APPENDIX A: ASSESSMENT COVER SHEET

ASSESSMENT COVER SHEET

Surname

First Name/s

Student Number

Subject

Assessment Number

Tutor’s Name

2018 Submitted

Submission () First Submission Resubmission

Postal Address

E-Mail
(Work)
(Home)
Contact Numbers
(Cell)

Course/Intake

Declaration: I hereby declare that the assignment submitted is an original piece of work produced by myself.

Signature: 2018:

Page i of xviii
Table of Content

Page ii of xviii
s
Question 1 Impact of high public debt level of RSA economy..........................................2

Fiscal Sustainability and Budget Constraints:................................................................2

Debt Servicing and Interest Payments:.........................................................................3

Credit Ratings and Investor Confidence:.......................................................................3

Economic Vulnerability and Macroeconomic Stability:..................................................3

Income Inequality and Social Spending:........................................................................3

Investment and Productivity:..........................................................................................3

Exchange Rate and External Imbalances:.....................................................................3

Monetary Policy Challenges:.........................................................................................4

Examples of other Impacted Countries by high debt level(which could replicate in

RSA context)..................................................................................................................4

Question 2 why high income countries can sustain high public debt levels.....................4

Strong Investor Confidence and Trust:..........................................................................5

Reserve Currency Status and Monetary Policy Autonomy:...........................................5

High Domestic Savings and Financial Resources:........................................................5

Economic Productivity and Innovation:..........................................................................5

Central Bank Independence and Financial Stability Measures:....................................5

Question 3 Solutions to address the public debt of SOE in South Africa..........................6

1. Cost-Cutting Strategy:.............................................................................................6

2 Debt Restructuring:.....................................................................................................7

Question 4 Greek ESAP....................................................................................................8

GDP and CPI.................................................................................................................8

Current Account Balances and trade balance...............................................................8

Exchange Rate and Trade Competitiveness:................................................................8

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 Unemployment Levels and Income and Wealth Distribution:........................................9

Consumption Expenditure and Investment Expenditure:..............................................9

Appraisal of the Effects of SAPs on Greece's Economy:..............................................9

Question 5.1 Causes of Sri Lanka debt default...............................................................10

Excessive Reliance on Market Borrowing:..................................................................10

Loss of Government Revenue:....................................................................................10

Macroeconomic Imbalances and Poor Policy Decisions:............................................10

Geopolitical Factors and Competition:............................................................................10

Insufficient Forex Reserves and External Debt:..........................................................11

Question 5.2 Possible recommended solution panacea to Sri Lankan Debt..................11

“Austerity for prosperity”...............................................................................................11

Fiscal Consolidation and Revenue Mobilization:.........................................................12

Debt Sustainability and Management:.........................................................................12

Financial Sector Stability:.............................................................................................12

Structural Reforms and Diversification:.......................................................................12

Green and Resilient Growth:........................................................................................12

Gender-Inclusive Policies:...........................................................................................13

References:......................................................................................................................13

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Question 1 Impact of high public debt level of RSA economy
Fiscal Sustainability and Budget Constraints:
Rising public debt levels can lead to fiscal imbalances and strain on government
budgets, as a significant portion of revenue may need to be allocated to debt servicing,
reducing the availability of funds for essential public services and infrastructure
investment (IMF, 2021). The crowding-out effect can occur, where increased borrowing
by the government reduces the availability of credit for private sector investment,
hampering economic growth and productivity (Kolisi & Mgadla, 2020).
Debt Servicing and Interest Payments:
Higher debt levels result in increased debt servicing costs, including interest payments,
which can divert resources away from productive investments and social programs
(Khumalo & Ndimande, 2020). The higher the interest payments, the greater the burden
on the budget, potentially leading to a cycle of increasing debt to finance debt
obligations (Koekemoer, 2020).
Credit Ratings and Investor Confidence:
Rising public debt can negatively impact a country's credit ratings, making it more
expensive for the government to borrow and reducing investor confidence (Ncube et al.,
2021). Lower credit ratings can lead to capital outflows, reduced foreign direct
investment (FDI), and constraints on accessing international financial markets, thereby
limiting the country's economic growth potential (World Bank, 2020).
Economic Vulnerability and Macroeconomic Stability:
High public debt levels increase a country's vulnerability to external shocks and
economic downturns, as there is less fiscal space to respond to crises or implement
countercyclical measures (Mohr et al., 2021). Excessive debt can undermine
macroeconomic stability, leading to inflationary pressures, currency depreciation, and
increased borrowing costs (Krugell & Ndebele, 2020).
Income Inequality and Social Spending:
Rising public debt may lead to a reduction in social spending and welfare programs,
exacerbating income inequality and social disparities (van der Berg et al., 2020). As
debt servicing costs increase, there is less room for government expenditure on
education, healthcare, and social services, which can hinder inclusive economic growth
(Zikhali et al., 2021).

