PUBLIC DEBT IN REPUBLIC OF SRPSKA

The global crisis has led to the requestioning of the justification of economic growth based on borrowing. The issue of public spending and public debt has become particularly important for small and opened economies that are not sufficiently competitive on the world market. If one such country seeks to enter the EU, the rules on the amount of total borrowing and public debt can be a significant obstacle. In recent years, Republic of Srpska has been borrowing rapidly, so in the academic community is already concerned about the possibility and price of servicing those debts. The paper gives a theoretical explanation of the public debt and the needs for borrowing, then to set out the rules on debt level limitation. In the final part, the indicators of indebtedness of Republic of Srpska were presented on the basis of the available information, with the conclusion that this is a medium-indebted country, but also a country that is very vulnerable when it comes to maintaining macroeconomic stability and regular debt


Public sector borrowing
Public or state debt represents the amount of funds the state borrowed to finance its previous deficits.Public debt can be defined as the accumulated borrowed state money, that is, the sum of all claims that the public sector to its creditors has at a certain moment.
The word "debt" is often used, thinking about and meaning "deficit."The difference between these two terms can be simply explained: If government expenditures are higher than its revenues, the budget shows the deficit that must be financed by borrowing.The amount of deficit increases the debt, and only the surplus can reduce it.In a narrower sense (from the perspective of fiscal policy), public debt can be observed as a means of financing expenditures that are not covered by tax revenues.In practice, two arguments to justify structural borrowing are often used: a) Since the benefits of long-term public goods financed by borrowing have future generations, it is fair that they also bear part of the investment burden; b) borrowing allows financing of more public investment than it can be financed by taxes.True, at first glance it seems unfair to finance infrastructure projects (e.g.building roads, railways, etc.) in today's taxpayers' money, but it should be borne in mind that future generations will enjoy from those benefits, since the debt returns for a longer period.For many years, future generations will also be involved in financing these goods.
www.japmnt.comToday the thesis about the redistribution of debt burden to the future is considered generally accepted, and it is based on a very simple argument: the debt from today is a tax from tomorrow.However, due to forced transfer for payment of debt and interest in the future, a negative impact on the creation of capital and future credible growth is realistic.On the other hand, the budget must and will be solvent in the present and the future, which depends on the amount of total available state revenues, the level of public spending and the amount of public debt that is achieved through skillful management of public finances and the implementation of appropriate economic policy measures in general.Although borrowing is justified by investment needs, public debt today largely represents the growth of public sector spending.Deficit financing i.e. public debt issuance can be done in several ways.One of them is the issue of securities with the obligation of the issuer to pay off the principal and the related interest in the future.This kind of financing implies that there is a developed financial market and free financial resources in the household and economy sector.If these prerequisites are fulfilled, investment in government bonds is considered to be low-risk investments, and as such has lower yields than investment in other types of securities that are considered to be higher risk and higher interest on borrowed funds.In literature and contemporary practice, it is often emphasized that the emergence of a state as an issuer of securities affects supply of financial capital, interest rate and can lead to the effect of extortion of the so-called.crowding out effect.Financial assets move to the public sector as less risky, leaving less available funds to finance the economy, which negatively impacts the long-term rates of real economic growth.On developed and stable financial market, the general level of interest rates depends on the supply and demand for capital, and on this basis, when issuing securities, anticipated changes in interest rates in the future.Economic theory suggests that if an increase in interest rates is expected, the issuer will issue securities with a longer maturity, while if interest rates are expected to be shorter, then maturity will be shorter, too.A well-balanced public debt means such a maturity that will not lead the economy to illiquidity and inflation.However, it should be borne in mind that in a less developed country with underdeveloped financial markets, the impact of government bonds issue appears to be less intense since there are not enough free funds.The second method of obtaining financial resources, mainly in order to finance investment projects in the long run, is credit indebtedness on the domestic or international market, where banks (domestic or foreign) or international financial organizations appear as lenders.The public debt owned by domestic creditors is an internal public debt whose repayment represents the redistribution of purchasing power from taxpayers to those who in the previous period were sovereign debtors.When the state borrows abroad, we are talking about external public debt.With the repayment of funds, the funds are leaving the country, a trade deficit grows and its repayment can have serious consequences on the actual loss of the country's production capacity.Such borrowing has multiple effects on domestic economy.It exerts pressure on exports because it is necessary to obtain more financial resources in foreign currency, the demand for foreign currency increases which leads to changes in the foreign exchange rate, affects the balance of payments and the country's credit rating as well as its further borrowing.Arrangements with the International Monetary Fund also require changes in the conducting of economic policy in the direction of reducing the deficit and public debt.
www.japmnt.comThis results not only in the savings and rationalization of the public sector, but the overall reduction in public spending can also affect the quantity of delivered public goods, social security of citizens and social peace.Having in mind previously mentioned circumstances, it becomes clear that public debt has to be carefully managed and that its existence and level of indebtedness can be dangerous for the country and its economy.It is of utmost importance to determine the actual size of the public debt as well as its structure.The size of public debt is reflected by its share (together with interest rates) in gross domestic product (GDP).Contemporary finances in global terms record an increase in public debt relative to GDP.In modern finance, characterized by an increase in public debt, public debt policy has become an important instrument of economic policy influence and consists of changes in the public debt structure in terms of maturity and ownership.Public debt can be repaid in three ways: fiscal policy, i.e. taxation where the burden falls on consumption of present generation; domestic borrowing where the burden falls on cash accumulation and burdens future generations or lending abroad; and "printing" of money, which is a monetization of debt.Depending on the choice of funding, the consequences will also depend on the increase in taxes, government borrowing or additional monetary growth.The higher the level of indebtedness, the larger budget surplus is needed which can be achieved by increasing budget revenues or by reducing expenditure.

