Topic 7.

Public credit

PLAN

1. The essence and necessity of public credit

2. Functions and role of public credit
3. Forms of public credit
4. Public credit management

LITERATURE

1. N.Novruzov, H.Huseynov - Finance, Baku - 2007

2. MM Sadigov, SM Mammadov - Finance, Ganja - 2010
3. MM Sadigov, MC Huseynov, HH Hasanov - Finance of agriculture, Ganja - 2011
4. B.Atashov, N.Novruzov, E.Ibrahimov. Financial theory, Baku 2014.

1. The essence and necessity of public credit

The state creates additional financial resources by attracting temporarily free funds of the population
and economic structures. The main way to get money is a state loan. In this case, the mobilized funds
are placed at the disposal of public administration bodies and, as a rule, are used to cover the budget
deficit.
Public credit is a set of economic relations between the state and legal entities and individuals in which
the state participates as a borrower, creditor and guarantor. Also in this case, the activity of the state as
a borrower is more dominant. The volume of transactions as a creditor, ie the state lending to legal
entities and individuals, is very low.
State guarantee means the obligation of the state to fulfill the debts or other obligations of individuals
and legal entities.
Government guarantees usually apply to relatively unreliable borrowers, which leads to increased
expenditures from the centralized cash fund, respectively.
The objective necessity of public credit is the constant contradiction between the state's need for
money and government revenues.
Regulation of the economy, social policy, defense and governance, as well as international activities
require a constant increase in government spending. However, state budget revenues are limited by the
level of taxation established by the current legislation, so the authorities use public credit in order to
attract free money from the population, enterprises and organizations.
Public credit, as an economic category, is at the crossroads of two types of monetary relations -
financial and credit relations, and reflects their characteristics.
As a link in the financial system, public credit serves the formation and use of centralized state funds, ie
budgetary and extra-budgetary funds.
Public credit is different from other types of credit. Thus, if a bank loan is usually secured by specific
valuables, such as property and other valuables, all the property owned by the borrower, the property
of that territorial unit or any of its income acts as collateral for the loan. Another distinctive feature of a
bank loan is its productive use as capital, which creates conditions for the repayment of debt and the
payment of interest due to the increase in the value of the surplus product - production.
The source of repayment of the state loan is the budget.
 Credit relations should not be confused not only with money, but also with financial relations. First of
all, it carries out financial distribution relations, and credit carries out redistribution relations. In
addition, all financial categories (taxes, duties, etc.) move unilaterally, and credit moves in a reciprocal
form.

2. Functions and role of public credit

Public credit performs the functions of distributor, regulator and supervisor.