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Investment and Productivity:
High levels of public debt can crowd out private investment by absorbing available funds
and raising borrowing costs, leading to lower levels of investment and reduced
productivity (Zhan et al., 2020). Reduced investment in critical sectors such as
infrastructure and technology can limit the country's competitiveness and long-term
economic potential (Paus, 2021).
Exchange Rate and External Imbalances:
Escalating public debt can put pressure on the exchange rate, leading to currency
depreciation and affecting external balances, particularly if the debt is denominated in
foreign currencies (Tesfaye et al., 2020). A weaker exchange rate can result in higher
import costs, inflationary pressures, and a deterioration of the trade balance, which can
further strain the economy (Limakatso & Phiri, 2021).
Monetary Policy Challenges:
Elevated public debt levels limit the flexibility of monetary policy as the central bank may
face difficulties in managing inflation and interest rates (Aisbett & Eicher, 2020).
Increased reliance on monetary financing to address debt obligations can heighten
inflationary risks and undermine the effectiveness of monetary policy (Aisen & Veiga,
2020).
Examples of other Impacted Countries by high debt level(which could replicate in
RSA context)
Greece's debt crisis in 2010, characterized by unsustainable public debt levels, led to
severe economic contraction, loss of investor confidence, and the need for external
financial assistance (Mauro & Romeu, 2020). Argentina experienced multiple debt
crises, which adversely affected economic growth, investment, and access to
international capital markets (Melconian, 2020). Japan's persistent high public debt-to-
GDP ratio has led to a prolonged period of low economic growth, limited fiscal flexibility,
and concerns about fiscal sustainability (Hoshi et al., 2020).

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Question 2 why high income countries can sustain high public debt levels
Japan and the USA are two countries with remarkably high levels of public debt in
relation to their GDP. Despite their substantial debt burdens, both nations have
managed to maintain stable economies. This analysis will examine the reasons behind
Japan and the USA's ability to sustain such high levels of debt-to-GDP ratio, highlighting
key factors that contribute to their economic stability.
Strong Investor Confidence and Trust:
Both Japan and the USA benefit from strong investor confidence and trust in their
respective economies. Their robust financial markets, backed by stable political systems
and solid institutions, attract significant domestic and international investments. This
confidence leads to continued demand for government bonds, allowing the countries to
finance their debt at relatively low interest rates (Oshio & Oguro, 2021).
Reserve Currency Status and Monetary Policy Autonomy:
The USA's status as the issuer of the world's primary reserve currency, the US dollar,
grants it unique advantages. This privilege enables the Federal Reserve to implement
monetary policies to manage its debt and stabilize its economy. Likewise, Japan
benefits from the yen's status as a major global currency, allowing it greater control over
monetary policy and exchange rates (Oshio & Oguro, 2021).
High Domestic Savings and Financial Resources:
Both Japan and the USA possess high levels of domestic savings, providing a stable
source of funding for their debt. In Japan, a cultural inclination towards saving and a
large pool of household savings contribute to financing the government debt. The USA
benefits from a deep and diversified financial sector, attracting significant domestic
capital inflows to support its debt requirements (Oshio & Oguro, 2021).
Economic Productivity and Innovation:
Japan and the USA have highly productive and innovative economies, which contribute
to their debt sustainability. Both countries possess advanced industrial sectors,
technological advancements, and highly skilled workforces that drive economic growth
and generate revenue. This economic productivity helps offset the burden of debt by
increasing tax revenues and maintaining a competitive advantage in global markets
(Oshio & Oguro, 2021).

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Central Bank Independence and Financial Stability Measures:
The independence of central banks, such as the Bank of Japan and the Federal
Reserve, plays a vital role in managing debt and maintaining economic stability. These
institutions have implemented effective measures to ensure financial stability, such as
quantitative easing programs and regulatory frameworks. These measures help mitigate
risks associated with high levels of debt and support economic resilience (Oshio &
Oguro, 2021).

