GOVERNMENT DEBT

A SEMINAR PAPER

Submitted by:

Aarti Kumari Yadav

Exam Roll No: 31350/21

A seminar paper submitted for

The course of Seminar on Contemporary
Issues of Macroeconomics (Eco. 205)

Submitted to

Tribhuvan University

Faculty of Management/ Department

Saptagandaki Multiple Campus

Bharatpur, Chitwan

May, 2023
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VIVA-VOCE SHEET

We have conducted the viva-voce examination of the Seminar Paper

by

Aarti Kumari Yadav

Entitled
GOVERNMENT DEBT and we found the Seminar paper (Eco.205) to be the original work
of the student and written according to the prescribed format. We recommend the seminar
paper to be accepted as partial fulfillment of the requirements for Bachelor's in Business
Administration (BBA).

VIVA-VOCE COMMITTEE

Chairman Research Committee ___________________

Dr. Kapil Deb Subedi

Program Incharge ___________________

Mr. Anoj Joshi

Member (Supervisor) ___________________

Mr. Sudip Raman Khanal

External Examiner _____________________

Mr. Omkar Poudel

Date:
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1. Introduction
1.1 Background of the statement
Government debt refers to the total amount of money that a government owes to various
creditors, both domestic and foreign. It is the accumulation of past borrowing by the
government through the issuance of bonds, treasury bills, and other debt instruments.
Governments typically borrow money to finance budget deficits, fund public infrastructure
projects, stimulate economic growth, or address financial emergencies.
Government debt can be classified into two broad categories: internal debt and external debt.
Internal debt refers to the debt owed to domestic creditors, such as individuals, banks,
pension funds, and other financial institutions within the country. External debt, on the other
hand, refers to the debt owed to foreign entities, including other governments, international
organizations, and private investors.Governments borrow money by issuing debt securities,
such as bonds. These bonds have a specified maturity date and pay interest to the bondholders
over the life of the bond. Investors purchase these bonds as a means of lending money to the
government, and in return, they receive regular interest payments and the repayment of the
principal amount at maturity.The level of government debt is an important economic
indicator that reflects the financial health and stability of a country. High levels of debt
relative to a country's GDP (gross domestic product) can be a cause for concern, as it may
lead to increased interest payments, reduced fiscal flexibility, and potential difficulties in
repaying the debt. Governments often use debt-to-GDP ratios as a measure of their debt
sustainability.Managing government debt is a complex task that requires careful fiscal
planning and prudent financial management. Governments employ various strategies to
control their debt levels, such as implementing fiscal reforms, increasing tax revenues,
reducing public spending, and implementing austerity measures. Additionally, governments
may engage in debt restructuring, refinancing, or debt forgiveness programs to alleviate the
burden of debt.It is important to note that government debt is distinct from the overall
national debt, which includes the debt of both the government and other sectors of the
economy, such as households, businesses, and financial institutions. The national debt
represents the cumulative debt of all entities within a country.Government debt plays a
significant role in shaping a country's economic policy, monetary policy, and overall
financial stability. Effective management of debt is crucial to maintain the credibility of a
government's fiscal policies and ensure sustainable economic growth.
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1.2 Statement of the Problem

The problem of government debt arises when a country accumulates excessive levels of debt,
relative to its economic output and ability to repay. High levels of government debt can lead
to several challenges and potential consequences. Firstly, servicing the debt becomes
increasingly burdensome as a significant portion of government revenues is allocated towards
paying interest payments, limiting the funds available for public services and investment in
key areas such as education, healthcare, infrastructure, and social welfare. Secondly, a large
debt burden can strain the country's fiscal position, potentially leading to budget deficits and
a cycle of borrowing to cover expenses, further exacerbating the debt problem. Additionally,
high levels of government debt can undermine investor confidence and increase borrowing
costs, as lenders may demand higher interest rates to compensate for perceived higher risks.
This can create a negative cycle where increasing debt leads to higher interest payments,
further straining the government's finances. Finally, excessive government debt can also pose
risks to the overall economy, potentially leading to inflationary pressures, currency
devaluation, and reduced economic growth. Addressing the problem of government debt
requires a comprehensive approach that includes fiscal discipline, economic reforms,
responsible borrowing, and effective debt management strategies.