1. The formation and use of centralized state funds is carried out on the basis of the principle of
urgency, payment and repayment through the distributive function of public credit. The state, acting as
a borrower, raises additional funds to finance its expenses. This is one aspect of public credit relations.
The other side is the financial relations, which are subject to additional mobilization, return and
payment. In this case, the payment of income to creditors is provided by budget revenues.
In the case of unproductive use of capital mobilized with the help of government bonds, for example,
when military or social expenditures are financed from them, the only source of payment is taxes or new
bonds. The placement of new government bonds to repay debt on bonds already issued is called
refinancing of public debt.
2. By entering into credit relations, the state inevitably influences the state of money circulation, the
level of interest rates in the money and capital markets, production and employment.
Using public credit as an instrument of economic regulation, the state implements one or another
financial policy.
It regulates money circulation by placing government bonds between different groups of investors. It
reduces solvent demand by mobilizing individuals' funds. If production costs, such as investment, are
financed by credit, there will be an absolute reduction in the amount of cash in circulation.
The state has a positive effect on production and employment through the borrowing of foreign funds,
demanding the production of domestic goods. In this case, the state acts as a creditor and guarantor. In
particular, it can be expressed in the protection of small business, exports and production in individual
regions in decline. This can be done by guaranteeing a bank loan by the state in accordance with the
relevant program, and by repaying the bank's debt on a loan in the event of insolvency of small
enterprises.
Excessive activity of the state in the financial market diverts a significant part of savings from
production, significantly slows down the pace of economic development, leads to an increase in public
debt.
Loans are provided to legal entities for structural changes in production, settlements on targeted loans,
especially for the purchase of equipment, application and purchase of the latest technology and
materials.
In turn, the activity of the Republic of Azerbaijan as a guarantor stimulates the creation and activity of
financial-industrial groups, provides financial assistance for the export of goods and services produced
by producers.
3. The control function of public credit is organically related to the control function of finance.
The role of public credit in the development of the country's economy is expressed by its importance
for both the state, enterprises and organizations and the population. The lawful operation of public
credit relations increases the interest of the participants and leads to an increase in its efficiency.
The role of public credit in modern economic development is as follows:
 public credit ensures the coherence of budget expenditure financing by eliminating the imbalance in
budget revenues and expenditures;
  Eliminates the shortage of funds faced by the state as the main source of funding to cover the budget
deficit;
 plays the role of a source of funding for the implementation of overdue debt obligations of the state;
 Provides adequate loans to areas whose development is important for the national economy;
 meets the credit needs of relatively low-credit enterprises;
 creates conditions for the development and harmony of production by eliminating the shortage of
funds of state-owned enterprises;
 acts as an integral part of monetary policy by influencing cash and non-cash circulation in the country;
 Conditions the economical and efficient use of borrowed funds as part of credit relations;
 ensures the development of the securities market in the country through government securities;
 Carries out efficient use of free funds at the disposal of legal entities and individuals, as well as
attracts foreign financial sources - international loans to the country's economy, etc.

3. Forms of public credit

Public credit relations lead to the formation of debt obligations and assets of the state.
Debt obligations of the Government of the Republic of Azerbaijan constitute the public debt of the
Republic of Azerbaijan. Debt obligations on loans issued by the government constitute the public debt
assets of the Republic of Azerbaijan.
Public credit is divided into domestic and foreign (international) loans. Credit relations with legal
entities and individuals of the country in the national currency constitute domestic state credit. As the
bulk of public spending is in the national currency, domestic public debt is more developed. At the same
time, the international division of labor, the exchange of technology, scientific and technical
achievements, the need for financial assistance to foreign countries make it necessary to develop
international public credit, ie the implementation of public credit relations in foreign currency.
Credit relations with foreign countries and their legal entities and individuals, as well as with
international organizations constitute international credit.
Foreign government debt obligations include loans from foreign governments, loans from international
organizations, loans from foreign legal entities and individuals, as well as foreign loans from which the
state acts as a guarantor. These loans come in the form of investment loans, export loans, balance of
payments loans, and loans to support reforms.
Domestic public debt consists of borrowings from local enterprises, other centralized funds and the
population (for example, municipalities), as well as debt obligations of the state as a guarantor.
Domestic government credit can take the following forms:
 government bonds;
 conversion of a part of the population's deposits into public debt;
 treasury loans debt obligations;
 guaranteed bonds;
 Borrowing funds from the state loan fund;
 Guaranteed loans.

