In: Accounting
Martin Guzman, Argentina’s Minister of Economy, writes in the FT about the current debt crisis. Read closely and then analyze, using the following sequence of questions as your analytical structure.
a. Yes, Guzman is correct. Twenty percent of government revenues are substantial part which could have been used in any other development activities of economy. Going by balance sheet, it will have $ 65 billion on liability side of balance sheet & $4.55 billion in expense side of income & expenditure account. Hence, this will have negative effects on the country's development activities. Government could have spent this amount on healthcare, military, infrastructure sector, etc. So Guzman is correct in his approach.
b. Guzman proposes a restructuring of this debt, involving a 3-year grace period (no payment), reduction of interest rate, and reduction of principal. Of the three survival (payment) constraint is addressed by reduction of interest rate. Reason behind this is that 3-year grace period (no payment) will result in increased debts after three years & increased interest payments on that debts, which will absorb more part of government revenues after three years. Same way reduction of principal will lead to more payment for principal today resulting in even lower government revenues left in hand of government for other activities. But if interest rate is reduced it will result in lesser amount to be spent out of government revenues today as well as in future. Thus, it is a permanent solution.
c. Export growth relevant for debt service becuase it will lead directly to increase in government revenues as well as increase in foreign exchange reserves of country. Here government will benefit from export in form of increased tax collections, more employment generation, more foreign direct investment, self dependent economy,etc due to increased exports. Besides above factors GDP of country will increase. This in turn will generate more revenue sources for government. This will lead to result that interest and principal payment would become small part of governemnt revenues. Thus reducing the 20% to maybe 10% or even lesser. So, government will have more disposable income at it's end.