Introduction to Public Debt (Part 01)

Public debt indicates the amount of outstanding debt instruments that are issued by the government anytime during the past but not yet repaid. (Seater, 2008) Incurring public debt is a regular phenomenon in managing fiscal and the monetary policy of an economy leading to governments borrowing money from local and international institutions to cover the public deficit. (Kumhof and Tanner, 2004) Mostly the lenders to the government are the financial intermediaries of the country where Kumhof and Tanner, (2004) state that in developing countries, public debt holders are banks and pension funds who hold the surpluses of the economy. According to Alisena and Tabelleni, (1989) public debt serves 02 purposes even though it seems to indicate a negative reflection of the economy and one such purpose is redistributing the income over time across generations while serving as a mechanism to minimize the deadweight losses on taxation created through providing public goods and services for the well being of the public. However, Reinhart (2011) in his working paper has expressed his concern over surging public debt of many advanced economies which has surpassed the ratios prevailed during the World war 01 and great depression making it a decade of debt. In discussing the risk attached to surging public debts, The Economist, (2012) states that more public debt indicates that there would be more state inference in the economy to impose controls while there is anticipation about high tax burden into the future indicating negative impact to the economy as a whole. Also, The Economist, (2012) argues that having to roll over the public debt at regular intervals creates a popularity test for government which functions as a reality show where government needs to attract votes in favour and failing the test would result in financial crisis and significant economic losses as occurred in Greece in early 2010. Given the significance risk of surging public debts in advanced economies, IMF, (2011) has proposed suverign debt management system to raise required level of public debt while meeting cost targets and minimizing risk which will create efficient financial markets in the economy. In guidelines for efficient public debt management IMF (2011) emphasizes that the government’s debt is the largest financial portfolio in the economy where failure in management of such portfolio could lead to severe financial crisis. Even though IMF (2011) highlights that poor management in public debt is not the sole reason for financial crisis, maturity structure, and interest rate and currency composition of the government’s debt portfolio have significantly contributed towards past and present financial crisis.

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