Rules on debt limitation
The convergence criteria or, as they are called, the Maastricht criteria are the requirements that EU member states must meet to start the third phase of the Economic and enter Monetary Union (EMU), i.e. to introduce the euro as the official currency.These criteria have been elaborated pursuant to the provisions of Article 121 (1)  Here we can see that the two criteria are related to public finances and public debt management.What's interesting is that the Maastricht criteria have become one of the most commonly used criteria for borrowing and with 25 years since their inception, Deutsche Welle asked myself how are they a specific (www.dw.com) and came up with some interesting answers.
www.japmnt.comReporter interviewing Oliver Zifering from the High School of public administration and finance in Ludvigsburg, received the response that the entire story started with arbitrarily certain level of 3% of the permitted State deficit in France in 1982.On the other hand, at the time of negotiations on the establishment of the euro zone, the total debt of most countries was about 60% of the GDP.Taking into account that projected optimal growth is 5%, and the new indebtedness has been defined for the 3% of GDP, three fifths of this new growth is 60 and that's how it came to the numbers of allowed indebtedness of 60%.Later, it was shown that for many countries the projected growth of 5% was not realistic, and therefore the set of limitations sustainability, too.However, such budgetary rules first violated some of the EU's strongest economies -Germany and France, in the course of the crisis; other countries also began to follow that path.However, it is important to mention that no country has paid the penalties initially provided for by the Stability and Growth Pact (Šabić, A., 2006.).However, although most often quoted, these are not the only parameters for measuring the indebtedness of a country (Đurić, Marčetić, 2012).Traditional criteria used as a measure of indebtedness indicate the ratio of public debt not only to GDP, but also to exports of goods and services (plus remittances) and the ratio of public debt to budget expenditures.In addition, the repayment of public debt by years is analyzed, whereby repayment of public debt is placed in relation to the same indicators -gross domestic product, exports of goods and services plus remittances, as well as in relation to budget revenues.
The World Bank has three categories: - -Total debt to GDP ratio, total debt to export of goods and services, foreign reserves and foreign debt ratio, short term debt to total debt ratio and multilateral to total debt ratio.

Flow indicators are:
-The ratio of repayment of debt to exports of goods and services, the ratio of the annual liability for interest on exports, the ratio of principal repayment to used loans, the ratio of international reserves and repayment of external debt, the ratio of net transfers to exports, the ratio of net transfers of financial assets from abroad, the ratio of used loans to imports and the ratio of the annual liability for interest and debt.
The debt is sustainable if the real GDP growth rate is higher than the interest rate on the total debt.If more than 30% of the income from exports of goods and services should be allocated for repayment of debt, there is a real danger that the debt will not be repaid. www.japmnt.com According to the IMF criteria, the indebtedness margin is achieved if 25% of the current foreign exchange inflow of the debtor country is to be committed for repayment of the loan.
In addition, relating debt to the original income makes sense because in the debt repayment projection it is necessary to compare the repayment with future own revenues, as the borrower would not be forced to take a new loan in order to return the old one.In any case, in the long run, the growth rate of own revenues should be higher than the increase in borrowing, in order to avoid over-indebtedness.From the table it can be seen that the EU countries as a whole, as well as euro zone, recorded a debt-to-GDP ratio of more than 80%, which is a high indebtedness according to the World Bank criteria.In Italy, Portugal and Greece, this indicator exceeds 100%.The smallest debt among the observed EU countries have Bulgaria, Romania and Slovakia.

