Should the public sector (central government) borrow domestically or offshore

Abstract

1. Taxes are an important source of government revenue (income). A failure by the government to collect sufficient taxes to cover for its ever increasing expenditures, engenders fiscal problems. Amongst others the government is compelled to borrow to finance its budget short fall. In this instance, should the government borrow domestically or offshore to finance its short fall . 2. Amongst the theories discussed in this paper, are the views of the Neoclassical Keynesian and the Ricardi an schools of thought. Further more, South African theories on government debt are also discussed. 3. There is a considerably large number of indicators that can be used to determine an appropriate level of both domestic and foreign debt of a country. Certain well establish criteria such as the ratio of foreign interest payments to exports, the ratio of foreign debt to gross domestic product, the ratio of·govemment debt to gross domestic product and the ratio of foreign debt to exports, are amongst the pool of indicators that can be used. However, the following indicators have been identified as the most commonly used in the analysis of budget deficits, and they are; ratio of deficit before borrowing and debt repayment to GDP, the ratio of government debt to GDP, the ratio of interest payments to government expenditure, the level of real interest rates relative to economic growth and the net asset value or net worth of the government. 4. Deficit financing refer to the ways in which the budgetary gap is financed. Overreliance on domestic borrowing may mean high real interest rates and falling investment, and overreliance on foreign borrowing can cause appreciating real exchange rates and unsustainable external indebtedness, amongst others. 5. Amongst the available remedies for debt ills in this country, is the suggestion to significantly cut government expenditure. However, realities currently confronting the authorities, like the increase in public servants as a result of the abolishment of homelands and the constitutionally guaranteed employment of civil servants from the old order, automatically put pressure on public consumption. 6. On the international front, South Africa is underborrowed. In this regard favour should go more for offshore borrowing. Certainly South Africa has to generate the means of meeting debt obligations by running a surplus of exports over imports of goods and services. The bulk of the country's debt is of domestic origin which account for well over 90 % of total debt. The current anti inflationary monetary policy with its concomitant high interest rates, makes domestic borrowing more costly.