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? 

So, what about Ukraine, where the national debt is increasing by the minute (yes, even as you read this sentence)? With a falling GDP, declining exports, decreasing imports, and increasing destruction, how critical is the situation. Additionally, how can the crisis caused by the war be overcome?

To analyze these issues, we have studied how public debt is managed in economically developed countries recovering from the COVID-19 pandemic. The decisions made by these governments can help Ukraine develop its own plan to stabilize its economy.

The example of the United States, the largest borrower in world history, is often cited as proof that high debt is not necessarily a problem. $31.4 trillion is a staggering amount of money, hard to imagine. This is not an exaggeration or a campaign horror story – it is a real, massive loan from the federal government that has not yet been repaid.

The United States lives in debt, yet successfully develops and faces no issues. How do they do it? Firstly, the US currency is an independent and fully-fledged monetary unit. They export, import, attract investments, and even sell their debt for the dollar, which eliminates the risk of currency instability. It also increases demand for the currency itself, both domestically and abroad.

The US Treasury addresses the enormous challenges and opportunities facing the country through effective bond management. This eliminates the need for additional borrowing, determines the direction of the country’s development, and impacts the security and prosperity of the people for generations to come.

The pandemic has created a similar situation with debt in the Japanese economy, which leads the ranking of public debt to GDP.

Japan’s public debt is primarily domestic, meaning that the country owes money to itself—its banks, companies, trust funds, and government organizations. Furthermore, the debt is denominated in the country’s controlled currency – the yen. For Japan, this factor ensures independence from international partners and enhances attractiveness to creditors.

Government bonds play a dominant role in the Japanese debt market. Although the volume of these loans is substantial, the successful debt regulation policy of the Bank of Japan largely mitigates its negative impact on economic development. The country creates favorable conditions for investing in its own development, with citizens forming a crucial part of the economic backbone.

Germany has also reached a historic high in debt, causing stress for the country, which had been steadily reducing its debt-to-GDP ratio for an extended period.

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 outbreak. 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 initiative in Germany was the issuance of green bonds aimed at protecting the environment and addressing environmental problems. This tool was also employed in France, which similarly faced a serious challenge from the COVID pandemic.

The French government manages its public debt in a way that shields taxpayers from feeling the crisis, ensuring that 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 personnel, 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 precisely the opposite – the policy there is oriented towards increasing taxes.

Considering the decisions made by governments to stabilize the economy after the pandemic crisis, we have identified five key steps towards effective public debt management for Ukraine:

• Reducing the ratio of net public debt to GDP;
• Increasing the share of hryvnia-denominated debt in the public debt portfolio- Greater focus on development-oriented external loans;
• Optimizing the cost and risks of the overall 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 the focus on investment and innovative external loans.

Currently, the world is showing interest in green bonds, a relatively recent discovery. At the moment, this issue is not a cornerstone for Ukraine, but such an instrument could aid in the country’s post-war recovery. For now, military bonds remain a relevant investment option for Ukrainians to support the armed forces and the economy in the midst of war.

Another crucial observation from the study is the role of the manager in the country’s economic growth. Countries with weaker institutions face greater challenges sustaining 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 received is used properly, it can significantly improve the welfare of the country’s citizens in the long run. However, if managed inefficiently, debt becomes a heavy burden not only for the present but also for future generations.