Government bonds are a form of public credit, and the temporarily free funds of the population,
enterprises and organizations are used to finance public demand through the issuance and placement of
various bonds, treasury bonds and other forms of securities.
Bonds are the most common form of security. It reflects the government's debt obligations, which
entitles its holder to receive the amount and interest on the debt after a certain period of time.
 The nominal value (nominal price) of the bond is determined by the state. The nominal value of the
bond represents the amount of money that the bondholders give to the state for temporary use, which
is returned to the bondholder at the time of its repayment and accrued interest.
If the proceeds from the sale of bonds are used to finance extra-budgetary funds and special purposes
along with the budget, the treasury liabilities are fully included in the budget.
The most common form of current government debt is treasury bonds (promissory notes). Treasury
liabilities are issued for 3, 6, 12 months to cover the budget deficit. Medium-term bills can also be
issued. They do not have interest coupons, are sold at a discount from the face value and are purchased
at full value. Treasury bills are mainly placed in financial and credit institutions and trade and industrial
corporations and bring them large profits (they are not placed among the population).
Treasury bonds - unlike bonds, are sold only to the public. Proceeds from its sale will be used by the
state only to complete the budget.
The second form of public credit is the conversion of part of the population's savings into public debt.
The conversion of a part of the population's deposits into public debt is carried out through state-owned
banks. Private banks can lend part of the borrowed funds to the state. The existence of an intermediary
between the state and the population as banks and the fact that banks lend part of their funds to the
state without the knowledge of the real owners of the loan funds, gives grounds to define this
relationship as a form of public credit.
Conversion of a part of the population's deposits into public debt through the purchase of special types
of government securities (treasury savings certificates) or market securities (bonds, treasury bonds), as
well as documentation of debts without bonds (signing a contract or issuing a special certificate)
provided by.
Treasury loan - as a form of public credit, refers to the financial assistance provided by public authorities
to enterprises and organizations at the expense of the budget on a fixed-term, repayable and repayable
basis. Unlike a bank loan, a treasury loan is provided on preferential terms on terms and interest rates.
Treasury loans can be obtained when economic authorities are facing financial difficulties or when the
economic situation in the country is deteriorating. They have no commercial purpose and are a means
of protecting economic structures that are vital to the national economy.
In certain cases, the government may guarantee the unconditional repayment of bonds and interest
issued by local governments or individual economic bodies. In this case, there is a conditional
government loan - secured debt. The state is financially liable for secured debts only in the event of
insolvency of the payer.
Borrowing from the state loan fund as a form of public credit is characterized by the fact that public
credit institutions (Central Bank) provide part of the credit resources directly to cover government
expenditures. The use of this form of public credit accelerates the inflation process.
From foreign (international) public credit, the state acts as a borrower, creditor and guarantor of the
world financial market. External public debt, like domestic debt, is provided on a repayable, term and
repayable basis. The amount of foreign debt received, together with the accrued interest, is attributed
to the country's domestic debt.
External loans are issued from the budget or special government funds.
The main purpose of foreign public debt is to strengthen the economic potential of countries - buyers,
to overcome financial difficulties, to provide food assistance, etc. consists of.
Foreign government debt is presented in the form of money or goods and is issued in the currency of
the creditor - the country, the borrower - the country or a third country. Debts are repaid in goods or
currency by agreement of the parties.
Developed countries, international credit organizations - the International Monetary Fund, the
International Bank for Reconstruction and Development, the European Bank for Reconstruction and
Development, the Islamic Development Bank, etc. are the creditors of our country. performs.
 The activity of the Republic of Azerbaijan as a creditor and guarantor in the international arena is very
limited due to the unfavorable financial and economic situation of the country.
Foreign debt assets, as a form of international credit, include loans to governments of other countries
and loans to foreign legal entities and individuals.
Domestic debt assets include loans to other levels of budgets, financial institutions, government non-
financial organizations, local businesses and individuals.
Budget loans can be provided from the state budget and local budgets. For example, a budget loan for
the stabilization of the fuel and energy complex is provided from the state budget.
In addition to the state budget, loans can be allocated to housing cooperatives from local and municipal
budgets.
As budget loans are related to the expenditure of budget funds, their use should be strictly controlled.
Bonds are issued by both public and private companies under certain collateral to attract debt capital.
This pledge guarantees the bondholder that if the enterprise is unable to fulfill its obligations, it will sell
the pledged property and make appropriate payments. In some cases, unsecured bonds are issued that
reflect long-term liabilities. Such bonds are based on confidence in the firm's sound financial position
and creditworthiness.