Question 3 Solutions to address the public debt of SOE in South Africa

This analysis will assess the feasibility and potential impact of two solutions proposed to
address the public debt of SOEs in South Africa.
1. Cost-Cutting Strategy:
The cost-cutting strategy involves reducing expenses and improving efficiency within
SOEs to alleviate the burden of public debt. By implementing measures such as
reducing administrative costs, eliminating non-performing projects, and reforming
processes like procurement and finance, the government aims to curb unnecessary
spending (South African Government News Agency, 2009). This strategy can have the
following feasibility and impact:
Feasibility aspect:
On SOEs like ESKOM, reducing operational costs will include reducing workforce but
this might be impacting on unemployment, shifting from coal and diesel reliance to
nuclear but all this is pivotal on the following:
a) Political Will: The successful implementation of cost-cutting measures requires strong
political will and commitment from government officials to overcome resistance to
change.
b) Collaboration: Effective collaboration between SOEs, government departments, and
relevant stakeholders is necessary to identify areas for cost reduction and implement
necessary reforms.
c) Capacity Building: Adequate capacity building and training programs should be
provided to ensure that employees within SOEs have the necessary skills and
knowledge to implement cost-cutting measures.
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Impact:
a) Debt Reduction: By reducing expenses and eliminating non-performing projects, the
cost-cutting strategy can contribute to reducing the debt burden of SOEs, freeing up
financial resources for more productive uses.
b) Enhanced Efficiency: Improved efficiency within SOEs can lead to better service
delivery, increased productivity, and potential revenue generation, contributing to long-
term sustainability.
c) Improved Investor Confidence: Successful implementation of cost-cutting measures
demonstrates a commitment to fiscal discipline and can enhance investor confidence in
SOEs and the overall economy.

2 Debt Restructuring:
Debt restructuring involves renegotiating the terms and conditions of existing debt to
make it more manageable for SOEs. This strategy includes easing or modifying loan
agreements, extending repayment periods, reducing interest rates, and forgiving a
portion of the principal balance (Financial and Fiscal Commission, 2016). The feasibility
and impact of debt restructuring are as follows:
Feasibility aspect
a) Negotiation Capacity: The government needs strong negotiation skills and expertise
to engage with creditors and reach mutually beneficial agreements on debt
restructuring.
b) Creditor Cooperation: The willingness of creditors to cooperate and accept revised
terms is crucial for successful debt restructuring.
c) Legal and Administrative Framework: A robust legal and administrative framework is
needed to support the debt restructuring process and ensure its effectiveness.

Impact:
a) Reduced Debt Burden: Debt restructuring can alleviate the immediate debt burden on
SOEs by adjusting repayment terms, lowering interest rates, and forgiving a portion of
the debt, providing financial relief.

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b) Improved Cash Flow: Restructuring debt allows SOEs to improve their cash flow
position, enabling them to meet their financial obligations and invest in critical areas.
c) Enhanced Financial Stability: Successful debt restructuring can contribute to the long-
term financial stability of SOEs, improving their creditworthiness and access to future
financing options.

Both the cost-cutting strategy and debt restructuring offer potential solutions to address
the public debt of State-Owned Enterprises in South Africa. The feasibility of these
solutions depends on factors such as political will, collaboration, negotiation capacity,
and legal/administrative frameworks. If implemented effectively, these strategies can
lead to reduced debt burdens, improved financial stability, enhanced efficiency, and
increased investor confidence in SOEs. It is crucial for the government to carefully
assess the specific circumstances of each SOE and tailor the solutions accordingly to
achieve the desired impact on debt reduction and overall fiscal sustainability.

