand where there is increase in tax and decrease in expenditure.

Discuss how fiscal policy can be used to bring economic development (hint: use roles of tools of fiscal policy)