Government, corporate, municipal and foreign bonds are distinguished by type of issuer.
Government bonds are classified according to a number of characteristics.
1. For the subject of debt relations - bonds placed by the central government and local governments.
2. Internal and external bonds according to the place of placement.
3. According to the market turnover - market and non-market bonds.
Market bonds are freely traded and bought. It is considered key in financing the budget deficit. Non-
marketable bonds cannot change their owners freely and cannot be traded in the securities market.
They are usually issued by the state to attract certain investors. These bonds meet the specific interests
of investors. Non-marketable bonds are issued to raise funds from pension funds or insurance
companies.
4. Depending on the term of attracting funds - bonds are short-term (up to 1 year), medium-term (1 to 5
years), long-term (more than 5 years). Short-term bonds are used to cover the temporary difference
between the receipt of income and the implementation of expenses. As a rule, promissory notes are
issued for this purpose.
5. Depending on the security of the debt repayment, the bonds are divided into secured and unsecured
bonds. Mortgaged bonds are secured by a specific collateral, such as certain property. Such bonds are
often issued by local authorities. Unsecured bonds are not secured by anything concrete, they are
secured by the state or all the property of the municipality. Central governments usually issue
unsecured bonds. Their reliability is very high, so investors do not need any guarantees.
6. According to the form of income payment, government bonds are divided into interest-bearing,
winning and zero-coupon bonds. Payment of income on winning bonds is made on the basis of winning
draw. There is no great demand for these bonds. Investors try to make a steady income without
expecting coincidences. Therefore, the main type of bonds are interest-bearing bonds, the proceeds of
which are paid once, twice or four times a year on the basis of coupons. In other words, interest
coupons are added to the blanks of coupon bonds. These coupons show income paid in proportion to
the face value of the bond. Most investors prefer such debt obligations.
The government does not have a coupon for short-term debt obligations (discount bonds). They are
sold at a discount from the face value and are repurchased at face value. A number of long-term debt
obligations also do not have coupons. All income on them is paid together with the main source of debt.
Like short-term bonds, they are sold at a discount from the face value and bought at face value. Such
bonds are called zero coupon bonds.
 7. According to the income determination method, the government's debt obligations are strong and
floating. In this case, the fixed rate on securities leads to the payment of interest and an increase in
government spending.
8. Due to strict observance of the term of repayment of the bond - depending on the obligation of the
debtor, the debt instruments are divided into liabilities with the right to early repayment and without
the right to early repayment.
The issue of early repayment of debt is relevant when there are significant changes in the financial
market. For example, a borrower issues a bond with a fixed rate of 10 percent per annum. However, a
year later the rate dropped to 7 percent. In this case, he loses a lot, but the investor gains a lot. If the
bonds are issued with the right of early repayment, then the borrower can reduce its losses by issuing a
new bond - by placing and repaying the old one.
9. According to the placement method, the bonds are divided into voluntary, subscription and
compulsory bonds. Each method has its own method of implementation. The bonds are placed, sold
and bought freely on a voluntary basis.
10. Government bonds may be bonds or without bonds. Bonds and liabilities are accompanied by the
issuance of government securities. Non-bond liabilities are formalized by agreement, conclusion of a
contract, as well as by writing in the book of debt obligations and issuing a special certificate.
The first government securities in Azerbaijan as an independent republic were government bonds
issued in 1993. The volume of these securities placed among the population is 3.5 billion. manat,
average interest rate 3.9%, maturity 10 years. At present, there is no debt on these bonds.
Government securities issued in the Republic of Azerbaijan are guaranteed by the Ministry of Finance of
the Republic of Azerbaijan.
At the present stage, the credit activity of the state is used only to finance various projects, to cover the
budget deficit, and so on. does not end with borrowing for purposes. The state is also actively engaged
in lending. The budget forecast indicators of the Republic of Azerbaijan for recent years prove it once
again. Undoubtedly, the domestic credit activity of the state is multifaceted. The state allocates soft
loans to various sectors of the economy. Small and medium business, agriculture, transport, etc. An
example of this is a soft loan.
The activity of the state as an internal creditor is also related to the solution of social problems. Thus,
the organization and issuance of mortgage loans in Azerbaijan aims to solve the housing problem of the
population.
Azerbaijan Mortgage Fund was established in accordance with the Decree of the President of the
Republic of Azerbaijan dated September 15, 2005 “On establishment of the mortgage loan system in the
Republic of Azerbaijan”. AMF is a state body established under the Central Bank of the Republic of
Azerbaijan.
Mortgage loan is issued for a period of 3 to 25 years, at a rate of 6-8%, provided that it does not exceed
50,000 manat. The loan amount may not exceed 70% of the market value of the real estate, and the
monthly amount paid on the loan may not exceed 50% of the borrower's income.
It is possible for the state to lend not only domestically, but also to foreign states, international
organizations, foreign legal entities, and many financially powerful states are active as foreign creditors.

