Question

With example explain the term Public debt Mention and explain (3) three measures each that the Minister of Finance can recommend to Cabinet to manage public debt if the challenges faced relate to

Answer 1

Meaning of Public Debt: The public debt is how much a country owes to lenders outside of itself. These may include individuals, businesses, and even other governments. The term public debt is often used interchangeably with the term sovereign debt. Public debt usually refers to national debt.

Examples of Public Debt: There are certain types or examples of publice debts i.e. dated government securities, treasury bills, external assistance and short-term borrowings.

Measures to manage public debt:

1. Reduction in Primary Deficit: Corrective action with respect to the growing internal debt must be carried out in two stages. In the first stage, action must be directed toward slowing down the pace of growth of the debt ratio or reducing it to a reasonable level. In the second stage, attempts must be made to contain most revenue expenditures within the revenues raised by the Government so that Government's net borrowing is used only for productive purposes

2. Reduction in Growth of current expenditure: In order to reduce primary deficit, emphasis has to be placed more on reducing the growth of current expenditure of the Government than on raising the rate of growth of revenues such as reduction in the government's consumption expenditure for its staff, reduction in subsidies, reduction in capital assistance and subsidy to public enterprises and reduction in government civilian employment

3. Reforms in Debt Management of States: While several reforms in debt management policy have been introduced in the respect of sale of central government securities, sale of state government loans continue to be on old pattern and procedures. Under the present system, there is no scope for better managed states to access funds at competitive rates of interest. Hence, it is necessary to bring flexibility in the borrowing programs of the state governments with the help of central / controlling bank initiatives.

4. Foreign institutional investors and Public debt: Foreign Institutional Investors have been permitted to invest in government debt. In respect of government debt, they are permitted to invest only in dated government securities.