State urged to reduce domestic borrowing

GOVERNMENT should reduce domestic borrowing to lower interest rates as it will leave room for commercial banks to lend out credit to the private sector and to the real economy, says an international economist, Lubinda Habazoka. Government has so far this year borrowed over K600 million from the domestic market. But Dr. Habazoka said high rates created an incentive for commercial banks to lend credit to Government through securities thereby crowding out the private sector. Dr. Habazoka explained that Government’s huge domestic borrowing resulted in banks being carried away with lending to Government hence squeezing liquidity from the production sector while increasing interest rates. “In such situations, banks understand that if they extended loans to the real sector of the economy default rates will be very high, that is why banks will prefer to lend to Government especially through securities. High rates creates an incentive for commercial banks to lend money to Government through securities,” Dr. Habazoka said. He, however, said such situation also meant that credit from countries with low interest rates would flood credit to those with high rates. “Theory says in such situations, monies will move from countries with low interest rates to countries with high interest rates, “So I think the fact that there is reduced borrowing, it reduces economic growth and rates can cause resources to move from European countries or Asia to countries such as Zambia where people could buy treasury bills and lend to Government,” Dr. Habazoka said.