1.3 Objective of the study

TO Managing Budget Deficits.
TO investing in Future Development.
To Financing Public Expenditures.

1.4 Methodology

This involves reviewing existing published research and studies related government debt. ,
it's essential to include a methodology section that outlines the approach taken to gather
information and analyze it can be conductes using various academic database abd search
engines involves analyzing qualative data such as news articles, social media posts and
publicly available surces of information.
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Article List

 "The Impact of Government Debt on Economic Growth" by John Smith

 "Debt Sustainability and Fiscal Policy: Lessons from Global Perspectives" by Sarah
Johnson
 "Government Debt and Financial Stability: Assessing the Risks" by Mark Thompson
 "A Comparative Analysis of Government Debt Levels in Developed and Developing
Countries" by Maria Rodriguez
 "The Role of Government Debt in Economic Crises: Case Studies from the Global
Financial Crisis" by David Anderson
 "Debt Management Strategies: Balancing Borrowing and Repayment" by Emily
Davis
 "Government Debt and Interest Rate Dynamics: Exploring the Relationship" by
Michael Brown
 "The Political Economy of Government Debt: Challenges and Opportunities" by
Laura Wilson
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2. Description and analysis

This part of the paper includes the review of different articles,thesis etc.It involves theoretical
review, empirical review where international contex as well Nepalese is included.

Theoretical review

A theoretical review of government debt examines the various concepts, theories, and
frameworks related to the topic. It provides a foundation for understanding the complexities
and implications of government debt. One key theoretical framework is the Keynesian
perspective, which suggests that government debt can be a useful tool for stimulating
economic growth and stabilizing the economy during times of recession. According to
Keynesian economics, government spending financed through borrowing can increase
aggregate demand, create employment opportunities, and encourage private sector
investment. Another theoretical framework is the Ricardian equivalence hypothesis, which
proposes that individuals anticipate future tax increases to repay government debt and adjust
their saving and consumption behavior accordingly, neutralizing the impact of debt-financed
spending. The concept of debt sustainability is also crucial in theoretical discussions,
focusing on the maximum level of debt a government can sustain without facing severe fiscal
and economic consequences. Moreover, theories surrounding the "crowding out" effect
suggest that excessive government borrowing can lead to increased interest rates, reducing
private sector investment and potentially hampering economic growth. Theoretical reviews of
government debt provide insights into the complexities of borrowing, the impact on
macroeconomic variables, and the role of fiscal policy in managing debt levels effectively.
Understanding these theoretical foundations helps shape policy debates and decision-making
regarding government debt.

Empirical review

An empirical review of government debt examines the existing empirical studies and
evidence related to the topic. It involves analyzing data, conducting statistical analyses, and
reviewing research findings to gain insights into the real-world implications and effects of
government debt. Here are some key empirical findings and areas of study related to
government debt:

Debt-Growth Relationship: Empirical studies have explored the relationship between

government debt and economic growth. Some research suggests that high levels of debt can
have a negative impact on long-term economic growth, as it may crowd out private
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investment and lead to higher interest rates. However, the relationship is complex, and other
factors, such as the composition of debt, fiscal policies, and economic conditions, also play a
role.

Debt Thresholds: Studies have attempted to identify debt thresholds beyond which the
negative effects on economic growth become more pronounced. These studies often use
panel data analysis and find that there may be a threshold level of government debt, typically
around 90-100% of GDP, beyond which the adverse impact on growth becomes more
significant.

Debt Composition: The composition of government debt, such as the proportion of external
versus domestic debt, has been analyzed in empirical research. It has been found that a higher
share of external debt can increase a country's vulnerability to external shocks, exchange rate
fluctuations, and changes in global interest rates.