Question 4 Greek ESAP

This assessment will analyze the impact of SAPs on various economic indicators,
including GDP, CPI Index, current account balances, terms of trade, exchange rate,
trade competitiveness, unemployment levels, income and wealth distribution,
consumption expenditure, investment expenditure, exports, wages, and income levels.
GDP and CPI
The SAPs had a significant negative impact on Greece's GDP during the period. A
study by Zografakis et al. (2018) found that GDP contracted by approximately 26%
between 2012 and 2017, primarily due to austerity measures and reduced government
spending.
The SAPs resulted in deflationary pressures, causing a decline in Greece's Consumer
Price Index (CPI). According to Lyberaki et al. (2017), the CPI decreased by 3.5% on
average annually during the SAP period due to reduced consumption and subdued
economic activity.
Current Account Balances and trade balance
SAPs aimed to improve Greece's current account balances by enhancing export
competitiveness and reducing imports. However, the impact was limited. The current
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account balance improved slightly, but remained negative throughout the period,
indicating ongoing external imbalances (Eurostat, 2018). The SAPs had mixed effects
on Greece's terms of trade. While efforts to enhance export competitiveness led to a
slight improvement, the decline in domestic demand and reduced purchasing power
negatively affected import prices. Overall, the terms of trade remained relatively stable
(European Commission, 2018).
Exchange Rate and Trade Competitiveness:
As Greece is part of the Eurozone, it did not have an independent exchange rate.
However, the SAPs indirectly influenced the external value of the euro, which had
implications for Greece's competitiveness. The euro appreciated during the SAP period,
making Greek exports relatively more expensive and affecting competitiveness
negatively (Dadush & Derviş, 2018). The SAPs aimed to improve Greece's trade
competitiveness by implementing structural reforms. However, the impact was limited,
as the country faced challenges in adjusting its labor market and increasing productivity.
Greece's trade competitiveness remained weak, hindering export-led growth (European
Commission, 2018).
Unemployment Levels and Income and Wealth Distribution:
The SAPs resulted in a sharp increase in unemployment rates. As austerity measures
reduced government spending and private investment, job losses occurred across
various sectors. Unemployment peaked at nearly 27% in 2013 and remained elevated
throughout the SAP period (Eurostat, 2020). SAPs exacerbated income and wealth
inequalities in Greece. Cuts in public spending and labor market reforms
disproportionately affected low-income groups. The Gini coefficient, a measure of
income inequality, increased significantly during the SAP period (Lyberaki et al., 2017).
Consumption Expenditure and Investment Expenditure:
Austerity measures and reduced household incomes led to a decline in consumption
expenditure. The decrease in consumer confidence and purchasing power constrained
domestic demand, impacting businesses and economic growth negatively (European
Commission, 2018). SAPs significantly affected investment expenditure in Greece. With
reduced public and private investment, businesses faced challenges in accessing
capital and expanding their operations. This led to a decline in productive capacity and
hindered economic recovery (Zografakis et al., 2018).

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Appraisal of the Effects of SAPs on Greece's Economy:
The structural adjustment programmes implemented in Greece between 2012 and 2017
had significant adverse effects on the economy. Despite the intended objectives, the
outcomes fell short of expectations. The SAPs' negative impact on GDP, unemployment
levels, income distribution, consumption expenditure, and investment expenditure
highlights the challenges faced by the Greek economy during this period.
While there were some limited improvements in certain areas, such as current account
balances and export competitiveness, they were not sufficient to drive sustainable
economic recovery. Greece faced structural constraints, including labor market
inefficiencies and limited market diversification, which hindered the effectiveness of the
SAPs. Moreover, the negative social consequences, such as increased income
inequality and reduced household incomes, further strained the economy. The
contractionary effects of the SAPs contributed to a prolonged recessionary period and
delayed economic recovery. The SAPs implemented in Greece from 2012 to 2017 were
not successful in achieving their intended goals. The negative impact on key economic
indicators, coupled with social and distributional consequences, suggests the need for a
more comprehensive and inclusive approach to address Greece's economic challenges.

Question 5.1 Causes of Sri Lanka debt default

Excessive Reliance on Market Borrowing:
Sri Lanka's increasing reliance on market borrowing, particularly through the issuance of
International Sovereign Bonds (ISBs), significantly contributed to its debt default. The
country's governments, since the early 2000s, borrowed heavily from private
international capital markets, resulting in a precarious balance-of-payments situation.
The high interest rates and shorter repayment durations of these bonds added to the
burden (Sarvananthan, 2022).
Loss of Government Revenue:
Unsolicited tax cuts offered by the Sri Lankan government led to a severe loss of
government revenue. The reduction in value-added and income taxes resulted in a
decline in cash reserves. In the absence of adequate reserves, the Sri Lankan Rupee
depreciated, and inflation soared. The government's failure to implement appropriate

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measures, such as increasing interest rates, exacerbated the crisis (Sarvananthan,
2022).
Macroeconomic Imbalances and Poor Policy Decisions:
The Sri Lankan government's series of policy decisions and macroeconomic imbalances
worsened the economic crisis. Poorly thought-out borrowing, selling foreign exchange
reserves to support the exchange rate, and an ambitious shift to organic farming that led
to decreased agricultural output were among the mistakes made. These decisions
created imbalances across various economic sectors (Wijewardena, 2022).

