Public debt

1. The government decides to increase deficit financing to fund a large-scale infrastructure project.
Which one of the following will be the potential long-term benefit of this approach?
B Increase in disposable income.
C Immediate reduction in national debt.
D Increase money supply in the economy.
E Increase economic productivity and growth.
1. Any spending by the government must be directed by a productive and efficient
allocation of resources, otherwise it could result in
A. increase in per capita GDP
B. excessive unproductive debts
C. creation of employment opportunities.
D. increase in production of capital goods
2. Suppose a country’s debt to GDP ratio is very high, what would you suggest to the
government to avoid unproductive public debt?
A save the borrowed money in a separate account
B use the borrowed money in development projects
C use the borrowed money in public service delivery
D use the borrowed money to overcome the pandemic
3. What is deficit financing?
Ans: Deficit financing is the methods meeting the budget deficit between government
expenditure and revenue through creation of new money, borrowing and withdrawal from central
bank

4. The steady rise in public debt of a country over the years demonstrates a strong
correlation between public spending, economic and social development. What would be
some of the positive impacts of rising public debt in the provision of education facilities
and services?
Ans: With increase in public debt government could,
i. Provide better quality and more infrastructural facilities.
ii. Investment in sports facilities and equipment.
iii. Ensure school staff at all levels to be trained effectively in their responsibilities/
roles (Training and education programs for School staff)
iv. Provision of modern and efficient technologies for both learners and educators
(Provision for creating smart classroom)
v. Facilitate more PDs for all the stake holders of the education fraternity.
vi. Provision of resources that could enhance better holistic learning.

5. According to Asian Development Bank report, economic growth in Bhutan is forecasted

to contract by 3.4% this fiscal year (FY) 2021 in comparison to 0.9% in 2020. What
would happen to the economy if the government creates an additional money of Nu. 15
billion?
 i. Increase in economic activities.
ii. Decrease in unemployment.
iii. Increase in aggregate demand.
iv. Completion of planned developmental projects on time

6. The table below shows the total external debt by currency composition

How can the government of Bhutan allocate and utilize such a huge amount of debt to:
i) Boost trade and commerce?
 Introduce and encourage exporters and importers to embrace international
standards
 Assist in removal of regional trade barriers
 Help remove unnecessary red tape for effective and efficient flow of trade
 Strengthen participation to meet international standards of products in terms of
quality as well as quantity
 Provide technical cooperation and capacity building needs to be increased for
better production
ii) Uphold culture and tradition?
 Create places where exhibition on culture from diverse regions/localities can be
displayed
 Construct culture museum where youths and adults can explore and reflect on
the values of sustaining Bhutanese culture and tradition.
 Fund schools/institutions to conduct exclusive lessons on promotion and
preservation of culture and tradition.
 Fund schools to take teachers and learners go on cultural and historical
excursions.
 Train and provide regular PDs for cultural facilitators.
 Allocate enough funds for preservation and promotion of cultural sites
 Emphasize on education, training and awareness programmes of culture and
tradition

7. If deficit financing is used excessively, an economy could experience hyperinflation.

What would be the consequences of hyperinflation on the economy?
 Fall in purchasing power of consumers
 High social inequality
 Social turmoil  Increased poverty
 Loss of saving and reduced investment
  Hoarding and black market
 Low living standards
 Basic needs could be deprived

8. Excessive import of goods and services leads to deficit in balance of payment (BoP). Is
deficit BoP always bad for a country’s economy? Give FOUR reasons.
Yes;
 High drainage of foreign exchange
 Financial crisis (such as rupee crisis)
 Shortage of goods in the domestic market
 Depreciation of country’s currency
No;
 Create employment opportunities for economic development
 Encourage exports
 Discourages imports
 Development of agriculture sector
 Development of domestic industries
 Increase in basket of consumer goods

9. To finance the fiscal deficit, the government resorts to external and domestic borrowings.
Moreover, these borrowings are with minimal interest rates and long repayment periods
enabling the government to invest in socially beneficial projects.
(Source: Budget Report 2019-2020, MoF: Bhutan)
What are some of the benefits of using the borrowed money in socially beneficial projects?
⮚ Delivery of quality health and educational services
⮚ Development of infrastructural facilities
⮚ Employment generations
⮚ Increase in GDP
⮚ Reduce inequalities

10. Deficit financing can be used as a technique of meeting the financial needs of the
government under different situations.
Identify any TWO methods of deficit financing adopted in Bhutan.
 Borrowing from Central Bank
 Withdrawal of cash balances from RMA
 Issuing new currency

