Government borrowing crowds out investments

BoT Governor Prof Ndulu
The government is increasingly borrowing from commercial banks to foot various expenditures, crowding out investments, which impact negatively on economic growth.

On annual basis, domestic debt stock increased by 15.5 per cent or 711bn/- to 4.57tr/- as at the end of August from 3.86tr/- recorded in the corresponding period last year. 

On month-to-month basis, at the end of August this year the total stock of domestic debt increased to 4.57tr/- from 4.50tr/- registered at the end of July.

The Bank of Tanzania (BoT) said the increase was mainly on account of issuance of new Treasury bonds that outweighed maturing obligations. 

The increase, according to central bank, was a result of issuance of new Treasury bonds compared to maturing obligations. Economists urge that increasing government borrowing leads to crowding out investment as commercial banks tends to direct their lending to relatively risk-free government papers.

A University of Dar es Salaam Senior Lecturer (Economics), Dr Jehovanness Aikael, said government increase in borrowing from banks reduces the funds supposed to be lent to private sector.

 “The trend is not healthy especially if we believe that private sector is the engine of growth,” Dr Aikael told the ‘Daily News’.

The economist said should the private sector lending decrease while credit to government increases this means there is a crowding out of investment, a phenomenon that contracted GDP growth.

The BoT announced a sharp year-to-year decline of lending to private sector to 16.8 per cent in August this year from 27.5 per cent of the same month last year. 

“… a number of economic activities recorded slow growth rates in credit in the year ending August 2012, except for transport and communication, agriculture, manufacturing, and personal activities,” BoT indicates.

The government borrowing from private sector was necessitated by the fact that revenue collections are not tallying with total expenditures. At the end of August, total resources, on cheques issued basis, amounted to 645.2bn/- while total expenditure was 769.2bn/-, resulting in an overall budget deficit of 258.1bn/- after grants and adjustment to cash.

“The deficit was financed through both domestic and foreign sources,” BoT said on its September’s Monthly Economic Review. The central bank reported further that revenues, excluding Local Government Authorities (LGAs) own sources were 558.6bn/- representing 16.3 per cent below the target for August.

Government budgetary operation for the first two months of this fiscal year resulted in an overall deficit of 359.2bn/- after adjustment to cash: “This was financed by net foreign loans of 100.7bn/- and a net domestic borrowing of 258.4bn/-’’, BoT said.
Source: The Daily News,, reported by Abduel Elinaza in Dar es Salaam
Share on Google Plus

About Abduel Elinaza

This is a short description in the author block about the author. You edit it by entering text in the "Biographical Info" field in the user admin panel.