Debt Service Costs Research Articles

The Current State of the Russian Budget System and the Potential for Financing the Federal Budget Deficit

For the first time, Russia’s budget system is under large-scale stress in all areas: risks of losing the tax base due to international sanctions, a steady increase in unforeseen expenses, inflation risks, and rising debt servicing costs. In this regard, it is necessary to identify and analyze potential sources of financing the federal budget deficit as the main guarantor of budget stability. The article examines the state of the consolidated budget of the Russian Federation and the budgets of state extra-budgetary funds based on the results of the first half of 2024. It is shown that oil and gas revenues remain the main source of revenue growth. Among non-oil and gas revenues, personal income tax and VAT from domestic sales are growing at an accelerated rate. At the same time, the positive dynamics of some sectors of the Russian economy is largely due to budget financing. At the same time, inflation remains above target values, which forces the Central Bank of the Russian Federation to tighten monetary policy. The excess growth of federal budget expenditures and the increase in nominal rates threaten financial stability. In this regard, the article assesses the potential for financing the federal budget deficit in the context of strict borrowing restrictions. Based on the analysis of the state of the domestic federal loan bond market, a conclusion is made about the high risk of a liquidity crisis and the potential for placing domestic debt at the expense of non-bank financial institutions and individuals.

An Empirical Analysis of Public Debt Sustainability in Kenya

The study provides a focused analysis of Kenya’s determinants of debt sustainability owing to its consistent budget deficits and higher debt servicing costs. Unlike broader studies, this research focuses on Kenya's unique economic conditions and talks about the consequences of unchecked debt servicing payment failures in Kenya that could undo macroeconomic progress if unchecked. The study deploys a single equitation regression analysis followed by a series of robustness checks and a generalized method of moments (GMM) technique to analyze the link for Kenya, 1990-2023. The regression results show that debt in Kenya is not sustainable, with factors such as an increase in debt stock, high-interest rate costs, increase in budget deficits, inflation rate increase and high depreciation of the local currencies ultimately wiping out the repayment potential of Kenya. However, the results show that increased export revenue earnings and faster economic growth can improve budget resources for debt servicing. Our findings suggest that policymakers in Kenya should focus on fiscal consolidation by reducing non-interest expenditures and enhancing revenue collections.

A bank-level analysis of interest rate pass-through in South Africa

We study the pass-through of policy rate hikes and cuts to household and corporate lending and deposit interest rates in South Africa over the period January 2009 to December 2020. We show that rate hikes are typically passed through to mortgage interest rates completely while rate cuts are not. This asymmetry is more prevalent for household than corporate mortgages. Pass-through to household and corporate call deposit interest rates is typically complete, but cheque account interest rates are highly sticky and experience weak pass-through. Our results indicate that banks’ pass-through decisions often impose greater costs on households than firms, and may blunt the stimulatory effect of rate cuts by weakening their impact on debt servicing costs and the remuneration of deposit balances.

An Empirical Analysis of Short Run and Long Run Association between Debt Servicing and External Debt in Pakistan

Pakistan is at a crucial juncture where the escalating debt servicing cost of Rs 7.3 trillion is set to consume the majority of the projected revenue of Rs 9.2 trillion, which includes Rs 5.2 trillion allocated to the provinces. This study explores the interaction between debt servicing and external debt stock in Pakistan. It analyzes the impact of variables such as the debt service ratio, fiscal deficit, exchange rate, and globalization on external debt stock, using annual data from 1990 to 2020 obtained from the World Development Indicators (WDI) and the Pakistan Economic Survey. The stationarity of the variables is tested using the Augmented Dickey-Fuller (ADF) test. The Auto-regressive Distributed Lag (ARDL) bound test is utilized to investigate the long-term relationship among the endogenous and exogenous variables, and the Error Correction Model (ECM) is applied to study short-term dynamics. The findings indicate a negative long-term relationship between debt service and external debt, while fiscal deficit, exchange rate, and globalization show significant positive correlations with foreign debt. The study provides policy recommendations to alleviate the external debt burden.

Understanding the Nigerian Domestic Debt

The portion of a country's overall public debt that is owed to domestic lenders is known as its internal or domestic debt. The public debt profile of a nation is comprised of its external and domestic debt stock. This article provides insights into the various components and major holders of the country's domestic debt. The Country’s domestic debt profile, which is currently on the rise, has led to numerous challenges in the economy such as debt overhang, higher debt servicing costs, unstable currency rates, and crowding out impacts on the private sector, among others. Therefore, measures have been recommended to curtail the level of increasing borrowings. The goal of setting up a distinct public debt management agency such as the Debt Management Office (DMO) by the government was to continuously accomplish the benefits of cautiously sourcing financing to cover for government deficits at reasonable rates and with manageable medium to long-term risks.

