Public Debt

Management

R A N DY A . M E R O Ñ O
Public debt = Debt that the government owe
3 ways of Financing

2
3
 Interest
Coupon payment

Government

Repay value at
maturity date
Public Debt Management

➢ is concerned with the decisions of forms of public debt, in terms of

which new bonds are sold, maturing debts are redeemed or refunded, the
proportion in which different forms of public debt should be issued, the
pattern of maturities of debt and its ownership etc.”
- Prof. Abbos
Public Borrowing
➢ is money the government borrows to fund public spending, the total
amount of money that a country's central government has borrowed to
fund its spending on public services and benefits.
➢Public expenditures are generally met by ordinary public revenues such
as taxes, duties, fees, parafiscal revenues, property and enterprise
revenues, taxes, and penalties. However, the state is faced with the public
sector deficit due to reasons such as large infrastructure investments, war,
development financing, natural disasters, economic crises, budget
deficits, as well as the ever-increasing ordinary public expenditures. To
overcome this situation, they refer to borrowing.
Public Borrowing

➢ the
total of the nation's debts: debts of local, state, and national
governments; an indicator of how much public spending is financed by
borrowing instead of taxation.
Importance of Debt Management
➢ Public debt policy place an important in formation of economic policy of
country
➢ Increase or decrease of public debt affect the working of any economy
➢ It gives the knowledge of actual amount of requirements for the
implementation of certain policies.
➢ It helps to know conditions which are essential for implementation of
planning policies
➢ The way of utilization of public debt affects the economic development
of a nation
Objective of Debt Management
➢ Ensure the financing needs of the government
➢ Minimize borrowing costs
➢ Keep risks at an acceptable level
➢ Support the development of domestic markets
➢ It must serve the economic policy of the govt
➢ In time of emergences, it should provide sufficient funds t meet the
requirement of economy
Principles of Public Debt
Management
➢ Minimum interest cost of servicing public debt
➢ Satisfaction of the investors
➢ Funding the short term debt into long term debt
➢ It must be in coordination with fiscal & monetary policies
➢Proper adjustment of maturity
Debt Management Plan
➢ is a method used in various countries for paying personal unsecured
debt
➢ DMP deal with only unsecured debt
• It is offered by debt management companies
• It relieves stress of payment
• It can manage finance by using effective tips
 ❖ Short-term public debts (floating debts)
refer to debts up to 1 year. In short-term
Classification of borrowing, treasury bills and treasury
Public Debt guaranteed bond are used.
❖ Medium-term public debts refer to debts
ranging from 1 to 5 years.

1. Public Debt ❖ Long-term public debts refer to debts

more than 5 years. The instrument of long-
according to term borrowing is the government bond. These
debts are provided from the capital markets
Maturities and have a higher interest rate than the
interest rate of short-term borrowing. Long-
term debts are classified as redeemable debts
and irredeemable debts.
 ❖ Domestic/Internal borrowing refers to a
country’s borrowing from its own national
Classification of resources. This borrowing has no effect on
Public Debt increasing or decreasing national income.
Examples: BSP loans, treasury securities
❖ Foreign/External borrowing refers to
the resources provided from a foreign country
2. Public debts that is repaid with principal and interest at the
end of a certain period. External debt has an
according to increasing effect on national income when it is
sources taken and vice versa has a decreasing effect on
national income when it is paid. Examples:
IMF loans, WB loans.
➢ THE NATIONAL Government’s
outstanding debt hit a record
P12.09 trillion as of end-February,
as domestic and offshore
borrowings increased, accrdng. to
Bureau of the Treasury (BTr)

➢ BTr said total debt inched up by

0.5% or P63.83 billion month on
month “due to currency
fluctuations, and net financing
from both local and foreign
sources.”

➢ “For February, the increment in

external debt was due to the
impact of peso depreciation
against the (US dollar)
amounting to P17.91 billion and
the net availment of external
obligations amounting to P3.25
billion,” the Treasury said.

