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Improving public debt management
15/4/2011 10:39' Send Print

As a developing country which is integrating in the international economy, Vietnam increasingly needs investment for development. Public debts are still important financial sources to offset state budget deficit for economic growth and sustainable development. Public debt effectiveness depends largely on policies of debt management.

Concept of public debts

In the context of rigorous development of the world economy with unprecedented changes, typically the global economic crisis in late 2008 and early 2009 and the public debt crisis in Greece which has spread to other European countries, public debts and public debt management have become a hot issue of special concern of world leaders. In the first half of the 1980s of the 20th century, public debt crisis already happened. In 1982, Mexico was the first country which declared default on its debts to the International Monetary Fund (IMF). In October 1983, 27 countries with a total amount of USD 240 billion in debt declared or were about to declare restructure of their debt (1). However, until now there has not unanimous consensus on the concept and connotation of public debts. The World Bank (WB) and IMF define pubic debts, in broad sense, as debt liabilities of the public sectors including the central government, local administrations, central banks and independent organizations (with capital allocation from the state budget or 50 % of their capital belonging to the state ownership and in the case of their bankruptcy, the state have to pay their debts). In narrow sense, public debts include debt liabilities of the central government, and local administrations and debts of independent organizations guaranteed by the government. Depending on economic and political institutions, definition on public debts in each country differs. In most of countries, the Law on Public Debts define public debts as debts of the governments and debts guaranteed by the governments. In some countries and territories, public debts also include those of local administrations (Taiwan, Bulgaria and Rumania) and non-interest state enterprises (Thailand and Macedonia).

In Vietnam, the Law on Public Debt Management enacted in 2009 stipulates that public debts cover those of the government, those guaranteed by the government and those of local administrations. Thus, Government debts mean debts arising from domestic or foreign loans which are signed or issued in the name of the State or the Government or loans signed or issued by or under the authorization of the Ministry of Finance according to law. Government debts do not include debts issued by the State Bank of Vietnam to implement monetary policies in specific period. Government-guaranteed debts mean domestic or foreign loans borrowed by enterprises or financial or credit institutions with the Government’s guarantee. Debts of local administration mean debts signed or issued by or under the authorization of the People’s Committees of provinces or centrally run cities.

Public debts arise from the Government spending needs. When the expenditure exceeds revenues from collection of taxes, charges and fees, the State should borrow (either domestic or foreign borrowings) to make up for the state budget deficit. When the debts expire, the state has to raise taxes to pay both principle and interests. Hence, public debts, by nature, are gradual tax levy used by most governments to finance their budget expenditure. Government debts are tantamount to transfer of property of the younger generation (which has to pay higher taxes) to the existing one which is entitled to tax reduction.

Risks in public debt management

In developing countries where the private economic sector is not large and capable enough to drive the economic development, the state economy plays an especially important role. To achieve rapid development rate, governments of developing countries have often applied open fiscal policies, increased government expenditure, and reduced taxes to stimulate total demand increase, production and economic growth. However, open fiscal policy application is tantamount to increased state budget deficit and more government loans to make up for the deficit. The prolonged open fiscal policy pursuance also leads to bulging debt burden. If state budget revenues do not catch up with debt payment, the government has to resort to new loans to pay former debts. If total debt liabilities are higher than the government’s budget revenues for a prolonged period, there is a possibility of the Government’s default on their debts.

In general, settlement of budget deficit by both domestic and foreign loans results in unfavorable influence in macro economic environment. In developing countries, budget deficit is solved by a mixture of domestic and foreign loans. This depends to the ability to mobilize domestic loans and interests and conditions of foreign loans. In the case of domestic loans, part of the economy’s financial resources moves from the private sector to the state sector through government bonds. This mobilization will impact the capital market in general, giving rise to demands on credit and pushing up interest rates. In its turn, high interest rates result in increase in investment expenditure, decrease of investment requirement of the economy and possibly the crowding-out effect. In the case of foreign loans, the effect of hampering investment can be limited as the government uses outside additional resources instead of using domestic resources from the private sector. The utilization of foreign loans to finance budget deficit can ease tension in domestic credit market and thus contain economic instabilities. Nevertheless, foreign loans impose other kinds of impacts on the economy. During the first stage, a large foreign loan inflow will relieve the pressure on foreign currency balance. This has certain impacts on the foreign exchange rates, uplifting domestic currency and affecting trade balance. Fortunately, these impacts do not last long. In the medium and long run, the government’s needs of foreign currency to pay both principles and interests will add up to general demands of foreign currency, devalue domestic currency, increase expenditure on import of equipment and raw material (which often accounts for a large proportion in developing countries) as well as expenditure on inputs to the economy and eventually lead to inflation. High foreign exchange rate will raise payment of debts which may be lead to debt default if the debt size is larger than the state budget. In this sense, domestic loans are safer than foreign loans because in the case of domestic debt burden surpasses state budget revenues, the government can still turn to the last resort of issuing money to settle debts and accept inflation risks while it can not do the same with foreign debts.

