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Reduced borrowing to spur economy

GOVERNMENT’S intention to reduce internal borrowing is expected to free up money for lending to other economic players, hence stimulating growth in more productive sectors.
During the presentation of the 2019 budget to Parliament last Friday, Minister of Finance Margaret Mwanakatwe unveiled Government’s intention to curtail domestic borrowing from four percent to 1.4 percent of the gross domestic product (GDP).
The theme of the 2019 budget is ‘Delivering fiscal consolidation for sustainable and inclusive growth’.
Government’s local debt amounted to K51.9 billion as at June 2018, representing 19.2 percent of GDP, compared to K48.4 billion as at end of December 2017.
Reduced borrowing by Government, which is the dominant player in the economy, enhances innovation from banks and other financial providers to come up with incentives to attract other customers beyond the ‘low hanging fruit’ – government.
This grows the financial sector.
Competition in the financial sector pushes costs down, including interest rates, hence attracting more borrowers and benefits are cyclic for both banks and customers – like access to capital by businesses while banks reduce stock of non-performing loans.
When businesses access loans, they will stimulate economic activities, which leads to increased production, employment creation, as well as paying taxes to Government.
There are also spin-off economic benefits along the chain.
The reduction on borrowing both internally and externally tends to stabilise and cushion the pressures on the national budget deficit and will reduce huge demand of cash and credit from the local banks and financial institutions.
“The dangers of excessive external borrowing is that it forces the government treasury to commit large volumes of foreign exchange (US dollars) and local currency to be committed to the repayment of debts and this action automatically increases the demand of foreign exchange from the foreign exchange markets, thereby lowering the value of the Kwacha as pressure mounts on the US dollar market,” says governance expert Alfred Zulu.
Mr Zulu notes that too much borrowing by the State from the local banks has the effect of crowding out the local industries and small-scale borrowers.
“The resources that are derived from export of products and commodities should be invested in the domestic economy so that the manufacturers, industries and importers can easily have access to foreign exchange to pay for imported products like medicines, fuel, machinery and fertilisers and many more vital materials,” he says.
Mr Zulu notes that excessive external borrowing destabilises the macro-economic indicators because it tends to force the Bank of Zambia to increase interest rates, at the same time the inflationary patterns increase. The other effects are that infrastructure development; bilateral trade and importation of vital services and goods (to mention but a few) are negatively affected.
Overall, reduced borrowing by Government increases prudence by Government to channel resources to areas with higher socio-economic returns and this trickles down to other economic sectors.
Other highlights of the 2019 budget include the ban on export of raw hides and skins, which is designed to increase foreign exchange earnings.
This measure, if implemented, will spur improved investment in the production subsector of cattle and beef ranching as it will grow steadily as there will be added income for farmers and traders in the industry.
The value chain prices in foreign exchange will triple and farmers will benefit extensively.
The author is Zambia Daily Mail editorials editor.