Reference: businessworldonline.com
 ❖ Voluntary debts refer to the debts that
are lent to the state by its own will and
Classification of desire.
Public Debt
❖ Obligatory debts refer to the debts
which are lent by forcing to take the bonds
issued by the government. These debts are
3. Public Debt applied in times of war, natural disaster, or
economic crises. In itself, it is classified as
as a Voluntary the debts taken by full compulsion, the
debts taken by the threat of forcing, the
Basis debts taken by creating the necessary
savings, and the liabilities taken by the
moral coercion.
 ❖ Direct- made directly from lender to
Classification of borrower, rather than a third party
Public Debt (National and Local)
❖ Guaranteed- promise by a one party to
assume the debt obligation of a borrower

4. Public ❖ Non-guaranteed- not guaranteed for

repayment by a public entity because it is
Debts payable solely from pledged specific for
earnings of revenue (utilities, sewage
according to disposal plants, toll bridges, etc.)
Category
 ❖ Productive debts provide a constant flow
of income to the state if the debts are used
Classification of in construction, such as railways, power
Public Debt stations, and irrigation projects, which
contribute to the productive capacity of the
economy. The state generally pays the
5. Productive interest and principal debt amount from
these projects’ revenues.
Debts
 ❖ If the debts are used in the area such as
Classification of war, famine relief, social services, etc.,
which do not contribute to the productive
Public Debts capacity of the economy. denote. The state
generally pays the interest and principal
debt amount from taxes; therefore, these
6. Unproductive debts are a burden on the society.

Debts
 ❖ Governments required funding, as do modern states, but
they didn’t borrow “publically” in the sense of drawing funds
from a wide populace and making it ultimately responsible
for servicing the debt (paying principal and interest), as a
form of deferred taxes.

❖ Public borrowing became common, but initially involved

Ancient and loans in kind (commodities) instead of in money, for shorter

rather than longer periods, and for war or idiosyncratic
Medieval Times purposes rather than as a permanent funding source.

❖ no debt instruments existed in the forms so familiar to us

today – namely, tangible securities traded in secondary,
liquid markets with prices and yields visible on public
exchanges. This form of sovereign obligation emerged in the
late seventeenth century, when the rule of law, sanctity of
contract, and parliamentary checks on monarchical power
took hold, after Britain’s Glorious Revolution in 1688
Classical Theory (Mercantalist Period)
❖European economists between 1500 and 1750 are
considered mercantilists.

❖Era of merchant capital, dependent on

connections between social and productive
systems.

❖ Theory that believes in the essence of “ Laissez-

fair policy

❖ Theory that has a pessimistic point of view. Its

One of the greatest critic of mercantilism. supporters believe that government borrowing is
He was strong in emphasizing the invariably wasteful, ruinous to prosperity, and
disadvantages of borrowing and even morally unjust
expostulate on the advantages of the
❖ Mercantalism is an economic practice by which
balance budget during the year of
governments used their economies to augment
capitalism.
state power at the expense of other countries.
Neo-Classical Theory
❖ Extension of Classical Theory
(later part of 19th century)
❖ Formed by Arthur Cecil Pigou
through his book “Economics is
Welfare”
❖This theory believes that the
economic system functions in
response to the instructions of the
market the ultimately the consumer.
Keynesian Theory (Modern Theory)
❖ It was during the time of John
Maynard Keynes that the idea of
public borrowing was introduces
during the Great Depression mainly
as a compensatory tool in times of
economic stability.
❖States that the increase in public debt through the
multiple effects would raise the National Income.
❖ Borrowing for capital generation purposes is
necessary like setting up public enterprises which will
contribute to a productive output.
❖ John Maynard had proposed public borrowing as a
war financing to England
❖ It is based on the assumption of fully developed
economies undergoing cyclical difficulties. In LDC’s
productive capacity is not yet fully developed