Besides economic consequences, financial policies which are not sustainable and the threat of debt default can also weaken national political sovereignty due to heavy pressure from lenders and international monetary institutions to reform and liberalize national economy. The case of Argentina in 2001 demonstrated vividly political impacts on a country which declared delay in debt settlement. Commonly, those impacts bring pressure on tightened spendings, increased taxes, reduced social subsidy and even demands for institutional reform, change of management apparatus and liberalization of national economy. In addition, the heavy dependence on foreign loans will also lower the political status of a nation in its bilateral and multilateral relations with partners who are also lenders.

To evaluate public debt sustainability, the norm of public debt/GDP is considered as the most popular tool for an overall evaluation of a national public debt situation. To ensure public debt safety, countries have often used the following norms as limits for loans and debt handle. First: public debts do not exceed 50-60% of GDP or more than 150% of export turnover. Second, public debt payment does not surpass 15% of export turnover and government debt is not above 10% of state budget expenditure. The World Bank also regulates the safety limit of public debt of 50% of GDP. According to warnings of international institutions, the rational proportion for developing countries is under 50% of GDP. However, there is no common safety limit for all economies. It does not means that the low ratio of public debt against GDP guarantees safety or vice versa. The safety of public debts depends on healthy economy manifested through the system of macro economic norms. For example, the US public debt/GDP ratio is 96% but is said to be within safety limit as its world-highest labour productivity is the sustainable guarantee to its debt handle. Japan’s public debt/GDP ratio equals 200% but is considered to be within the safety limit. Meanwhile, many countries with much lower public debt/GDP ratio were caught in debt crisis. It was 15% for Venezuela in 1981 and Thailand in 1996; 45% for Argentina in 2011, and 13% for Ukraine and 20 % for Rumania in 2007. So, in order to identify and evaluate correctly the public debt, it is not enough to take into account only public debt/GDP but also consider public debt comprehensively in their rations with macro economic norms of the national economy, particularly the rate and quality of economic growth, integrated labor productivity, capital use efficiency (through ICOR), the rate of budget deficit, domestic savings and social investment. Besides, other options such as restructure debts in a debt portfolio, interest rate and debt payment duration should also be analyzed thoroughly when evaluating public debt sustainability.

Public debt management - some recommendations

According to the Ministry of Finance’s report presented at the recent session of the National Assembly, by December 31, 2010, public debts are estimated to be 56.7% against GDP; government debts are 44.5% against GDP2. Reviewing those figures and in the context of public debt crisis which is spreading in Europe, there have been speculations that the Vietnamese economy is facing big risks. Nevertheless, most of Vietnam’s foreign loans are long-term with preferential interests. Though the debts are high, they have not put pressure on state budget as far as liability settlement is concerned. The Ministry of Finance stated that Vietnam’s debt indicators are within safety limit and public debts are strictly managed under the Law on Public Debt Management. Domestic and foreign debts have been fully handled. There has been no bad debt. Every year, the state budget has earmarked from 14% to 16 % of the total state budget revenues (lower than the limit of 30%), an equal of 4.5% of export turnover (lower than the limit of 15%). These are debt safety norms. Compared with developing countries with the same credibility rate, Vietnam’s public debts and foreign debts stand at average level. Reality shows that public debts have helped accelerate the socio-economic development. As such, Vietnam has recorded relatively high growth rate in recent years. In 2009 when the world economy had to cope with inflation and many big economies saw no positive GDP growth rate, Vietnam’s GDP growth rate registered 5.4%. That result was conducive to important contribution of debts. In the coming years when Vietnam is actively integrating into the world economy and as a developing country, Vietnam needs more capital for investment. So, public debts remains an important financial source to fill state budget deficit and invest in economic growth and sustainable development.

