abstract
Through consideration of the COVID-19 pandemic and its impact on the public debt sphere, this article explains the changes by analyzing debt structure and volume within the scale of global economic status. Learn more about the significant shifts in debt-to-GDP ratios and the broader economic implications
Since the outbreak of the pandemic, there have been economic recessions. Therefore, with the current coronavirus situation and mitigation strategies undertaken in most countries worldwide, the economic downfall is unprecedented. Being a unique experience, the world does not have an appropriate remedy for recovery from this big economic shock. Countries both in the first world and third world urgently require financial assistance to sustain economic undertakings, especially to reduce the risk of a rise in the unemployment rate. The measures undertaken by different countries authorities to combat the crisis has caused an increment in borrowing and, precisely, public debt. Huge debts are a catalyst for slow investment and economic growth for a long period and, in effect its detrimental to the well-being of the population. Thus, public debt management is amongst the directions of economic growth policy and seamlessly sourcing for its efficiency is a responsibility of each country government. Therefore, through consideration of the COVID-19 pandemic and its impact on the public debt sphere, it well explained by analyzing debts’ structure and volume in the scale of global economic status.
The growth of the public debt is because of the government implementation of the country regulation of the economy. Mainly is because of facilitating progressive shifts in the fabrication of the economy. Furthermore, it reflects on the crisis activities transpiring in the country and thus demanding adaptation of stabilization approaches. The unprecedented outbreak of covid-19 led to a severe health crisis, economic downfall and social-negative impacts in most of the nations. Authorities in many countries were forced to impose social-distance and lockdown policies to help in curbing the spread of the virus. Even though these measures have been effective in reducing the number of infections, they have been counter-productive in economic growth. The pandemic has adversely affected considerable sectors of the economy, and at the same time making some of the companies face extinction. Globally, many economies are experiencing the fall of business activities. Both developed and developing countries’ economies are facing hardship, and at least 85% of nations around the globe expects to register sub-zero growth in 2020 (Global Financial Stability Report, 2020). Therefore, for the economy to remain competitive, the government need to borrow to combat the economic challenges. Technically, debt is what facilitates the government to get the extra resources to invest in development projects in all sectors of the economy. With the debt challenge, the ambition of development will be curtailed. On the other hand, the debt problem seldom becomes a complex economic problem to rectify. The current economic downturn has resulted in a sharp rise in government debt. Most governments have found themselves in a situation where they are unable to maintain the dynamics of the financial circumstances under control. With the debt volume increasing unprecedently, it makes it hard to reform the economy, decelerating economic growth and adversely affecting a country’s position in the world community. Regardless, developing countries are the most affected by the pandemic than developed nations. Arguably, the main reasons are over-reliance on revenues from foreign trade and service industry such as tourism. Developing countries are more vulnerable and faced considerable capital overflow (Outlook, 2020). According to IMF, new experience in the level and speed of portfolio outflows in the first quarter of the coronavirus outbreak led to adverse disruptions for emerging markets. For countries with huge economies, they have been able to implement key policies both monetary and fiscal policies. These policies are expensive to many developing countries. For the case of the emerging markets, few policy spaces are a stumbling block to mitigation policies. Thus, these countries were forced to borrow a colossal amount to prevent an economic downturn.
The number of finances expected for public compensation is significantly high compared to what have been experienced globally for some period. Most of the public spending currently is being funded by the public debt without considering the aspect of increasing tax levies on items. This is because a considerable number of countries do not have the political capital to contemplate raising taxes during pandemic times where there is economic turndown. They have been various concerns regarding the future expansion of the budget deficit. Considering the budget deficit due to the public support from the authorities is unavoidable, these types of issues will potentially become more widespread among the general public. It is because many people have an understanding that a massive government budget will tend to reflect a massive future burden. The government intervention strategies in place may not only reduce the current people’s income but also, incomes in the future. For instance, unprecedented fiscal stimulus, to ease the economic hardship may encourage government to borrow money to enforce it. In return, these borrowings will turn into a contingent liability for governments.
