Debt Management: Concept
Debt management is concerned with the determination of the structural characteristics of public debt. They are the size, types, proportions, terms, maturities, ownership patterns of public debt and the methods of its redemption. Debt management should help to achieve the economic objectives and should not have adverse effects on the economy.
Debt management even being a part of fiscal policy, should be well coordinated with the monetary policy as it has direct effects on the monetary system
Principles of Debt Management
Debt management should be guided by the following principles:
- The interest cost of debt-servicing should be minimized as far as possible;
- The need of the investors of different nature should be satisfied;
- The objectives of economic stability and growth should be achieved; and
- There should be minimization of the need to enter the market in a situation of inconveniency.
Debt Redemption Methods
Debt redemption refers to be getting rid-off the liability to repay the debt. There are different methods used in practice for this. The liability to repay the debt may be postponed or ended with the actual repayments.
1. Repudiation- It is the total refusal to repay the debt and was practiced after the great political revolutions immediately after the American Independence in 18th century and Bolsovik Revolution of 1917 in the USSR.
2. Postponement of the liability- The liability to pay the debt may be postponed without changing the size of the debt. The methods are:
- Refunding- In this method government repays the debt to the existing holders by raising the debt from new security holders. Government will have the liability to pay the debt to the new security holders instead of the earlier holders.
- Conversion- At the time of maturity, when the market rate of interest is lower than the existing rate of interest on the securities, the old loans are converted into the new loans, if the security holders agree.
3. Actual Payment- For actual payment of public debt following methods are in practice:
- Sinking fund- It is a fund where certain amount of revenue is deposited each year for the repayment of the outstanding debt. The balance in the fund can be invested, and the interest or other income from them is also accumulated in the fund until the debt is matured.
- Buying up loans- In a situation when government can generate budgetary surplus, mostly in a situation of prosperity, the surplus is used to clear the debt off gradually. It used to be practiced in case of the Console.
- Capital Levy- This method uses heavy taxes on property and income above certain value as the speculators and other business groups enjoy a huge profit mainly after the war.
- Serial Bond Redemption- This is the most common method of debt redemption. Government issues the securities maturing at different periods. The maturing securities are determined in a serial order by lottery or fixing certain maturity dates. The maturing securities are repaid with making budgetary provisions every year.
Redemption of External Debt
The external debt is to be repaid with the increase in foreign exchange reserves. It is possible with increasing the export earnings and/or reducing import payments. So, external loans should be used on productive investments which increase the production of export goods and services and/or import substitution goods and services that increase the foreign exchange reserves. However, some of the foreign loans are converted into grants as debt relief programs for the least developed countries facing financial problems.
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