Public debt management: global experience for Ukraine
Many people mistakenly believe that if a country has a lot of debt, its economy is on the verge of a crisis. This is not entirely true. If debt is managed effectively, it can significantly reduce its impact on the country’s living standards. Moreover, it can become an impetus that can lead the country out of a difficult situation. It sounds strange and illogical, doesn’t it?
Then what can we say about Ukraine, where the national debt is increasing by the minute (yes, even as you read this sentence)? Falling GDP, declining exports, declining imports, increasing destruction. How critical is the situation and how to overcome the crisis caused by the war?
The Institute for Analysis and Advocacy has studied how public debt is managed in economically developed countries that are recovering from the COVID-19 pandemic. The decisions made by governments can help Ukraine develop its own plan to stabilize the economy.
The example of the United States, the largest borrower in world history, is often cited as proof that high debt is not a problem. $31.4 trillion is fantastic money, hard to imagine. This is not an exaggeration or a propaganda horror story – it is a real huge loan from the federal government that has not yet been repaid.
The United States lives in debt, yet it is successfully developing and has no problems. How do they do it? First, the US currency is an independent and full-fledged monetary unit. They export, import, accept investments, and even sell their debt for the dollar, which eliminates the risk of currency instability. This also increases the demand for the currency itself, both in the country and abroad.
The U.S. Treasury responds to the enormous challenges and opportunities facing the country through effective bond management. This prevents the need for additional borrowing, determines the direction of the country’s development, and affects the security and prosperity of the people for generations to come.
The pandemic has caused a similar situation with debt in the Japanese economy, which leads the ranking of public debt to GDP.
Japan’s public debt is mostly domestic, meaning that the country actually owes “itself” – to its banks, companies, trust funds, and government organizations. Again, the debt is formed in the currency controlled by the country – yen. For Japan, this is a factor of independence from international partners and attractiveness to creditors.
Government bonds play a dominant role in the Japanese debt market. Yes, the volume of this type of loans is large, but the successful debt regulation policy of the Bank of Japan largely mitigates its negative impact on economic development. The country creates conditions for investing in its own development, where citizens are part of the pillar of the economy.
Debt has also reached its historic high in Germany. This was stressful for the country, as the debt-to-GDP ratio had been declining steadily for a long time.
Germany has managed to respond decisively to the challenges of the pandemic without jeopardizing the stability of the economy. This was undoubtedly facilitated by the country’s position before the epidemic. In addition, to reduce the debt burden on each German citizen, the government created the Economic Stability Fund, which became one of the elements of the agency model of debt management.
An equally important solution in Germany was the issuance of green bonds aimed at protecting the environment and solving environmental problems. Such a tool was also used in France, which also faced a serious challenge from the pandemic.
The French government manages public debt so that taxpayers do not feel the crisis, so the ultimate beneficiaries are the population. How do the country’s loans affect the wallet of an ordinary person? Directly. Salaries of teachers, doctors, scientists, military and civil servants depend on the size of the budget. If the deficit is covered by printing new money, inflation and prices will rise.
In the UK, the situation is exactly the opposite – the policy there is aimed at increasing taxes
The new government was forced to take this measure, as last year’s prime ministerial candidates promised to cut taxes. However, this would have led to an increase in the debt burden if the budget deficit from tax cuts were covered by borrowing.
Taking into account the decisions taken by governments to stabilize the economy after the pandemic crisis, we have identified 5 key steps to effective public debt management for Ukraine:
- Decrease in the ratio of net public debt to GDP;
- Increase the share of hryvnia-denominated debt in the public debt portfolio;
- Increased focus on development-oriented external loans;
- Optimization of the value and risks of the total public debt portfolio;
- Development of the treasury securities market.
However, it should be understood that it is virtually impossible to work in the direction of all these recommendations in a time of war. Therefore, it is worth highlighting those related to the development of the bond market and focusing on investment and innovative external loans.
Currently, the world is showing interest in green bonds, which are a relatively recent discovery. At the moment, this issue is not a cornerstone for Ukraine, but such a tool could help in the country’s post-war recovery. For now, military bonds remain a viable investment option for Ukrainians to support the armed forces and the economy in the midst of war.
Another important observation of the study is the role of the manager in the country’s economic growth. For example, countries with weaker institutions find it more difficult to sustain growth and are more vulnerable to experiencing periods of crisis and stagnation. Accordingly, the issue of institutional capacity in debt management is one of the key ones.
Thus, it can be argued that today public debt is a global practice for most countries. If the money is used properly, it can significantly improve the welfare of the country’s citizens in the long run. However, if it is managed inefficiently, the debt becomes a heavy burden not only for the present but also for future generations.