- Manmohan Kumar, and Pablo Guidotti
- Published Date:
- March 1991
In recent years, there has been an increasing concern about the growth of domestic public debt in developing countries with high levels of external debt and its implications both for stabilization policies and for attempts to deal with the external debt problem. Despite the critical impact the growth of domestic public debt can have in these areas, very few studies have provided a systematic analysis of the domestic public debt situation in these countries.1
The present study focuses on three main areas: (1) the evolution of domestic public debt and its relationship to external debt and underlying fiscal developments; (2) the development of an analytical framework which integrates different aspects of a country’s fiscal situation to facilitate an examination of the links between domestic and external debt, taxes, subsidies, and government spending; and (3) strategies for the management of domestic public debt and their implications for the design of stabilization policies and the control of inflation.
The study is organized as follows: Section II examines the recent growth of domestic and external public sector debt in the 15 developing countries with high levels of external indebtedness, which hereinafter will be referred to, for simplicity, as the Group of Fifteen (G-15) countries.2 It also discusses the fiscal developments underlying the public debt increase in the 1982–88 period. Section III develops an analytical framework for examining the relationship between domestic and external government liabilities and the current and anticipated fiscal stance. This framework is used to obtain a measure of the public sector’s ability to service its outstanding liabilities and to provide an estimate of the fiscal surpluses required to service a given level of public debt. Section IV focuses on the implications of the characteristics of the domestic public debt; in particular, it examines the link between nominal debt, credibility of policy, and inflation. The potential role of debt indexation and the management of the maturity structure of debt in determining the sustainability of stabilization programs is discussed. Section V presents the conclusions.
The G-15 countries include Argentina, Bolivia, Brazil, Chile, Colombia, Cote d’Ivoire, Ecuador, Mexico, Morocco, Nigeria, Peru, the Philippines, Uruguay, Venezuela, and Yugoslavia. These countries constitute the group of 15 heavily indebted countries identified in the 1985 Baker plan for dealing with externally indebted countries. See also International Monetary Fund, World Economic Outlook: A Survey by the Staff of the International Monetary Fund (Washington, May 1990).