Determinants of banking crises (Fragility) in the Malawian banking sector

This paper studies the determinants of banking crises or fragility in Malawi. In this study we modelled banking crisis conditions in a developing country banking sector applying a Logistic Regression model using data for Malawi for the period 1980 to 2022. We embedded banking crisis dummy, bank specific and macroeconomic drivers of crisis in the model. Our study finds that under crisis conditions macroeconomic, monetary and fiscal drivers such as the ratio of external debt stock to gross national income ratio, debt service costs to primary export revenue ratio, broad money to GDP ratio, changes in real interest rates, growth in real GDP, total reserves to GDP ratio has a negative and significant impact on banking crisis and fragility in Malawi. These findings are important for policy makers especially in an environment where fiscal dominance is prevalent and drives a significant build up of domestic debt (treasury assets) on the banks’ balance sheets.

Explaining the Divergence in German and French Public Finances

Abstract In this contribution, I discuss the divergence of German and French public finances over the course of the last two decades. Major gaps in public deficit/debt levels and debt service costs have opened even under the presence of a common fiscal framework at the EU level. To explain these differences, I focus on three elements: the (non-)perception of budgetary and socio-economic crisis, differences in demographic conditions, and contrasting approaches towards the role of rules and expertise in fiscal policymaking. The contribution illustrates these points by providing two concise case studies on key developments in fiscal policymaking and institutions since the 1990s. I conclude with a brief reflection on German and French fiscal policymaking in the years to come.

The Impact of High Government Debt on Economic Development in Somalia

This study focuses on the impact of high government debt on economic development in Somalia. The specific objectives of the study encompass: to examine the impact of high government debt on Somalia's economic development, to explore the strategies that can be used to mitigate the negative impact of high government debt on economic development in Somalia and to evaluate the role of international financial institutions in managing high government in Somalia. This study employed descriptive research design and quantitative research method to investigate the impact of heavily-indebted on rebuilding economic development in Somalia. The study employed purposive sampling technique to select the participants of the study. The sample size of the study was 80 participants. To collect data from the respondents which they entail: Government officials, Economic analysts, representatives from financial institutions, Business owners and entrepreneurs, representatives from Non-governmental organizations (NGOs) and Academics (researchers and scholars). The study adopted close-ended questionnaire instrument data collected from the respondents of the study was entered, coded, sorted, organized and analyzed using Statistical Package Software Science (SPSS) version 28. The key findings of the study on the impacts of high government debt on Somalia's economic development entail: limited access to credit, increased debt servicing costs, inflation and currency depreciation, reduced investor confidence, limited fiscal space, vulnerability to external shocks and social unrest. The strategies the can be used to mitigate the negative impact of high government debt on economic development in Somalia include: promotion of financial literacy, strengthening regulatory framework, encouragement of diversification of the economy, Improving infrastructure and access to financial services, implementation of debt management strategies, fostering a conducive business environment and seeking external assistance and debt relief. And the role of international financial institutions in managing high government debt in Somalia entail: providing financial assistance, negotiating debt relief, offering technical expertise and supporting capacity-building. The study recommended that the Federal Government of Somalia should improve fiscal management and should work with international financial institutions and creditor countries to negotiate debt relief and restructuring agreements to reduce the burden of debt payments and boost economic development.

Assessing economic effects of foreign aid and capital flows on real economic growth

The study sought to investigate the effect of foreign aid and capital flow on real economic growth for the SADC region. Eleven member states of the SADC region are selected for analysis based on data availability. In the study, foreign aid is represented by official development assistance (ODA), external debt (EXTD), and debt service cost (DSC) while the inflow of foreign direct investment represents capital flow (FDI). Annual percentage growth of per capita Gross Domestic Product (GDPpc) is used as a proxy of real economic growth. Trade balance (TRO) is included in the model regression as a control variable. The study employed panel econometric models. The results of panel ARDL indicate that ODA and FDI were found to have a negligible effect on real growth in the short run but contribute positively and significantly in the long run. This revelation supports the view that ODA and FDI are essential determinants of growth. On the other hand, EXTD together with its associated costs was found to have a detrimental effect both in the short run and long run. Based on the results of the study, the authors put forward the following policy recommendations for the SADC region: most importantly, there ought to be effective management of external debt by SADC countries to reduce their overdependency on external debt for their domestic needs. Given the positive effect of FDI in the region, the SADC region needs to intensify its efforts in devising measures that will attract foreign investors to the region which among others include pursuing inclusive and sustainable economic growth. Lastly, there is a need for effective management and official development aid to ensure sustainable growth.

