Most developing countries rely heavily on borrowing to finance their development budgets. Explain five reasons for such reliance. (10 marks)November 2022

Developing countries often rely heavily on borrowing to finance their development budgets for a variety of reasons:

1. Limited domestic resources: Developing countries typically have limited domestic resources, such as savings and investment, to finance development projects. Borrowing allows them to access the resources they need to invest in infrastructure, education, and other areas that are critical for economic growth and development.
2. Low creditworthiness: Developing countries may have low creditworthiness due to weak institutions, poor governance, and lack of economic and political stability. This makes it difficult for them to access capital markets and secure funding from other sources.
3. Lack of access to alternative financing: Developing countries may lack alternative financing options such as foreign direct investment, capital markets, or venture capital, which limits their ability to raise funds.
4. High infrastructure costs: Developing countries often have high costs associated with building the infrastructure necessary for development, such as roads, power plants, and water systems, which can be financed through borrowing.
5. Urgent needs: Developing countries may have urgent needs that require immediate funding, such as providing basic services, addressing social and economic inequalities, and reducing poverty, which can be financed through borrowing.
6. Inadequate domestic savings: Developing countries may have inadequate domestic savings to finance their development projects, hence they may rely heavily on borrowing to finance their development budgets.