eaz public discussion on debt lusaka, april 3, 2014

EAZ Public Discussion on Debt

Lusaka, April 3, 2014

Public Debt: Some General Considerations

TRasmussen@imf.org

2

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

Midd

le-inc

ome

coun

tries

Frag

ile co

untri

es

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 II05

1015202530354045

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