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International Monetary Fund
Despite difficult political and economic circumstances, Papua New Guinea has made progress toward stabilization and structural reform under the program supported by the Stand-By Arrangement. Executive Directors welcomed these developments, and stressed the need to maintain fiscal and monetary stances, and accelerate structural reforms. They cautioned the authorities to remain vigilant over financial developments and implement additional corrective actions, if needed. They agreed that the country has completed the fourth review under the Stand-by Arrangement, and approved a waiver.
International Monetary Fund

debt, contracted mainly with official creditors, is linked to LIBOR. Consequently, major changes in the prices of these commodities and/or in world interest rates (including the effects of a weakening in the world economy) would have a significant impact on Papua New Guinea’s external current account, as well as on tax revenue and the government interest bill.

Mr. Christoph A Klingen

multiple of Baa spread … … … … … 1.3 1.1 2.7 3.5 3.7 Central government interest bill/GNP 7.7 7.3 10.0 7.7 11.5 13.7 16.3 23.3 18.9 16.4 Central government interest bill/central government revenue 39.9 41.2 55.5 39.4 52.7 57.0 60.6 79.3 67.9 58.5 Treasury debt service/GNP 22.8 24.2 31.3 18.8 28.8 34.6 32.3 59.4 50.6 49.1 Treasury debt service/central government revenue 118.4 136.0 173.8 95.4 131.5 144.0 120.2 202.2 182.0 174.6 Macroeconomic

Mr. George A Mackenzie

than the central bank. However, unlike central banks, these PFIs typically are not in a position to levy quasi-fiscal taxes—meaning that their quasi-fiscal operations, on balance, tend to be loss-making. Central banks and other PFIs have a number of motives for engaging in quasi-fiscal activity. These activities can hide what are essentially budgetary activiti es (when the central bank lends money to the treasury at no interest, the governments interest bill is artificially reduced). They may be; more convenient to administer (if a central bank is used to operating

Mr. Philip R. Gerson and Mr. Manmohan S. Kumar

Kingdom; Figure 2.3 ) and debt structures are generally more resilient to abrupt changes in market perceptions than was the case for emerging economy defaulters of the past. Thus, even the countries currently recording high spreads have considerable time to win over the markets before their total government interest bill becomes too high. While it is true that the current juncture is unique—given the large number of countries that have to implement fiscal adjustment—many countries in the past experienced serious market tensions and recorded high spreads but were

International Monetary Fund. Monetary and Capital Markets Department

balance sheets and creates an adverse feedback loop through the real economy. In the euro area, recent episodes of volatility in financial markets have weakened the investor base for some countries’ government bonds. This erosion of investor demand risks concentrating exposures among vulnerable financial institutions, while increasing funding uncertainty for the sovereign. Under a baseline scenario, government interest bills in advanced economies are projected to rise, notably in parts of the euro area. However, the interest burden should generally remain manageable