The effectiveness of debt use depends much on debt management policies. Due to differences between sources of debts and taxes and fees, it is necessary to introduce specialized mechanisms to manage of debt use and collected taxes and fees use. The mechanism on loan use management requires stringent regulations on output, debt payment of both principles and interests, rate of disbursement, capital efficiency, risk mitigation and other criteria. Requirements on tax and fee use management are often less stringent or not applied at all. The specialized mechanism on management of public loan use is considered as an important indicator for evaluating the sustainability of public debts in general and the state budget in general.

To effectively manage public debts from borrowings, loan use and payment, improve loan use effectiveness, maintain national prestige in debt payment, ensure financial security, and mitigate risks, it is imperative to implement the following tasks:

First, the Government should develop a strategic plan on public debt management which is based on and conforms to the socio-economic development plan, and the state budget spending in each stage and period. The strategic plan should specify the objectives of loans (to offset state budget deficit), restructure debts, relend or borrow to finance important and effective programs and projects and ensure national financial security. It also stipulates the mobilization limit of short, medium and long term loans from domestic and foreign lenders with suitable forms of principle and interest mobilization. The plan should also identify borrowers, expected effectiveness, borrowing duration, the volume of debts in each stage to avoid prolonged unused loans or unreal needs for loans.

Second, to ensure the sustainability of public debt size and growth rate, solvency in different situations and limit risks and expenses. In doing so, it is necessary to set a safety limit to public debts while regularly evaluate risks arising from government debts in relations to GDP, state budget revenues, total export turnover, trade balance, foreign currency reserve, financial reserve and accumulative fund to pay debts.

Third, to strictly control loans to relend and government-guaranteed loans. The Government will borrow loans and relend enterprises which need to mobilize large amount of capital from the international capital markets but are not credible enough to ask for loans. The Government will help enterprises to have access to large size and low interest loans from international capital sources. These borrowings and guarantees are projected budget liability which gives rise to the possible payments to enterprises’ debts from the state budget when the enterprises meet with difficulties or insolvency. This risk is all the higher when the government’s loans and issuance of guarantee are not based on careful analysis of risks and enterprises’ solvency. Thus, the government should be very careful in its borrowing for onlending and loan guarantees. Priority is given to key programs and projects of the state or of high national concerns. The government should also control government-guaranteed foreign loans and issuance of guarantees to domestic loans of enterprises and encourage the development of public-private partnership.

Fourth, to enhance the effectiveness and control the use of loans and government-guaranteed loans. This is the major step to ensure solvency and sustainability of public debts. The Government is the borrower but is not the user of loans. In fact, project managers, state budget receivers and enterprises are loan users. In any cases, the state budget has to shoulder the debt burden, risks and consequences. To ensure the effectiveness of loans and loan use, it is necessary to observe two basic principles: not to use short-term loans for long-term investment and commercial foreign loans are only used in programs and projects which are able to directly recover loans and guarantee solvency; to regularly and closely control and supervise the use of loans and government-guaranteed loans, particularly in direct loan users like: economic groups, state corporation, commercial banks and infrastructure investment projects.

Fifth, transparency and accountability in public debt management. This is to raise responsibility in management and use of public debts and accountability of public debts managing institutions. To realize these two important principles, public debts should be reflected fully in the state budget balance sheet and audited and certified by independent professional agencies.

To fully implement the above five tasks, the Law on Public Debt Management and the Law on State Audit should regulate the tasks of auditing public debts of the State Audit Office which is an independent auditing agency. The office examines and certifies debt data, evaluate the government debt sustainability against GDP in relations with national finance security; structures debts, and the proportion of foreign debts in the total debts, debt management mechanisms and clarifies aims of loan use (especially foreign loans), transparency and completeness of loans to provide the government with precise data and status quo so that the government can draw up comprehensive solutions to manage risks in time. However, as public debts consist of government loans, government-guaranteed loans, local administration loans, and each of these public debts requires specific management, relating to different loan users, the regular and annual audit of public debts is a must. In addition, the quantity and quality of specialized audits like audit domestic loan audit, government foreign loan audit, government-guaranteed loan audit and loan expenses should be strengthened. On the other hand, it is also necessary to enhance auditing the use and evaluation of loan effectiveness of loans, government-guaranteed loans of investment projects, enterprises, commercial banks and to provide warnings against possible risks that endanger the sustainability of public debts and state budget./.

(1) History of the Eighties - Lesson for the Future, a study prepared by the FDICs Division of Research and Statistics (1997), Volume I: An Examination of the Banking Crises of the 1980s and Early 1990.

(2) Report on socio - economic development of 2010, of the Government presented at the National Assembly.

Vuong Dinh Hue