Currently, there are very many financial trends which are coming up in the international economic framework. Among the popular financial trends is the international borrowing of funds. This is the situation where by the countries borrow money from the other countries or from the global financial bodies such as the World Bank and the International Monetary Fund (IMF). However, the borrowing can also be within the specific country in need of the financial resources. These borrowed funds are normally for economic development or for tackling emergencies which normally arise. In this write up therefore, the South Africa’s debt composition and debt service methods as well as the reasons for more internal debt than the external debt shall be discussed.
Foreign debts are the amount of money that a country owes to another country as a result of direct borrowings or obtaining of commodities and services for later payments while the total debt service is the sum of principal and the interest amounts due for repayments to the foreign countries in terms of foreign currency. South Africa being one of the middle class economies in the world, as shown in the figure below comparing its GDP with that of the other six African countries, and having the largest economy in the African continent, is noted as one of the countries that utilize this system. (United Nation. Office of the Special Advisor on Africa.; New Partnership for Africa’s Development.; Organization for Economic Cooperation and Development, 2011).
The Overview of the Financial Stability of South Africa
In comparison to the other strong African economies, South Africa’s economy since 1994, has been riding very high. This is probably contributed by the fact that it properly utilizes the debt as a source of government capital generation. The use of debt is popular in this country probably because it is of great benefit to the economy as it helps obtain funds which can be used in the general economic development of the country. The country normally borrows funds from outside and even from within in order to enable it perform its financial obligations such as provision of the social amenities such as; schools, healthcare, and water. In some cases, the country also uses the borrowed funds in funding the deficit budgets and tackling of emergencies such as wars, hunger, and disease outbreaks (Ahmed, Arezki & Funke, 2005).
In order to obtain sufficient amounts of funds as required by this country, it has resorted to the utilization of both the internal and the external sources of finance. The external sources mainly include the international bodies such as the International Monetary Fund (IMF) and the World Bank. However, the country sometimes borrows funds from specific governments. On the other hand, the internal sources normally include commercial banks and the other private corporations such as companies and banks. There are also cases where the country borrows from the individual citizens. This is done through the sale of government bonds and other securities to them. Such are then paid back as they mature. According to the 2011 IMF economic report, the foreign debt of this country was standing at $ 47.66 billion, an increase from the 2010 $ 44.8 billion. It is further noted that this figures have been fluctuating over the years because of the different level of financial needs in the different economic seasons (McMillian, 2011). This trend is demonstrated in the graph below; stating the percentage of the country’s debt to the Gross Domestic Product (GDP) between the years 2002 and 2012.
Reasons why Domestic Debts is Greater than the External Ones
However, Ahmed, Arezki & Funke (2005) note that, in South Africa, the internal debts are greater than the external debts. This has been the trend since its independence in 1994 since following the commitment by the country to become self reliant. That is, ruling out the chances of getting financially involved with the international monetary bodies. It is an ideology which was developed after the apartheid so as to relieve the country from any form of financial dependence after the political independence. This was further enabled by the fact that the country had proper financial policies.
This higher level of internal debt can also be attributed to the fact that the internal sources are more reliable to the government than the external sources. That is, the lending institutions are within the governance of the government and hence their reliability can easily be assessed by the government. In addition, such sources are not very stressful when it comes to honoring of the payment as it is with the external sources whose repayment periods may be very inflexible. This means that it is easier for the government to negotiate repayment issues up to the time when it is convenience for it to repay the loan. Moreover, the internal sources of funds also act as a source of income to the local firms; the local firms benefit from the part of the money that is repaid as interest rates by the government.
The government of South Africa also prefers the internal debts based on the fact that they are easily understood by the public. This means that the citizens easily understand why the government needs money and also can understand in cases of default if the government was at a fix with very many financial obligations. This has been witnessed in cases where the government has to provide essential needs such as the healthcare and education. In addition, it is a strategy for the country to become self reliant. This is because much of the needed funds are locally generated. Moreover, this system of generating funds teaches the country’s public to be responsible since they can be relied upon to assist the government fund its activities (Rustogjee & Global Economic Governance Programme, 2004).
A report by Rustogjee & Global Economic Governance Programme (2004) also notes that the internal process of securing the loan is not as lengthy as when a country tries to obtain the funds from the external sources. The internal sources may not require such conditions as the presentation of the economic performance by the company. Equally, there is no need to change the currency whenever the country uses this system and thus there is no loss the country incurs in cases of adverse currency changes. Unlike the external debt which is affected by appreciation of the paying currency against the local currency, in case of the internal debt, it is only the inflation rate which has to be adjusted.