11. Explain the role of deficit financing in accelerating the rate of economic development.
 Raising of additional resources
 Generation of saving
 Increase in aggregate demand/ Increase in purchasing power
 Meeting increased demand for money
 Best use of resources
  Reduces inequality
 Price rise self-destructible in the long run.
 Employment generation

12. “Bhutan’s trade deficit during the year 2019 stood at Nu. 27 billion(B), a decrease from
Nu.30 B and Nu. 29.6 B in 2018 and 2017 respectively.”
(Source: [Link], April 13,2020)
Although there is a drop in trade deficit, measures must be taken to balance the trade.
How would you correct the trade deficit?
 Deflation
 Depreciation
 Devaluation
 Exchange control
 External debt
 Discouraging imports and encouraging exports
 Quota restriction
 Tariff
 Attraction of Foreign Tourist
 Import substitution

13. Government debt at times becomes necessary to meet the essential expenditures rather
than cutting its spending.
Apart from meeting the budgetary deficit, why does a government resort to internal borrowing?
 To control inflation
 To control recession
 To finance development plans
 War finance
 Meeting unforeseen expenses
 To finance public expenses
 To make use of available resources
 To reduce external debt/Dependence on foreign countries
 To reduce outflow of foreign currencies
 Easy to avail
 Low risk

14. Deficit financing can be used as a technique of meeting the financial needs of the
government under different situations.
Identify any TWO methods of deficit financing adopted in Bhutan.
  Borrowing from Central Bank
 Withdrawal of cash balances from RMA
 Issuing new currency

15. Deficit in the balance of payment can be corrected by encouraging exports and
discouraging imports. How can you do this? Mention TWO ways to achieve this task.
Any TWO:
➢ Reducing export tax to encourage export
➢ Increase import duty to discourage import
➢ Providing subsidies to domestic industries
➢ Providing financial assistance to domestic industries
➢ Providing tax holidays to domestic industries
➢ Provide technical support to domestic industries
➢ Quota restriction to discourage imports
➢ Productions of import substitutes

16. Bhutan’s public debt as of September 30, 2018 is estimated at Nu 182 billion. The
external debt forms Nu 175 billionand domestic debt constitutes Nu 7 billion.
Would the increasing national debt be a major challenge for Bhutanese economic
development? Why?
Yes(Any FIVE):
➢ Delayed social security
➢ Rising interest rates
➢ Reduced public investment
➢ Additional tax burden
➢ Reduced fiscal flexibility(inability of a government to respond to future emergencies,
unanticipated challenges, recessions etc)
➢ Burden of external debt-Outflow of foreign exchange
➢ Interest burden
➢ External debt burden
➢ Political dominance
➢ Shortage of food in the domestic market
No (Any five):
➢ Acceleration of economic development
➢ Efficient uses of resources
➢ Increase in saving and investment
➢ Employment generation
Import of capital equipment
➢ To meet budgetary deficit
➢ Development of infrastructural facilities
➢ International cooperation
➢ Economic instability/inflation
➢ Income inequality
 ➢ BOP deficit

17. ‘Deficit financing helps to finance development plans of underdeveloped countries and
also accelerate their rate of economic development’. Do you agree? Support your opinion
with TWO points.
Yes (Any TWO):
➢ Best uses of resources
➢ Increase in demand
➢ More saving
➢ Reduces inequality
➢ Meet additional demand for money
➢ Overcoming depression
➢ Overcoming unemployment
➢ Price rise- self destructive
➢ Increase investment No,
➢ Inflation
➢ Unequal distribution of income
➢ Change in pattern of consumption
➢ Forced saving
➢ Misallocation of resources
➢ Social burden
➢ Decrease in purchasing power/real income
➢ Saving of fixed income group decreases
➢ Black marketing/speculation/hoarding/illegal activities

18. The graph shows the trends in the balance of payment in Bhutan

The deficit in the balance of payment is projected to be bad during the financial year 2015-2016
as compared to the other years. What could be the reason for it? Mention any TWO reasons.
The main causes for such deficits(Any TWO):
 Fall in foreign demand
 High inflation in the economy
 Import of heavy machineries
 Increases in cost structure
 Decrease in exports
 Rise in the value at home currency
 Increased debt burden

19. Government covers the deficit finance either by using the accumulated reserves or
through the borrowing from the central bank.
Is deficit financing bad for an economy? Why?
Yes,
 Inflationary rise in Prices.
Deficit financing leads to creation of more money which in turns leads to rise in prices if
there is an equivalent increase in aggregate supply.
 Forced Saving.
The impact of forced savings may fall on fixed income earners rather than on the higher
income groups.
 Distribution of income.
Profits tend to rise while the purchasing power of the fixed income group falls. Thus,
deficit financing leads to greater income inequalities in favour of the rich.
 Change in the pattern of investment.
Deficit financing often lends to undesirable activities such as hoarding, speculation and
construction.
No,
 Finance War
 Fight Depression
 To activate and divert resources
 To raise capital formation
 To mobilize resources to finance massive plan expenditures.