МОДЕЛІ ТА МЕТОДИ УПРАВЛІННЯ ЗАЛУЧЕНИМ КАПІТАЛОМ НА ПІДПРИЄМСТВІ

Raised capital is a part of the enterprise's capital, which is formed at the expense of external sources, such as loans, credits, issuance of securities, etc. Raised capital, such as loans, bonds, shares or investments, is an important part of financing a business. It is an important tool for financing the company's activities, but at the same time it is associated with certain risks. Achieving effective management of this capital helps to ensure sustainable operation and growth of the enterprise, ensure financial stability and the ability to pay interest or repay loans on time. A business must determine the optimal mix of financing that meets its needs and constraints. Effective management of capital employed can help a company to be more competitive in the market, as it helps to influence the cost of capital and overall financial profitability. Factors affecting the capital structure include the organizational and legal form of the enterprise, industry specifics of operational activity, the size of the enterprise, the cost of capital, the freedom to choose sources of financing, the state of the capital market and the level of income taxation. Regular determination of capital management efficiency indicators is important for monitoring the current state of its structure. The important issues related to the effective use of loans and other forms of borrowed capital to achieve the company's financial goals are considered in the article. Debt management strategies and tools, optimization of debt service costs, as well as risks associated with the use of borrowed capital were studied.

MANAGEMENT OF THE STATE DEBT OF UKRAINE IN THE CONTEXT OF BALANCING ITS ECONOMIC DEVELOPMENT

Introduction. Settlement of the state debt problem determines the country’s budgetary capacity, the situation of its currency reserves, the level of interest rates, the investment climate, the stability of the national currency, and the behavior of all segments of the financial market. At the same time, in modern conditions, there is no unified approach to the management of the state debt as a priority direction of the state financial policy, which requires the search for opportunities to fulfill the state’s debt obligations in order to form the goals of its balanced economic development, to intensify scientific efforts aimed at researching the above-mentioned problem. The purpose of the article is to systematize approaches to determine the features of state debt management and assess its consequences for identifying balanced development of the country. Results. The problems of increasing the state’s debt obligations, which lead to structural imbalances, increase the country’s financial dependence on foreign creditors, reduce its solvency and investment attractiveness and increase debt service costs, are studied. The analysis of the conditions of formation of the state’s debt obligations was carried out and an assessment of their consequences in the context of balancing the country’s development was carried out. The peculiarities of the change in the structure of the state debt of Ukraine in terms of repayment currencies have been revealed. The indicators of Ukraine’s debt burden were monitored and compared with the limit values in order to determine the level of financial threat to the country. The consequences of an inefficient mechanism of state debt management, which are revealed at the stage of servicing and repayment of the state debt and which lead to the need for annual interest payments financed from the budget, are singled out. The measures to improve the government debt management mechanism to prevent negative macroeconomic trends are substantiated. Conclusions. According to the results of the study, it was established that the state debt of Ukraine creates risks for the financial capacity of the state, and the further attraction of loan funds at insignificant rates of economic growth increases the threats to macro-financial stability. Therefore, to increase the effectiveness of state debt management, it is important to form a proper management mechanism, monitoring of debt security indicators and determine the optimal structure of the debt-to-GDP ratio, taking into account the main aspects and trends of development of the national economy. To improve the mechanism of state debt management, it is proposed to: reduce the share of debt denominated in foreign currency; increasing the share of domestic borrowing in the structure of the state debt; reduce the specific weight of debt that must be repaid in the short term; increase the demand for government securities; refuse to attract financial resources of international organizations, which provide for additional crediting conditions and limitation of economic and political dependence of the state.

