eaz public discussion on debt lusaka, april 3, 2014 public debt: some general considerations...
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EAZ Public Discussion on Debt
Lusaka, April 3, 2014
Public Debt: Some General Considerations
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Outline
• Defining debt and relevant considerations
• Debt trends in international perspective
• Findings and conclusions
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What is Public Debt?
• Total financial obligations of public sector• To residents (domestic debt)• To non-residents (external debt)• Central Government + wider public sector
• Change in debt = fiscal deficit • Differences due to e.g. debt relief, exchange rate and valuation changes
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Why Borrow?
• Borrowing used to finance investment that earns a rate of return greater than the interest rate is a net positive for the economy
→need good project selection; rate of return analysis; investment management
• But debt can also mean added vulnerabilities
• reduced scope to finance larger deficits during economic slowdowns
• repayment (roll-over) risks when debt becomes due
• at the extreme, an economic (debt) crisis
• Debt management framework can help
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Thresholds?
• Higher debt → less return, more vulnerabilities
• Notion that debt ratios (e.g. to GDP) above certain levels leads to worse economic outcomes
• Reinhart & Rogoff (2010): marked change at 90% debt/GDP. Others (e.g. IMF WP/14/34, 2014) find no evidence of any “magic” threshold
• IMF/World Bank debt sustainability analysis• Baseline debt path and stress tests to assess
vulnerabilities • Thresholds for external debt and debt service
ratios to GDP, exports, and government revenue.
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Sustainability?
• Debt dynamics hinge on:
• real interest rate (r)
• real growth rate of the economy (g)
• primary fiscal balance as ratio to GDP (p)
• If r-g>0 then debt/GDP ratio increases over time (becomes unsustainable) unless offset by p>0
• Long-term outcomes are very sensitive to these parameters
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Debt Trends in Global Perspective
Source: IMF, SSA Regional Economic Outlook, May 2013.
8International Monetary Fund, Regional Economic Outlook for sub-Saharan Africa, May 2013
Sub-Saharan Africa: Distribution of Total Public Debt, 2000-12
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20170
40
80
120
160
200
240
Perc
ent o
f GDP
Interquartile range
Median
Mean
Sources: IMF, DSA database; and IMF staff calculations.Note: The "box and whiskers" plot summarizes the distribution of debt-to-GDP ratios across sub-Saharan African countries.
SSA: Debt Generally Falling in 2000s
Still Large Investment Needs
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Paved road density Generation capac-ity
Improved water Improved sanitation0
25
50
75
100
125
150
175
200
326
326
Sub-Saharan Africa LICsOther LICs
Norm
alize
d un
its
Note: Road density is in kilometers per kilometer squared; generation capacity is in megawatts per million population; water and sanitation coverage are in percentage of population.
10International Monetary Fund, Regional Economic Outlook for sub-Saharan Africa, May 2013
Public Sector Debt Levels in 2012 and Sustainability Thresholds
Congo, Republic ofGhana
ZambiaEthiopia
MadagascarMozambiqueSierra Leone
BurundiCongo, Dem. Rep. of
Guinea-BissauTogo
Mid
dle-
inco
me
coun
tries
Frag
ile c
ount
ries
0 10 20 30 40 50 60 70 80 90
ExternalDomesticDSF threshold
Percent of GDPSources: IMF, DSA database; and IMF staff calculations.Note: Excludes Eritrea and Zimbabwe. Debt to GDP ratios pertain to public sector debt as defined in the Debt Sustainability Framework.
Most SSA Countries Below Thresholds
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But Large Debt Increases in Some Countries
Group I Group II0
5
10
15
20
25
30
35
40
45
Public Debt Level
Public Debt Increase
End-2013 Public Debt Level and Debt Increase since Low Point by Country Groups (in percent of GDP)
Group I is the 40 percent of SSA countries where debt ratios increased by more than 10 percentage points since the pre-crisis period or their lowest public debt level since 2001 (whichever is lower). Source: WEO Database
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Conclusions
•Need to balance consideration of longer-term development needs with fiscal space•How depends on country-specifics, but a number of things can improve the trade-off, including:
• Careful investment selection, to get high returns
• Plan ahead and identify risks• Ensure link with broader macro-economy
→ Grow the economy and avoid debt distress