Chapter

V Concluding Remarks

Author(s):
Manmohan Kumar, and Pablo Guidotti
Published Date:
March 1991
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This study has highlighted a number of issues related to domestic public debt in developing countries with high levels of external debt. It has emphasized the crucial role played by developments in the fiscal sector, the implications of high indebtedness for stabilization programs, and strategies for managing the domestic public debt.

An analytical framework has been proposed to facilitate an examination of developments concerning domestic public debt. The framework has integrated analysis of domestic public debt with that of external public debt and the underlying current and prospective fiscal stances, and, hence, it could be useful for analyzing the interrelationship between government liabilities and other aspects of the fiscal picture. In particular, this approach suggests that the external debt situation cannot be analyzed effectively in isolation from the domestic debt situation.

Analysis carried out using the balance-sheet approach to the government fiscal operations has shown that short-term improvements in a country’s primary surplus may be far from adequate to enable it to regain solvency. Therefore, a public sector’s ability to service its liabilities may not be substantially affected by stabilization programs that are not credible in the medium term and long term. These considerations suggest that in the design of programs, more emphasis should be given to their long-term sustainability and to the required structural policies. In this context, the balancesheet approach appears to be a useful complement to the medium-term scenarios often employed to analyze policy sustainability.

The study has also shown that there are potentially important links between nominal debt, the credibility of economic policy, and inflation. Clearly, these links should be taken into account in the design of stabilization programs in countries with high nominal public debts. Furthermore, the existence of these links underscores the need to conduct a sensitivity analysis of the effects of different real interest rates on the fiscal accounts when designing an adjustment program.

Finally, the study has shown that a large stock of nominal debt can be destabilizing because of its potential effect on inflationary expectations. It has been shown that in such circumstances, debtmanagement policies—such as those concerned with the management of debt maturities and debt indexation—may have a role in preventing such problems as the loss of a nominal anchor and the occurrence of “confidence crises.” This suggests that even though these aspects of domestic debt management are not a substitute for fiscal adjustment, they should be taken into consideration in policy design.

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