4.Public credit management

The main goal of the state in the management of public credit is to increase its efficiency. Comparing
the amount received annually under the public credit system gives a certain idea of the results of
borrowing operations. However, more accurate information on the efficiency of public credit operations
(SK) is given as a percentage of the ratio of revenues (D) to expenditures over the public credit system
(X). This can be illustrated by the following formula.
 Sk = ((D-X)) / X ∙ 100
It can be expressed as follows:
Sk = (F ∙ 100) / X
Here Sk - the efficiency of public credit.
F - the amount of revenues over the state credit system in excess of expenditures.
D - receipts on the state credit system.
X - government loan costs.
In this case, the positive effect of public credit on the state budget and the country's money supply, the
strengthening of confidence in the financial performance of government agencies and, ultimately, the
favorable trend of economic development of society should be taken into account.
It is known that the main part of the expenditures on the state credit system consists of winnings on
bonds, payments, annual interest and other debts. Expenses also include the preparation,
transportation (dispatch) and sale of government securities, winnings and draws, and some other
expenses.
It is known that bonds are repaid by holding draws (in which case the face value of the bond is paid
along with the winning amount), as well as by winning and interest-bearing bonds or obtaining
government securities from creditors.
The service ratio for foreign debts is determined. It is the percentage of total debt repayment (OB) to
foreign exchange earnings (VDixr) from exports of goods and services.
Oborc ∙ 100%
Xaxb =
VDixr
It is accepted to consider the safe level of public debt service as 15-20% of foreign exchange earnings on
exports of goods and services.
Measures such as conversion, consolidation, regressive exchange of bonds, deferral of bonds and its
cancellation are taken to achieve the efficiency of public credit.
Conversion usually means a change in the yield on bonds. First of all, the government reduces the
amount of interest paid on bonds in order to reduce the cost of debt management.
Debt consolidation means extending the life of bonds by changing the terms of their bonds. In addition,
the reverse operation can also reduce the life of government bonds. It is also possible to replace
consolidation with conversion.
Usually, along with consolidation, unification of government bonds is also carried out. Unification of
bonds means the merging of many bonds into one bond when previously issued bonds are exchanged
for new bonds.
The government rarely regulates bonds in a regressive manner, ie several bonds previously issued are
equated to one new bond. Such a change was made, for example, to remove military-era bonds from
circulation after World War II.
Deferment of bonds occurs when the government issues excessive bonds and their issuance is not
efficient enough for the state. The extension of the maturity of bonds differs from the consolidation of
bonds in that when the maturity is extended, not only the maturity is extended, but also the payment of
income is suspended.
With excessive public debt and growing budget constraints, the government may embark on public debt
restructuring. Restructuring means the replacement of a debt obligation with another debt obligation
based on a debt cancellation agreement. In this case, the debt obligation is subject to new terms of
service and repayment. Active restructuring is applied to foreign debts of the state and when payments
are made.
 Conversion, consolidation, unification and exchange of bonds of public debt are carried out only for
domestic borrowing. The deferral applies to both domestic and foreign debt. Extension of foreign debt
repayment is usually carried out with the consent of creditors.
An important area of public debt management is to determine the terms of the new bonds. In this
case, the important aspect for creditors is the yield of securities, the term of the bond, the method of
payment of income. The success of new bonds depends on proper consideration of the state of the
economy, cash flow, yield and maturity of existing bonds, concessions and many other factors.
Preparation and sending of government bonds is carried out through the relevant department of the
Ministry of Finance. Securities are sold by the banking system. Foreign bonds are usually placed in
foreign money markets by a banking consortium on behalf of government borrowing. They receive a
commission for this service. Debts between countries are usually without bonds, and all their terms
(interest rate, currency issuance, debt repayment, etc.) are reflected in special agreements