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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. Outline. Defining debt and relevant considerations Debt trends in international perspective Findings and conclusions. What is Public Debt?.

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EAZ Public Discussion on Debt Lusaka, April 3, 2014

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  1. EAZ Public Discussion on DebtLusaka, 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

  3. 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

  4. 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

  5. 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.

  6. 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

  7. Debt Trends in Global Perspective Source: IMF, SSA Regional Economic Outlook, May 2013.

  8. Mean SSA: Debt Generally Falling in 2000s • Sub-Saharan Africa: Distribution of Total Public Debt, 2000-12 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. • International Monetary Fund, Regional Economic Outlook for sub-Saharan Africa, May 2013 8

  9. Still Large Investment Needs 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.

  10. Most SSA Countries Below Thresholds • Public Sector Debt Levels in 2012 and Sustainability Thresholds Sources: 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. • International Monetary Fund, Regional Economic Outlook for sub-Saharan Africa, May 2013 10

  11. But Large Debt Increases in Some Countries 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

  12. 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

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