Geopolitical Factors and Competition:

Regional powers, including China and India, have been vying for influence in Sri Lanka,
leading to increased competition and geopolitical pressures. Sri Lanka's strategic
significance in terms of trade routes and regional politics attracted attention from these
powers. The administration under President Gotabaya Rajapaksa attempted to navigate
between the interests of China and India, but these geopolitical dynamics complicated
the country's economic situation (Wijewardena, 2022).
Insufficient Forex Reserves and External Debt:
Sri Lanka's limited foreign exchange reserves and high external debt levels further
contributed to the debt default. The country's foreign exchange reserves were
inadequate to meet its debt obligations, with reserves totaling just $1.6 billion against
obligations exceeding $7 billion for the year. The inability to generate sufficient forex
inflows and reduce debt burden placed Sri Lanka in a vulnerable position
(Sarvananthan, 2022).

Question 5.2 Possible recommended solution panacea to Sri Lankan Debt

To ensure economic recovery and foster sustainable growth, the government of Sri
Lanka can implement various measures. This section discusses the key measures that
could be undertaken.
“Austerity for prosperity”
The decision to implement austerity measures in Sri Lanka should be carefully
evaluated, considering the country's specific economic circumstances and the potential
impact on different sectors of society. Countries like Zimbabwe are still trying to
implement this with Zimbabwean finance minister Mthuli Ncube dubbing it “austerity for
Page 11 of 18
prosperity”. Austerity measures typically involve reducing government spending, cutting
public services, and implementing fiscal consolidation measures to address budget
deficits and reduce public debt. While austerity measures can help restore fiscal
stability, they can also have social and economic consequences. Therefore, it is
important to weigh the potential benefits and drawbacks before deciding to use austerity
measures. The Latvian, Portugal, Ireland government implemented significant austerity
measures, including public sector wage cuts, pension reductions, and tax increases, to
address the fiscal imbalances. These measures helped restore fiscal stability, attract
international investment, and restore economic growth. Latvia's economy rebounded,
and the country successfully completed an International Monetary Fund (IMF) program,
indicating the effectiveness of its austerity measures (IMF, 2021).
Fiscal Consolidation and Revenue Mobilization:
The government should focus on reducing fiscal deficits through effective fiscal
consolidation measures. This includes rationalizing public expenditure, improving tax
administration, and enhancing domestic revenue mobilization. Strengthening tax
collection, broadening the tax base, and reducing tax evasion can help increase
government revenue and reduce reliance on debt financing (World Bank, 2022).
Debt Sustainability and Management:
To restore debt sustainability, the government should explore feasible options such as
debt restructuring, refinancing, or negotiating favorable terms with creditors. It is crucial
to develop a comprehensive debt management strategy that prioritizes debt reduction
and ensures sustainable debt service. Transparent and accountable debt management
practices will enhance investor confidence and access to international financial markets
(World Bank, 2022).
Financial Sector Stability:
The government should closely monitor the financial sector, given its exposure to the
public sector and the impact of currency depreciation on banks' balance sheets.
Strengthening regulatory frameworks, enhancing supervision, and conducting stress
tests can help mitigate risks and ensure financial stability. Collaboration with
international financial institutions for technical assistance and capacity building in the
financial sector may also be beneficial (World Bank, 2022).

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Structural Reforms and Diversification:
Sri Lanka should implement structural reforms to address long-standing vulnerabilities
and promote economic diversification. This includes improving the business
environment, enhancing competitiveness, and fostering innovation and
entrepreneurship. Reforms in key sectors such as agriculture, manufacturing, and
services can contribute to sustainable economic growth and job creation (World Bank,
2022).
Green and Resilient Growth:
Given the impact of rising fuel prices and the need to reduce dependence on fuel
imports, Sri Lanka should prioritize transitioning to a green and resilient growth
trajectory. This involves promoting renewable energy sources, investing in energy
efficiency, and adopting sustainable practices in industries and transport. Phasing out
inefficient fuel subsidies and introducing environmentally friendly taxation can help
incentivize greener economic activities (World Bank, 2022).
Gender-Inclusive Policies:
Addressing gender disparities and promoting gender equality is essential for inclusive
growth. The government should adopt policies that enhance women's access to
economic opportunities, including education and skills training, financial inclusion, and
entrepreneurship support. Tackling discriminatory norms and promoting gender-
responsive budgeting can create an enabling environment for women's economic
empowerment and contribute to overall economic growth (World Bank, 2022).
To ensure economic recovery and foster sustainable growth, the government of Sri
Lanka should undertake comprehensive measures encompassing fiscal consolidation,
debt sustainability, financial sector stability, structural reforms, green growth, and
gender-inclusive policies. Implementing these measures will require strong political
commitment, effective governance, and collaboration with international partners. By
addressing the root causes of economic challenges and promoting inclusive and
sustainable development, Sri Lanka can pave the way for long-term economic recovery
and growth.

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