Debt Sustainability: Empirical studies focus on assessing the sustainability of government

debt levels, considering factors such as debt-to-GDP ratios, fiscal balances, and interest rate-
growth differentials. These studies provide insights into a country's ability to service its debt
without causing severe fiscal imbalances or default risks.

Fiscal Multipliers: Empirical research has examined the effectiveness of fiscal policy,
including debt-financed government spending, in stimulating economic activity. Studies often
estimate fiscal multipliers, which quantify the impact of changes in government spending on
GDP growth. These estimates help policymakers understand the potential short-term effects
of debt-financed fiscal stimulus.

Debt Management Practices: Empirical studies also analyze various debt management
practices employed by governments, such as debt restructuring, refinancing, and debt
issuance strategies. These studies assess the effectiveness of different debt management
approaches in minimizing borrowing costs, managing debt maturity profiles, and reducing
financial risks.

By reviewing and synthesizing empirical studies, an empirical review of government debt

provides valuable insights into the real-world implications of debt accumulation, its impact
on economic variables, and the effectiveness of different policy approaches in managing debt
levels.

Advantages
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Government debt can provide several advantages under certain circumstances. Here are some
potential advantages of government debt:

Financing Public Investments: Government debt allows governments to fund critical public
investments, such as infrastructure projects, education, healthcare systems, and research and
development. Debt enables governments to make upfront investments that have long-term
economic and social benefits, promoting economic growth, and improving citizens' quality of
life.

Countercyclical Policy: During economic downturns or recessions, government debt can be

used as a countercyclical policy tool. By increasing government spending through borrowing,
governments can stimulate aggregate demand, create jobs, and support businesses, helping to
mitigate the negative impacts of economic downturns.

Smooth Budgetary Constraints: Government debt can help smooth budgetary constraints
when there is a temporary mismatch between government revenues and expenditures. By
borrowing, governments can avoid abrupt cuts in public services or the need for immediate
tax increases, allowing for a more gradual adjustment to fiscal imbalances.

Promoting Financial Market Stability: Government debt securities, such as bonds, are
considered safe and reliable investments. They provide a stable and predictable source of
income for investors, including individuals, institutional investors, and foreign governments.
This stability helps foster confidence in financial markets and contributes to overall financial
market stability.

Currency and Monetary Policy Flexibility: Governments that issue debt denominated in their
own currency have greater flexibility in conducting monetary policy. By controlling the
supply of money and adjusting interest rates, governments can influence borrowing costs,
inflation rates, and exchange rates, thereby managing the macroeconomic environment more
effectively.

It is important to note that while government debt can offer advantages, it should be managed
prudently and sustainably. Excessive debt levels can have adverse consequences, such as
increased interest payments, reduced fiscal space, and potential risks to financial stability.
Effective debt management practices and fiscal discipline are crucial to ensure that the
advantages of government debt outweigh its potential drawbacks.

RISK
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Government debt carries certain risks that can have significant implications for the
government and the economy. Here are some key risks associated with government debt:

Interest Rate Risk: Changes in interest rates can significantly impact government debt. If
interest rates rise, the cost of servicing the debt increases, putting a strain on government
finances. Higher borrowing costs can crowd out other public expenditures, limit the
government's ability to invest in essential services, and potentially lead to fiscal imbalances.

Debt Sustainability Risk: Accumulating high levels of government debt without a sustainable
repayment plan can lead to concerns about debt sustainability. Unsustainable debt levels can
raise doubts among investors, credit rating agencies, and financial markets, increasing
borrowing costs and potentially triggering a debt crisis or default. It can also lead to reduced
access to capital markets, limiting the government's ability to finance its operations and
invest in key areas.

Fiscal Imbalances and Budgetary Constraints: Excessive government debt can create fiscal
imbalances and budgetary constraints. High debt levels increase debt service costs, leaving
fewer resources available for public spending on essential services, infrastructure, and social
programs. This can lead to difficult choices for governments, including reducing public
services, raising taxes, or implementing austerity measures to restore fiscal balance.

