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EAZ Public Discussion on Debt
Lusaka, April 3, 2014
Public Debt: Some General Considerations
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Outline
• Defining debt and relevant considerations
• Debt trends in international perspective
• Findings and conclusions
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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
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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
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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.
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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
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Debt Trends in Global Perspective
Source: IMF, SSA Regional Economic Outlook, May 2013.
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SSA: Debt Generally Falling in 2000s
Sub-Saharan Africa: Distribution of Total Public Debt, 2000-12
240
Mean
200
Interquartile
range
Percent of GDP
160
120
Median
80
40
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
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
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Still Large Investment Needs
200
326
175
Sub-Saharan Africa LICs
Normalized units
150
Other LICs
125
100
75
50
25
0
Paved road density Generation capacity
Improved water
Improved sanitation
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.
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Most SSA Countries Below Thresholds
Fragile countries
Low-income countries
Middleincome
countries
Oil
exporters
Public Sector Debt Levels in 2012 and Sustainability Thresholds
Cameroon
Chad
Congo, Republic of
Nigeria
Cape Verde
Ghana
Lesotho
Senegal
Zambia
Benin
Burkina Faso
Ethiopia
Gambia, The
Kenya
Madagascar
Malawi
Mali
Mozambique
Niger
Rwanda
Sierra Leone
Tanzania
Uganda
Burundi
Central African Rep.
Comoros
Congo, Dem. Rep. of
Côte d'Ivoire
Guinea
Guinea-Bissau
Liberia
São Tomé & Príncipe
Togo
External
Domestic
DSF threshold
0
10
20
30
40
50
Percent of GDP
60
70
80
90
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
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But Large Debt Increases in Some Countries
45
End-2013 Public Debt Level and Debt Increase since Low Point by
Country Groups (in percent of GDP)
Public Debt
Level
40
35
30
Public Debt
Increase
25
20
15
10
5
0
Group I
Group II
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
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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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