Sample Essay Paper on Debt Management

Debt Management

A review of IMF “Revised Guidelines for Public Debt Management”

IMF. (2014, April 1). Revised Guidelines for Public Debt Management. Retrieved May 16, 2015.

Public debt management according to IMF (2014) refers a process of developing and executing mechanisms for managing a state’s debt to raise adequate amount of funds at the possible lowest cost, over both the short and long term while putting into consideration the uncertainty that may come with the risks of acquiring debts. The main endeavor of these management strategies is to meet the fundamental goals of Public debt management, which include developing the national economy or maintenance of a stable market for the states securities.

In macroeconomics context, IMF (2014) notes that the states should develop a public policy that looks to make sure that growth and level of public debts it at a sustainable level. The government has to be in a position to service the debt under a broad choice of circumstances while taking into consideration the risk and cost objective of the debt. The government has to put in place a credible debt management policy that is tailored towards reducing the excess level of borrowing. Debt administrators have to ensure that fiscal authorities are conscious of the effect of the states financing needs and the cost that the state incurs as a result of borrowing. The parameters that can be used in guiding a country on its borrowing capacity and sustainability include debt service ratio of the public sector in comparison to the tax revenue and the GDP.

A study by IMF (2014) indicates that poorly structured debt management strategies have a high likelihood of plunging a country into an economic crisis. In is imperative for debt administrators to reflect on the state of the national currency, interest rates, the nature of unfunded contingencies, and liabilities. For instance, the current exchange rates or the amount of both domestic and foreign debt that the government has. Many economies have faced a crisis because of putting much focus on possible cost saving strategies, which is in association with a significant volume of balanced rate liability. This has left many governments without an option other than changing the market conditions. In addition, overreliance on overseas money debts can result in monetary pressure when investors become unwilling to refinance the foreign currency debt of the country.

The state always has the biggest portfolio in a country, which always contains risky and complex financial structures that have a high potential to cause significant risk to a country’s balance sheet and economic stability. There is a great need for the state to control its liquidity build-up exposures and risks that can cause external shocks. The main reason for limiting external risk is that when the government is vulnerable to the external monetary influences, the private sector that is the backbone of many economies is also hurt (IMF, 2014).

 The rationale for the public sector establishing an effective debt management policy is to caution it from external vulnerabilities. However, emerging economies are less vulnerable compared to small markets since their economies are more diversified, and have a substantial base of home financial cutback with more advanced financial systems. Therefore, the guidelines have to be directed by forces influencing the financial liquidity of the nation (IMF, 2014).

Capacity building is another significant strategy in public debt management where the state equips its managers with modern skills that will ensure that the risks arising from borrowing are minimized at all cost through adequate research and projection of future financial conditions of the country. Furthermore, an analysis of a country’s macroeconomics by debt managers can also help a country to know whether to undertake a long-term debt commitment. Care should be taken to ensure that the state does not end up in payment of the debt instead of development of domestic market conditions (IMF, 2014).

The article is crucial in helping the country to develop sound debt management policies that will ensure that it is not exposed to external risks and markets that make the government plunged in a financial crisis. The article also provides insights that can guide the government in reducing vulnerabilities through sound borrowing and repayment strategies. It shows the importance of capacity building in enhancing effective debt management strategies.

The article relates a lot to my experiences in the US Army. The army always undertakes constant pieces of training and learning to be relevant and up to date with the modern security protocols since security threats keep on evolving day and night. Capacity building will ensure that the US army is overboard in the case of any invasion. In addition, the article can guide the state through the managers and policy makers on how to engage in favorable borrowing strategies while buying more arms for strengthening the army.

The public sector can benefit a lot from the arguments since policy makers will not borrow for the sake of borrowing but for developing the economy. The discussion from the article provides insights on what has to be considered before the government borrows money either locally on through foreign lenders.

References

IMF. (2014, April 1). Revised Guidelines for Public Debt Management. Retrieved May 16, 2015.