20. Assume that you are an economic advisor to the royal government of Bhutan. Will you
advise our government to follow a policy of deficit financing? Support your judgment
with FIVE reasons.
YES(Any FIVE):
1. Best use of resources
 Creates more funds
 Promotion and development of projects

2. Increase in demand
 Increases public expenditure
 Raises the aggregate demand
 Leads to higher employment opportunities and business activities
[Link] saving
 Encourages people to save more due to increase in production and income
 Increase in public expenditure leads to increase in income and saving

[Link] inequality
 Government starts projects in the rural areas
 Brings balanced development thereby reducing inequalities

[Link] finance five year plans

 Fund five year plans
 Enable the government to carry out development activities as per the plan schedule

[Link] promote social welfare

 Population increases leading to increase in demand for social welfare
 Government expenditure on health and educational services increases.

NO: (Any Five):

Inflation
 Increases money supply in the economy
 Purchasing power increases
 Demands for goods and services increases
 Increases price of commodities

Unequal distribution of income

 Producers earn more profit
 Consumers land up paying more
 Gap between rich and poor widens

Change in the pattern of investment

 Producers produce those goods for which the demand is high
 Ignores common goods
 Resources gets reallocated

Promotes hoarding
 Producers create artificial scarcity
 Increases the price
 Scope for black money

Social interest
 Rise in price leads to public dis-satisfaction
 Consumers lose their confidence on producers
 Hampers the process of production

Mis-allocation of resources by the government

 Funds are not utilized as per the project plans
  Mis-use of funds

21. Accumulation of public debt is a national concern. Many think rising public debt might
lead to debt crisis.
Should the government worry about its public debt? Why?
Yes,
 Principal amount and interest have to be paid regularly (debt servicing charges).
 External debt has to be paid in terms of foreign currencies. This requires export surplus
to obtain foreign exchange.
 A part of debt is used for non-developmental activities which do not derive economic
benefits (dead weight debt).
 Challenge to political freedom: The lender country interferes in the national and foreign
policies of the debtor country.
 Hampers the economic conditions: Government taxes heavily on the people to pay the
debt thereby reducing the ability to save and invest.
 Leads to inflationary pressure
 Discourages innovative ideas or initiations
No,
 Ensures sustainability of hydro external debt
 Debt has to be used for productive purposes such as infrastructure and investment in
health and education.
 Mobilization of resources for economic development
 Public debt/borrowing has promoted savings and investment
 Inflow of foreign currencies needed for development
 Meeting wartime expenses which cannot be met by domestic revenue
 To meet unforeseen emergencies
 To fight depression
 Controlling inflationary pressure
 For providing social services

22. Why does the government resort to deficit financing? Explain any TWO positive impacts
and TWO negative impacts of deficit financing.
The government resorts to deficit financing in order to fill the gap created by the excess of
expenditure over revenue.
Positive impacts:
 Best use of resources.
 Increase in aggregate demand.
 More saving.
 Reduce inequality.
Negative impacts:
 Inflation.
 Unequal distribution of income.
 Change in the pattern of investment.
 Speculation and black marketing.
 23. “The percentage of external debt - to - GDP is projected to hit at 129.1% by FY 2023 – 2024,
which was an increase by 11.2% as compared to FY 2022 – 2023.
Source (NSB, 2022-2023)
Suggest TWO ways to reduce external borrowing.
Ans:
 Increase tax collection.
 Control government spending.
 Reduce subsidies and incentives.
 Increase domestic borrowings.
 Diversify economy.
24. Owing to large resource gap, government is considering the use of deficit financing to fund its
various initiatives. Critically, evaluate its potential benefits and drawbacks.
Benefits

 Stimulate economy
 Enhance public investment
 Supports social welfare
 More employment opportunities
 Ensure continues public services
Drawbacks

 Increase public debt

 Risk of inflation
 Future tax burden
Reduced public spending on essential services
25. Bhutan’s national debt to GDP stands at 131.1%.
(NSB, 2022-23)

A large national debt means a significant portion of the government’s budget goes towards
interest payment on debt. How might this risks impact Bhutan’s future development goal.
Ans:
 Reducing ability to respond to shocks.
 Limited social spending
 Crowding out investment
 Hinders overall growth and development