Public Debt Management

Public Debt Management:

The objective of the management of public debt refers to the aim that the method of borrowing funds and the repayment of loans by the government should not have any adverse effect on the economic situation of the country. Moreover, the methods of borrowing funds and repayment of loans should help to maintain economic stability, i.e., it should reduce inflationary or deflationary effects upon the economy, and should make available the needed funds to the government. Therefore, all those methods which are adopted by the government to achieve these objectives, through the process of borrowing funds and repayment of loans, come under public debt management. For instance, if a government reduces its public debt, it may cause inflationary or deflationary effects. If the government repays the public debt through deficit financing or from past savings, the effect would be inflationary. If taxation is increased to repay the loans to banks, the effects may be deflationary. Here, the role of public debt management would be to adopt such methods which may not cause inflationary or deflationary situations. Hence, during inflation, the government increases its debt by increasing the rate of interest and vice versa. Again, the surpluses, collected by way of taxes may be used to repay debt in deflation and additional taxes may be imposed during inflation. These methods should help to bring economic stability rather than create a condition of economic instability.

Definition and Significance:

Public debt management is concerned with the decisions regarding the forms of public debt issued, terms on 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 the debt its ownership, etc. In short, it is concerned with the determination of the structural characteristics of public debt. Hence, the management of public debt is concerned with refunding, floating, or retirement of public debt, etc. Some say that public debt should not be reduced and the interest should be paid out of taxes or out of a new issue of money and on maturity repayment should be secured by selling new securities. Others say that public debt should be reduced, i.e., retired as it matures.

The management of the public debt is very significant because there can be important economic effects of the changes in the size of the public debt on the operation of an economy. These changes may foster or offset monetary and fiscal policies.

The public debt policy, fiscal policy, and monetary policy are closely connected with each other for the determination of economic policy, and, therefore, they should work in coordination with each other. Various principles of public debt management are as follows.

Principles of Public Debt Management:

Redemption of Public Debt:

Repayment of External Debt:

The redemption of external debt is possible only through the earnings of foreign exchanges to pay it. It can be done by creating export surpluses. If foreign loans are invested in those industries, which increases the supply of those commodities which are exported, the loans may easily be repaid. If, however, the loans are utilized for unproductive purposes, and export, a surplus may be possible at the cost of home consumption, and the burden of debt may be very much felt by the people.