Новые тенденции в развитии мировой экономики и их влияние на Россию

Fragmentation processes are developing in the world economy since the 2010s. They are characterized by the active use of protectionist measures in foreign trade. Manifestations of fragmentation include a slowdown in global trade dynamics, a reduction in international capital flows relative to global GDP, and increased volatility in global commodity and financial markets. However, we can not find statistical confirmation for the full-scale development of the process of fragmentation in the world economy. It should also be noted that there are also the global debt problem, currently manifested in increasing debt servicing costs, and the problem of currency competition from both private digital currencies and competition for the US dollar from the Chinese yuan as a currency of an alternative center of the global economy. The Russian economy has experienced the full-fledged impact from the fragmentation trend through the unprecedented sanctions regime imposed on it in 2022, and has also faced the impact of increased global inflationary pressures. At the same time, the consequences of sanctions against Russia have also affected the dynamics of global commodities markets due to the “big country trap” effect. The economic policy pursued in Russia contributed to overcoming the negative short-term consequences of the sanctions shock. Currently, economic policy is faced with the task of solving medium- and long-term problems, first of all, contributing the structural changes in the Russian economy.

ОЦЕНКА ВЛИЯНИЯ ДОЛГОВОЙ НАГРУЗКИ НА ЭФФЕКТИВНОСТЬ ДЕЯТЕЛЬНОСТИ ПРЕДПРИЯТИЯ

These days, domestic industrial enterprises tend to use borrowed funds for business development needs due to insufficient own funds for achieving the desired rates of sustainable growth. The forms and scopes of borrowing may vary depending on corporate goals and objectives at each stage of business development, including the possibility for the company to increase its debt burden without detriment to the operational performance. If the company's debt obligations grow at a higher rate than its profits, the company may be facing a loss of financial stability, potentially leading to bankruptcy. This article presents the findings of a study on the capital structure and change dynamics of a major furniture manufacturer in Russia, including the impact of the growing debt burden on the operational performance indicators. The study demonstrates that the capital growth rate slows down with an increase in the share of borrowed funds within the capital structure. Such borrowed funds, being essentially long-term financial liabilities, are found to dominate the overall capital structure, resulting in lower financial stability and a sharp rise in the company's debt service costs, which in turn contribute to reduced level of profits and lower return on assets. Based on the findings of this study, it was concluded that keeping on with the current trend of growing debt burden, the company will not be able to discharge its debt obligations through the operating activities at the given pace of business development.

Can passive monetary policy decrease the debt burden?

Large expansionary fiscal measures are often implemented with monetary accommodation during an economic crisis. When a government is highly indebted, and the timing of switching to the conventional regime M (passive fiscal/active monetary policies) is uncertain, a government spending increase in regime F (active fiscal/passive monetary policies) increases government debt. Such regime uncertainty dampens inflation and debt revaluation effects. Also, as regime uncertainty generates a smaller real interest rate decline, debt servicing costs fall less, and tax revenues increase less, than in the fixed regime F. These factors contribute to reversing the debt decline for a spending increase in the fixed regime F. The result holds under adverse supply shocks and potentially higher capital taxes, relevant factors in the post-COVID U.S. economy.

Monetary policy, inflation and distributional impact: South Africa's case

AbstractThis paper presents further empirical support for the finding that the impact of inflation and that of policy instruments to manage inflation are not distributed equally across households of different income groups. In particular, the evidence using South African data suggests that monetary policy tightening, which seeks to maintain low and stable inflation, has a relatively modest effect on real consumption of poorer households, who tend to rely on government grants and spend larger shares of income on food stuff, while the reduction in real consumption of wealthier households is much larger. This may be due to the fact that low and stable inflation help maintain the value of government grants and cap food prices both in real terms, and higher interest rates reduce labour income, weaken asset price performance and increase debt service cost.

Monetary Policy Tightening and Debt Servicing Costs of Nonfinancial Companies

Rapid monetary policy tightening in most advanced economies in 2022 and 2023 was accompanied by substantial increases in prevailing interest rates for new credit to businesses and households. In addition to increasing the cost of new borrowing, monetary policy tightening may also be associated with increases in costs of servicing existing debt, potentially leading to the tightening of firms' and households' financial constraints, leaving them with less cash for investment and consumption.

The contribution and influence of total external debt, FDI, and HCI on economic growth in Indonesia, Thailand, Vietnam, and Philippines

