Debt level

IT must be understood that debt is a stock variable and interest rate is a flow variable.
Interest rate is the cost of borrowing that is tied to the loan.
This means that whenever a country secures a new loan, it incurs an additional cost of borrowing which is added onto the existing stock of debt.
This means that meeting the funding needs for the current population comes at the cost of the future generations.
The burden of the debt is borne by the future generations if the benefits of the loans are not sprea over to them. This undermines the future generation’s ability to use funds by diverting the resources away from them, as they concentrate on servicing a loan that they have not benefited from.
Debt is good if it is manageable and sustainable.
A level of a country’s debt is determined by its propensity to borrow and its borrowing needs every year.
It is good if the funds are intended to be spent on areas that will enable a country to achieve economic growth and development.
As long as a country can manage its debt and achieve economic progress and as long as the debt enhances the growth prospects of the country, it is viable for the country to borrow and thus increase its debt.
However, it must also have the ability to repay its debt.
If the country has the ability to repay, and if it is intended for areas that are vital for the country’s growth and development, a country should resort to borrowing to supplement its expenditure shortfalls.
This is because the prospective gains will outweigh the cost of the
loan. Maintaining high level of debt is not good because that drives up the interest rate of borrowing thus lowering private sector borrowing and investment which economists refer to as ‘crowding out effect’.
The debt should be manageable and sustainable.
This is to avoid the country from defaulting when the debt dues.
Accumulated debt is not beneficial for a country because it diverts funds away from other useful purposes.
It is therefore advisable for PNG to minimise or reduce its debt level. This will prevent PNG from defaulting on its debts.

Richard Napam
Port Moresby