Extending public debt limit to navigate full recovery

By Can Van Luc - Member, National Fiscal and Monetary Policy Advisory Council

According to the International Monetary Fund, as of July around $18 trillion has been committed worldwide, equalling 16 per cent of global GDP in 2020, including $11 trillion in fiscal policies and $7 trillion in monetary assistance. Particularly, the United States has deployed various bailouts valued at around $5.84 trillion, equivalent to 28 per cent of the country’s GDP in 2020, and raised the ceiling of public debt. The bailouts of emerging countries made up around 7.7 per cent of GDP in 2020.

Regarding restructuring of fiscal policies, countries have spent 12.6 per cent on healthcare, 6.7 per cent on tax payment delay, and 80.8 per cent on measures to support and stimulate the economy such as cash delivery, worker allowances, tax decreases, preferential interest loans for smaller businesses and those with financial distress, and tourism stimulation.

In addition to the decline in operating interest rates of central-run banks, credit guarantees have accounted for 66 per cent of the total value of monetary assistance. Concessional loans (preferential interest rate) captured 27.5 per cent of the total and asset purchase measures to support market liquidity made up 6.3 per cent. In fact, these monetary bailouts also mainly withdrew money from the state budget, through finance ministries or central-run banks.

In Vietnam, the four bailouts that the government announced since 2020 valued around $48 billion. However, the real expense of the government and banks was $8.03 billion, equivalent to 3 per cent of GDP only, much less than other countries.

There are several differences between other countries’ bailouts and Vietnam’s. Firstly, their bailouts mainly covered fiscal policies, at just over 60 per cent. Secondly, in terms of bailout structure, others spent a lot on health (not applying many tax deferral policies), credit guarantee policies, and preferential loans.

In addition, there have been bailouts for both short term and long term, the latter including investment into healthcare and infrastructure. Furthermore, other countries accepted an increase in public debt.

Besides numerous solutions to contain the coronavirus and live with it, we need some drastic measures to remove obstacles and continue implementing bailouts to support individuals and enterprises, as well as consider some more bailouts that could concentrate on freelancers.

If investment is quite enough, the country can mobilise more resources and spill over to various areas of the economy as well as contribute to overcoming the middle-income trap because the growth does not reach the necessary threshold. Therefore, like the way other countries are doing, the government should consider spending 3.5 per cent of GDP on bailouts, which would be essential to maintain stability.

For the long-term economic recovery and development, the economy needs huge resources so we should accept an increase in public debt, budget deficit, and credit during this time then reduce them in later years. Of these, a public debt limit extension will create room to mobilise more local and foreign financial resources. The National Assembly may think about placing the ceiling at higher than the limit at present for the 2021-2025 period, with suitable and flexible schedules to coincide with the actual movement of the economy.

Looking at the macroeconomic indexes of Vietnam at present, both local and foreign economists highly appreciate the stability, despite the decline in growth. Export and import turnover is expected to reach over $600 billion in 2021 with a trade surplus, a light increase of foreign investment into the country, and inflation under good management.

The relatively good credit rating helps Vietnam to increase public borrowing both domestically and internationally easily. Managing the public debt and foreign debt is said to be safe, while there is room for aggregate demand and supply. The higher debt ceiling will provide room for the government to apply more fiscal policies in the medium term if required, while maintaining good debt servicing ability. The government should consider issuing bonds and making international loans from such organisations as the World Bank and the Asian Development Bank because interest rates are still affordable. Numerous developing countries like the Philippines, Indonesia, and nations in Latin America are also moving in this direction.

Instead of worrying about a limit extension, we should care about the ability to repay debts and the long-term development outlook of the economy. In fact, when the spending multiplier soars high, there is a possibility of high GDP growth in the next period.