External Finance and Budget Deficits in Developing Countries: A General Survey
B. E. S. Machangu
Download Article | Published On 01/12/1996

Abstract

When a deliberate excess of expenditure over income is carried out by the government, it takes the form of a budgeted deficit, financed by borrowing. either from foreign sources or domestic sources. Usually, the anticipated objective is to stimulate economic activity and employment by injecting more purchasing power into the economy. Whereas there is evidence to show that there is negative relating On between domestic savings on one hand and foreign borrowing on the other, the trend of the causation seems at least for the Tanzania case to nm from foreign borrowing to savings. The analysis from this paper recommends external financing (foreign borrowing) which can be viewed as a benefit cost question. Such borrowing, when carried out the net gain resources (present and future) should be balanced against the cost of debt servicing including repayment. Thus, a budgetary deficit financed through borrowing should be of a type that results in a net addition to national outlay or aggregate expenditure, otherwise external financing may not be a satisfactory way of dealing with budget deficits

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