The goal of this research is to ascertain how much foreign debt, foreign investment, and HCI have contributed to the growth of the economies of the four ASEAN nations. This research uses the Panel Vector AutoRegression Model (PVAR). The PVAR method is a method used to analyze the relationship between several variables that change over time. This method combines two approaches, namely Vector Autoregression (VAR) and panel data. The type of data used in this research is secondary data, an annual time series with a time range from 2000 to 2020 for all cross-section variables taken from four countries in ASEAN, namely Indonesia, Thailand, Vietnam and the Philippines. The World Bank provided the data for this study. The variables examined in this study are GDP, total foreign debt, foreign debt, FDI, and HCI which are represented by education and health variables. From this study, we find that the relationship between variables varies, such as gross domestic product which has a significant negative relationship with FDI but has a significant positive relationship with debt service. In addition, there is a significant and negative relationship between GDP and total foreign debt, GDP is also negatively and significantly related to education and health variables, which means that GDP is also negatively and significantly related to HCI. It can be concluded that in the four countries we studied, an increase in debt service will increase people's consumption capacity which will lead to an increase in economic growth, but in this study total foreign debt and debt service have a negative relationship with gross domestic product. This research shows that foreign direct investment (FDI) has a significant positive relationship with the gross domestic product (GDP) of ASEAN member countries, especially Indonesia, Thailand, Vietnam and the Philippines. Therefore, it is recommended that the governments of ASEAN member countries jointly determine foreign investment policies and manage their foreign debt to increase economic growth in the Southeast Asia region. In addition, it is recommended that the governments of ASEAN member countries pay more attention to their fiscal policies, because increasing debt service costs can reduce economic growth. This can be seen when there is a surge in foreign debt which is disproportionate to the ability to pay ASEAN member countries.

Finances of the Nation: From Bonds to Banknotes—Central Banking and Public Finances in Canada

This article presents a summary of the Bank of Canada's finances from 1935 to the present, highlighting the interplay between the central bank and the federal government's fiscal operations. It explores the historical, political, and economic factors that led to the establishment and subsequent nationalization of the Bank of Canada. It also presents new data and analysis on the central bank's impact on Canadian public finances. By examining the evolution of the Bank of Canada's balance sheet, revenue streams, and expenditures, the article underscores the importance of understanding these connections, particularly considering the COVID-19 pandemic and the subsequent implementation of quantitative easing. Understanding the financial position of the Bank of Canada separately from the broader consolidated position of the government of Canada is valuable. For example, it allows one to construct a broader measure of federal debt service costs, which today are materially larger than what is reported in the public accounts. It may also clarify the implications of monetary policy choices for the economic and financial welfare of the nation.

On the Dynamic Relationship between Household Debt and Income Inequality in South Africa

This paper analyses the relationship between household debt and income inequality in South Africa for the period 1980–2021. We use two measures of inequality and estimate a vector error correction model (VECM) which includes household debt, inequality, and other macroeconomic variables. To test the robustness of our results, single equation models are used, which estimate household debt as a function of inequality and macroeconomic factors. We employ two measures of inequality, namely Gini coefficient and ratio of top and bottom income earners’ proportion of income. Furthermore, we use both household debt as a percentage of disposable income and household debt service costs as dependent variables in single equation regressions. The study finds a negative and significant relationship between household debt and income inequality in the long run, which contradicts the Rajan hypothesis in the South African case. Rather, we find that inequality in South Africa creates a bias in debt allocation towards high-income earners, whose incomes can easily absorb the extra debt (reduced ratio of debt to disposable income). There are therefore no socio-equity considerations in South African credit markets. We find growth in gross domestic product (GDP) per capita also has a moderating effect on the relationship between household debt and income inequality. High GDP per capita growth in the presence of high inequality reduces the impact of inequality on household debt and vice-versa. All other control variables take expected signs. These results are robust to changes in the inequality or household debt measures.

Analysis of the Relationship Between Fiscal Deficits and Debt Accumulation in Zambia

Zambia has experienced structural deficits for decades and these have been viewed as the main cause of debt accumulation. Despite heavy investment in infrastructure and other sectors, the country faces low revenue relative to rising cost of debt. Objective: to establish whether deficit financing is the cause of high debt in Zambia. Method: Using secondary data and an archival strategy, data was analyzed through a mixed research choice which required both qualitative and quantitative data to be presented together. This involved using descriptive and analytical approaches. Findings: It was found that Zambia cannot survive without borrowing and this is the main cause for debt accumulation. The reason is that investments do not adequately contribute towards covering debt servicing costs. The country’s reliance on copper exports is the main reason for continuous deficits as the country fails to diversify the economy in order to increase income streams. In addition, Zambia generates growth which is not sufficient to cover the debt servicing burden. Conclusions and Recommendations: The study concluded that Zambia needs to control it’s key resource, mining, to ensure that proceeds are maximized and invested into agriculture and in boosting the manufacturing sector. The country needs to focus on generating the fiscal surplus of 1.32 of GDP to make the debt ratio of 60 percent to be sustainable.