Figure 1 Fiscal measures in response to the COVID-19 pandemic
Therefore, in a situation where the supply of capital goods is ceased because of cessation of corporate production undertakings, capital investment by companies and authorities will not be possible, and capital formation of a nation will be at a standstill (Obayelu et al., 2020). In case the accumulation and renewal of the capital stock remain to stagnate, it may result in the stalling of production and income soon. In the additional implementation of strategies such as furloughs and increment of the leave absence to curb the spread of infection, if prolonged it may cause degradation of human capital encompassed in individuals’ labour. The probability increases with more workers being dismissed from their workplaces. Moreover, corporate bankruptcy as the results of the recession of the economic undertakings may result in loss of management capital (Didier et al., 2021). Mostly, these may result in the contraction of production and income currently instead of in the present. Thus, these costs are inevitable, and society is obliged to take measures to help combat the spread of the virus. The government debt will tend to create present and future burden. With most government lacking the financial ability to support businesses and households, the existence of corporate bankruptcies and unemployment is inevitable. Therefore, for these government to sufficiently support the businesses and households so that to prevent the spread of the virus and economic hardship, they will have to borrow. Therefore, these countries will be forced to default their existing debt and borrow more funds to combat the negative effects of covid-19. Eventually, these countries will be at higher risk of debt distress. More borrowings will result in an increment of public debt to unmanageable levels.
Figure 2 Risk of external debt distress in selected countries
Generally, when the government is supporting its measures using deficit financing it will lead to both current and future measures. In case the financing tightens capital markets, it will lead to an increase of interest rates and demoralize the private investment. In most cases, deficit financing without considering its production approaches, stalls capital formation and shrinks production and distribution of income. Furthermore, the public debt is not a burden if it does not shrink consumption possibilities. Public debt will be a burden depending on whether it was issued aiming to acter for budget deficit domestically or overseas (Kamli-Ozcan, 2020). Therefore, in the situation of internal debt, the government will be forced to tax even the future generation. The generation is taxed to redeem government bonds. For the external debt, the cut-spending will not fell on the current generation but the future generations will pay through taxes to facilitate settlement of debts. In this regard, most of the countries to help their citizens to combat the economic hardship because of the pandemic; preferred to take external debts. Some of the international bodies that provided debts to various countries to deal with the adverse effects of the pandemic include but not limited to the IMF and the world bank. For example, in responding to the request from the IMF and World Bank, top advanced countries endorsed the Debt service suspension initiative to assist the poorest countries to control the negative effects of coronavirus pandemic (United Nations, 2020). On top of that, they put a temporary suspension of the payments by the emerging countries to repay their official bilateral debt. Also, with the drop of the interest rates in the global market, developing countries managed to raise their borrowing in the forms of bonds. Significantly, it helped in raising finances but results in the problem of ballooned debts costs. There is a need for effective debt management to control the burden of repayment of debt on the economy both currently and in the future.
The mitigation policies are in place to control the spreading of the virus. Nevertheless, these measures to combat its adverse effects may lead to the debt crisis. This problems for both developed and developing countries. However, the ability of different countries to respond to the covid-19 crisis and problems in the debt sphere varies. Therefore, for the governments to successful curtail the spread of the virus and at the same time avoid debt crisis various measures need to be taken. The government should come up with measures to safely and successfully reopening of the economy. These programs will enhance employment and economic activities. Thus, the following recommendation will be useful in reducing public debt. The government should issue debt with bonds. It will impede the government from raising taxes and provides funds for expenditure spending. Also, another technique of curtailing ballooning of debt is interest rate manipulation. Maintaining interest at low levels rate, will generate tax revenue and eventually reduce national debt. The final recommendation is spending cuts. Its implication is lowering of the deficit.
References
Didier, T., Huneeus, F., Larrain, M., & Schmukler, S. L. (2021). Financing firms in hibernation during the COVID-19 pandemic. Journal of Financial Stability, 53, 100837.
Financing for Development in the Era of COVID-19 and Beyond. United Nation. (2020). Retrieved 4 April 2021, from . https://www.un.org/sites/un2.un.org/files/part_ii-_detailed_menu_of_options_financing_for_development_covid19.pdf.
Global Financial Stability Report. IMF. (2021). Retrieved 4 April 2021, from https://www.imf.org/en/Publications/GFSR.
Kalemli-Özcan, Ṣ. (2020). COVID-19 and Emerging Markets: An Epidemiological Model with International Production Networks and Capital Flows.
Obayelu, A. E., Obayelu, O. A., Bolarinwa, K. K., & Oyeyinka, R. A. (2021). Assessment of the Immediate and Potential Long-Term Effects of COVID-19 Outbreak on Socioeconomics, Agriculture, Security of Food and Dietary Intake in Nigeria. Food Ethics, 6(1), 1-22.
Outlook update/April 2020. EDB Macroreview. (2021). Retrieved 4 April 2021, from https://eabr.org/upload/iblock/881/EABR_Macroview_04_2020_EN_web_2.pdf.
No comments:
Post a Comment