The sustainability of domestic debt means the following:
Domestic Debt/GDP ratio = constant or declining over time.
If the percentage is 50% in 2022, it will remain 50% in 2023 or less.
To achieve this goal, two conditions need to be met:
1. The rate of interest is equal to or less than the rate of growth in GDP
2. Revenue equal to or higher than the initial expenditure
Example 1: The stability of the domestic debt ratio from year to year
Data:
1. Interest rate = 10%
2. GDP growth rate = 10%
3. Revenue equal to initial expense (non-interest expense)
In 2022
Local debt = 50
GDP = 100
Ratio = 50/100 = 50%
In 2023
Revenue = 100
Initial expenses = 100
Interest = 10% x Debt Balance 50 = 5
Total deficit = 5 because the initial balance = zero
Domestic Debt = Debt Balance + Deficit = 50 + 5 = 55
GDP = 110 (10% growth)
Debt to Output = 50%
In the previous example, interest = growth and primary deficit = zero, so the ratio of domestic debt to output remains constant.
Example 2: Decreased domestic debt ratio
Data
1. Interest rate = 8%
2. GDP growth rate = 10%
3. Revenue higher than initial expenses
In 2022
Local debt = 50
GDP = 100
Ratio = 50/100 = 50%
In 2023
Revenue = 100
Initial expenses = 99
Interest = 8% x balance of debt 50 = 4
Total deficit = 3
Domestic Debt = Debt Balance + Deficit = 50 + 3 = 53
GDP = 110 (10% growth)
Debt to result = 48%
So, when the IMF asks to sustain the domestic debt, it asks in particular:
1. Interest equal to or less than the rate of growth in GDP
2. Primary balance = zero or positive
3. And if interest rates rise exceptionally to combat inflation, the effect of this rise must be compensated by achieving a larger primary surplus.