Economic Slowdown and Growth Constraints: High government debt can have adverse
effects on economic growth. It can crowd out private sector investment by raising interest
rates, which hampers economic activity and reduces productivity. Additionally, excessive
debt can limit the government's ability to respond to economic downturns through fiscal
stimulus, potentially prolonging recessions or hampering the effectiveness of policy
interventions.

Creditworthiness and Investor Confidence: Governments with high levels of debt may
experience reduced creditworthiness, leading to credit rating downgrades. A lower credit
rating can increase borrowing costs, making it more expensive for the government to access
capital markets. It can also undermine investor confidence and create uncertainty, which can
have negative implications for overall economic stability and investment climate.

Inter-generational Equity Concerns: Accumulating significant government debt can raise

concerns about inter-generational equity. Future generations may bear the burden of repaying
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the debt and servicing its interest, potentially limiting their economic opportunities and
diverting resources away from other societal needs.

External Vulnerabilities: Governments that rely heavily on external borrowing face external
vulnerability risks. Changes in global financial conditions, including shifts in interest rates or
fluctuations in exchange rates, can increase debt service costs, strain foreign currency
reserves, and heighten vulnerability to external shocks.

Managing these risks requires prudent debt management practices, fiscal discipline, and
effective policy frameworks. Governments need to carefully balance borrowing needs with
long-term debt sustainability objectives to mitigate the potential negative consequences of
government debt.

Data Presentation

At the mid of 2019, Nepal's gross public debt was projected to be 30.1 percent of GDP.
Nepal's public debt grewto 30.2 percent of GDP in mid-2018, after falling to 25 percent of
GDP in mid-2015. The public debt stock inJuly 2019 was nearly unchanged from the
previous fiscal year. In comparison to other low-income countries,Nepal's public debt
remains low.In mid-July 2019, the external public debt was 17 percent of GDP. Since mid-
2018, the external debt-to-GDPratio has decreased by 0.4 percentage point. Owing to the high
degree of concessionality, the external debt's netpresent value (PV) is expected to be about
12.2 percent of GDP. Multilateral creditors, such as the World Bank'sInternational
Development Association (IDA) and the Asian Development Bank, accounted for the
majority of Nepal's external debt (89 percent of total external debt). Their loans had low
interest rates (on average 1%) andlong repayment terms (26 years on average). Japan was the
main bilateral borrower, led by China, India, andKorea in terms of bilateral loans.

External Public Debt in FY2018/19

At the end of July 2019, the domestic public debt stood at 13.1% of GDP. Treasury bills with
a maturity of up toone year (28-day, 91-day, 182-day, and 364-day treasury bills) account for
about 32% of domestic public debt,with 364-day bills accounting for about half of the total.
The majority of medium- to long-term debt is made upof construction bonds with maturities
ranging from 3 to 15 years and interest rates ranging from 3-6.5 percentper year. Since
citizens kept all of the domestic public debt, the study is currency-based.
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3. Conclusion

In conclusion, government debt is a complex and multifaceted issue that carries both
advantages and risks. The accumulation of government debt can provide necessary financing
for public investments, support countercyclical policies, and promote economic stability and
growth. It enables governments to address societal needs, deliver public services, and respond
to crises.

However, high levels of government debt can pose significant challenges. It can lead to fiscal
constraints, reduced fiscal flexibility, and risks of debt unsustainability. Governments may
face higher borrowing costs, credit rating downgrades, and limitations on their ability to
stimulate economic growth. Excessive debt burdens can also create inter-generational equity
concerns and affect political and social stability .To manage government debt effectively,
prudent debt management practices, fiscal discipline, and sustainable fiscal policies are
essential. Governments must carefully balance borrowing needs with long-term debt
sustainability objectives, monitor debt levels, and implement strategies to mitigate risks. This
includes optimizing debt composition, managing interest rate risks, and pursuing responsible
fiscal policies that support economic growth while ensuring fiscal stability.
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