There is also fear of the adverse punishments which may arise as a result of failure to repay a loan at the specified time. This punishment can be the declaration of credit unworthiness, suspension from the International Monetary Fund (IMF) or even fine. This may not be the exact case with the internal sources which in most cases demonstrates leniency on the government. Moreover, this source also normally act as a monetary policy for the government to control the amount of money supply to the public; therefore helping controlling of inflation rates. This is normally done by the sale of the government bonds and other securities and also by direct borrowing (Ahmed, Arezki & Funke, 2005).
Moreover, the repayment interest rates are normally lower than the external sources and again they are normally stated and controlled by the government itself. It is thus convenient since the government can easily strategize and repay. Additionally, the government prefers this method of borrowing since the income realized by the borrowers is part of the national income which improves the economic welfare of the country. It thus increases the country’s per capita income which will generally imply that the living standard of the country improves (McMillian, 2011).
This source of financing also ensures that the government does not exploit the internationally stated limit amount of external debts. Therefore, it enables the country to access loan when there are emergencies that require financial attention such as disease outbreak, hunger and war. Another merit of internal loan is that there is no stated limit as long as the government promises to pay unlike with the external sources such as the World Bank that normally has a stated borrowing limit to the countries. Equally, this type of loan also assists the government in preservation of the national resources such as the minerals which could be used in exchange for the required funds, or even sold in order to acquire the money to repay the creditors (McMillian, 2011).
Since the economy of the country is stabilized by this kind of internal reliance, the credit worthiness of the country increases in the international monetary institutions. This is therefore of great advantage since the country can easily obtain loans in cases of emergency and without strict limits to any amount. It is also a sign of economic and political stability to the foreign investors who can get attracted to the country and start investments either inform Foreign Direct Investments or export trade. In cases of the general global financial crisis such as inflation or deflation, the country is likely to thrive well since it is already adapted to the use of its own capital sources. Unlike the countries that are used to borrowing and using of the outside sources of capital (Ahmed, Arezki & Funke, 2005).
Despite the post apartheid reliance by the south African government, its account still shows some level of debt which has to be repaid per year within a specified duration of time. The government has therefore come up with strategies which are used to repay such external loans. This mandate is left with the ministry of finance in order to generate and repay the money that is owed to the creditors (International Monetary Fund, 2011).
First, the government has ensured that nearly all the borrowings are done for the sake of carrying out income generating activities such as in the establishment of manufacturing industries. Such borrowings are also used in the development of investment boosters such as good roads and railway networks so that the money to be used in repaying the loans is promptly generated by such projects. However, for the activities which are not economically generative, strategies such as use of part of tax and funds from the other government investments have been used in repaying the loans (Rustogjee & Global Economic Governance Programme, 2004).
Additionally, Rustogjee & Global Economic Governance Programme (2004) state that these loans, especially the ones from individual governments, are repaid through the exchange of the natural resources such as the minerals which are found in the country in very large quantities. A part from this, the loans can also be repaid by putting up specific short term investments whose purpose is to generate funds for the repayment of the loans. Moreover, there are instances where the country borrows to get funds to repay loans. This happens in case of external loans whose deadline is fixed and there are no sufficient amounts of money to repay. The government therefore may decide to borrow from the internal sources which can be repaid later on.
In cases where the government is totally not able to repay a debt within the specified period of time, it is forced to enter a new agreement. This can either be an extension of the deadline or restructuring of the accrued amount then stating new terms of payment. The government may also include the external debt amount as part of the public budget. This is in order to ensure that there is commitment towards raising sufficient amounts of money for paying of the loan. Finally, in the cases where the government is not able to repay or enter a new debt agreement, it may be forced to print more of its currency so that it can use the excess money to repay the debt. This may be very possible but it is normally not economically advisable. This is because it can lead to excess supply of money into the economy which in the long-run may lead to the devaluation of the currency in the Foreign Exchange Market (Rustogjee, C. & Global Economic Governance Programme, 2004).
Rustogjee, C. & Global Economic Governance Programme (2004) further states that in extreme cases, the government may be totally defeated to repay the loan and chooses to default the payment. This is a possible way of doing a way with the obligation to pay but then it can be of a very negative implication. This is because the financial bodies such as the International Monetary Fund (IMF) and the World Bank may declare it unworthy of credit; hence hindering it the chance to secure loans in the future in cases of emergencies. Another possible action to such payment default may be the exemption from being a member of such international institutions.
In conclusion, any government needs funds in order to run their activities. However, there has to be very sound means of obtaining such funds. These may include; borrowings, raising funds from its own investments as well as from the taxation of the individual citizens. It is therefore worth saying that the South African way of generating the government’s funds is very cost effective and less stressful since the government majorly deals with the locals which can be very understanding. It also shows a high degree of self reliance and should be implemented by other governments especially in Africa.