Public debt is a key instrument of economic policy. Borrowing can help countries invest in their development and spur growth. Indeed, countries deprived of credit access are more likely to be caught in poverty traps and aid dependency. Through debt accumulation, governments can mobilize domestic and foreign savings to fund public investment and other growth-enhancing programs such as education, health, or sanitation.
Nevertheless, experience shows that countries that do not manage their debt prudently may accumulate excessive debt. Rapid growth in public debt and debt service can impose increasing claims on the government budget and crowd out critical development spending. Increasing public debt may result in lower future growth, as it reduces the room for the private sector to borrow, increases uncertainty regarding levels of taxation needed to service public debt, and raises the risk of defaults.
Given the importance of public debt, the USAID Fiscal Accountability and Sustainable Trade (FAST) team produced the document “Public Debt: A Primer for Development Practitioners”. This primer covers key concepts and tools that are central to public debt theory and practice. Development stakeholders can use the contents of the primer to put the proper emphasis on public debt developments in their analysis and advice, and to understand appropriate roles that USAID and other partners can play.
This primer makes clear that getting public debt right means achieving a proper balance between the benefits, the costs, and the risks of borrowing. Successful debt management largely hinges on credible commitments to maintain “sustainable” levels of government indebtedness. Thus, the primer addresses three main questions: What does “getting public debt right” mean concretely? What should countries do to get there? And how can development partners and stakeholders help in the process?
To answer these questions, the primer provides a framework linking the key relevant concepts, the basic theories and assessment tools and indicators. That framework can assist development stakeholders in putting the proper emphasis on public debt developments in their analysis and advice. An improved ability to detect early warnings of unhealthy developments could prompt advice to take timely and effective mitigation measures aimed at plugging the gaps in the debt management framework. Good international practice derived from past cases of success and failure informs this discussion.
The primer equips the reader with concrete tools to (i) understand the importance of a sound public debt policy for economic and financial development, (ii) assess when the government’s approach to public debt is problematic (poor management, wrong prioritization and sustainability at elevated risk), (iii) understand preventive strategies to mitigate the risk of debt problems and how development partners can help in developing such strategies and putting them in place, and (iv) in case of failure, have a good grasp of productive approaches to debt restructuring or default.
“Public Debt: A Primer for Development Practitioners” is now available on the USAID Development Experience Clearinghouse. It can also be accessed by clicking here.