Jurisdiction and debt limitation of Republic of Srpska
The indebtedness of Republic of Srpska cannot be observed separately from its competencies and authorizations, or goods to which public spending is directed.As a part of the wider state union -Bosnia and Herzegovina, Republic of Srpska has wide powers of economic policy pursuing, but with certain limitations that come mostly from the conduction of monetary policy according to the currency board principle, which means the inability to monetize public debt.In addition, there is the fact that the regulation of indirect taxes, that are the most sophisticated, is not within its jurisdiction.This suggests that the potential for growth in public spending based on growth in tax revenues is limited.Public sector expenditures relate to the competencies, assigned to entities in within state arrangement of BiH.The competencies of the entity include functions such as: conducting certain economic and fiscal policies, regulation of financial institutions, reconstruction programs, highways and railway lines, production and distribution of electricity.Since the Republic of Srpska is centralized, in addition to the level of the Republic, public services are also delivered by local governmentsmunicipalities and cities, whose responsibilities we can be own, transferred and shared.As exclusive, the municipality's own, competencies may include the following: urban planning, utility services, preschool education, material maintenance of primary and secondary education facilities, organization of transport for pupils and teachers, physical education, outpatient services, health care, culture, sport, maintenance of libraries facilities, parks and city traffic signalization.In addition to these, municipalities have also been assigned responsibilities for local politics and local roads.-The total debt at the end of the fiscal year should not exceed 60% of GDP in the observed year, -Public debt at the end of the fiscal year cannot be exceed 55% of GDP in that year, -In addition, a limit on short-term debt, which cannot exceed 8% of regular income of previous year, -Total exposure of the Republic of Srpska's budget to issued guarantees cannot be exceed 15% of GDP in that year.It should be noted that, according to the valid legal solutions, the debt of the Republic of Srpska based on financing the reimbursement of damage from the unique register of damages, was defined by the Law on the Solidarity Fund for the reconstruction of the Republic of Srpska, and itis excluded from the limits set for the total and public debt of the Republic of Srpska.That debt is dealing with the damage caused in the floods of 2014, which have hardly hit the territory of Republic of Srpska.As a special type of debt controlling mechanism, that can be named as the political limitation of indebtedness, can be stated the fact that the law regulates impossibility to create a direct debt of the Republic, as well as indirect debt which implies borrowing of the Republic on behalf of and for the account of another public sector entity or take the guarantee, unless the National Assembly of the Republic of Srpska has given its consent.In addition, debt limits for local government units are defined, such as (Debt and Guarantee Act): -The local self-government unit can only be indebted in the long run if, in the period of the creation of the debt, the total amount due for repayment, by the proposed debt and the total outstanding debt, in any subsequent year is not more than 18% of the amount of its regular revenues realized in the previous fiscal year. www.japmnt.com

Conclusion
Based on the above, we can identify elements of good debt management: -The law defines restrictions on the total indebtedness of all levels of government, at all levels of government, restrictions on exposure to guarantees are defined, the debt structure of the debt is good because more than 98.33% of the debt is long-term, about 60.33% of the total debt is under fixed repayment terms, the currency structure of the debt is acceptable because in it most of it is taken by the KM and the Euro for which it is bound, any indebtedness and giving guarantees require a compliance from a competent legislative authority that provides political control, the records are kept for which transparency is ensured, the government is developing strategic documents for debt management.
Based on these indicators, we can conclude that Republic of Srpska belongs to medium-indebted countries according to the criteria of the IMF and the World Bank.However, it should be kept in mind that in over 50% of cases, the debt crisis erupted when the external debt was below 60% of GDP, although according to the defined criteria, the country is considered to be the middle indebted.Moreover, in some countries, creditors are withdrawing even if the debt level is below 40% of GDP, if lenders consider the country insecure and has a bad history of debt repayment and inflation.(Marčetić, Đurić, 2012).Another danger to be kept in mind is the flow indicators.We have mainly focused here on the indicators of stock, however, it is very important that indicators are observed in the longer term and from the dynamic point of view.Here, the key purpose of the funds taken, the growth rate of GDP, and the volume of foreign trade are key.On the other hand, it is necessary to evaluate whether the fiscal burden is at an optimal level, i.e. to determine whether taxes impair the economy and whether repayment of loans in the medium term is possible, without their refinancing.
Below is a table showing the share of debt in GDP of selected EU countries and Republic of Srpska.