Download Lecture 1.Principles of Public Debt

Lecture outline
 Soft budget constraint at times of command economy
 Public Debt of the Former Soviet Union
 Economic policy in Uzbekistan after 1991
 Public investments in Uzbek economy
Soft budget constraint at times of command economy
 Hard budget constraint – expenditures are limited by
income
 Soft budget constraint – income can be transferred from
other budgets so that expenditures are not limited to
company’s profit
Soft budget constraint at times of command
economy
 Price was not determined by supply and demand
 All companies were stated owned
 The main instrument of regulating businesses - subsidies
 Banking credit was not popular
 Economy was mainly run by heavy industries
Soft budget constraint at times of command
economy
 Inflation was hidden since prices did not reflect equilibrium
price
 There was a chronic shortage
 State decided what to produce and whom to produce. The
trade between companies was also planned.
 Soft budget constraint created little incentive to increase
efficiency. The quantity was priority while quality did not meet
standards
Public Debt of the Former Soviet Union
 The Former Soviet Union did not have full access to
international debt market due to political reasons
 Nevertheless, starting from 1960 s it borrowed from
foreign banks in order to import technology (Popova, G,
2004, “Government credit and debt”, Rostov)
 In 1980s, when economy was in recession, the
government had to sell its gold reserves. These reserves
decreased from 2500 tons in mid 1980s to 240 tons in
1991.
Public Debt of the Former Soviet Union
 By 1989 the government budget deficit was 100 billion
rubles against internal debt worth 400 billion rubles
(Popova, G, 2004, “Government credit and debt”,
Rostov).
 In 1991 external debt amounted to 71 billion dollars. This
is partly explained by falling oil prices which were equal
to 10 dollars per barrel in 1991 against 30 dollars in
1970s.
Public Debt of the Former Soviet Union
 In 1991 payments on previous loans were due which
amounted to 20 percent of the whole public debt. To cover
this the government allocated 16 billion dollars in its
budget plan (Popova, G, 2004, “Government credit and
debt”, Rostov).
 As a result the main bank for international payments could
no longer make transactions due to lack of funds.
International banks stopped providing loans without state
guarantee. Between 1990 and 1991 7,5 billion dollar
credits were attracted under the state guarantee.
Public Debt of the Former Soviet Union
 In 1993 Russian Federation took over the responsibility to pay
the entire former soviet union debt. At the same time, Russia
gained ownership of all assets of the former soviet union.
However, it turned out that assets inherited were not sufficient
to meet liabilities.
 Since Russia could not repay debt on time, it negotiated with
London and Paris clubs on rescheduling soviet union debt. In
1996 the debt due to Paris club members amounted to 38
billion dollars. As a result of negotiations Russia achieved that
45 percent of debt should be paid by 2020, and 55 percent until
2115.
Economic policy in Uzbekistan after 1991
 Uzbekistan gained independence form the former Soviet
union in 1991
 The country started its way towards establishing market
economy. However, the main challenge was to overcome
difficulties left as a legacy of the command economy
 Many post-soviet countries had to attract debt from
international financial institutions to buy imports while
their own production collapsed.
Economic policy in Uzbekistan after 1991
 In short period Uzbekistan achieved the level of GDP it had before
independence. In fact, it was the first country among former soviet
union states to recover its income of the pre-transition period
 The main economic achievements of Uzbekistan are attributed to
model of economic growth. The model defines the government as the
leading reformer, which aims at social protection and gradual
transition to market economy.
 Like other transition countries, Uzbekistan attracted foreign debt.
However, it did not attract this debt to cover its budget deficit. The
whole debt accumulated financed investment and social projects.
Economic policy in Uzbekistan after 1991
2001
2002
2003
Debt/GDP
56,2
44,1
Exportimport (in
mln dollars)
33,5
276,4 760,8
43,7
2004
2005
2006
2007
2008
37,3
31,3
23,1
17,0
13,3
1037
1317,5
1993,9
2263,4
4068,8
Source: Journal “Birja expert”, 2009, N1
Deficit/surplus of the government budget
Surplus
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
Surplus
2010
2011
2012
2013
2014
Source: Uzbek Economy 2014, Statistical summary, CER
Public expenditure in economy
 The government expenditures were equal to 21,7 percent of GDP in
2014 (Uzbekistan economy 2014, Center for Economic Research)
 59 percent of budget expenditures are social expenditures. These
amount to 12,8 percent of GDP
 For investment purposes the government created Fund for
reconstruction and development. In 2014 this Fund initiated 15
investment projects worth 439,1 million dollars.
 The government also provided guarantees for foreign credit
institutions. In 2014, the foreign credits attracted under the
government guarantee amounted to 607 million dollars. This is 10
percent increase compared to the previous year.
Public expenditure in economy
 The government stimulates economic growth by active fiscal
and monetary policies.
 For example, the government has provided various support for
young families, foreign investors and small business in form
of tax deductions, subsidies and others. The costs all these
projects are paid by the state budget.
 Active involvement of the government in investment projects
imply that in Uzbekistan the fiscal policy aims at increasing
productivity. Moreover, to reduce the distortionary effect of
taxes, the government is cutting tax rates annually.
Thank you for your attention!