Two recent Financial Times articles by The Editorial Board and Martin Wolf capped media coverage since the start of the pandemic on the financial impact of Covid on global finances. The recently released World Development Report by The World Bank adds emphasis to the need for smart restructurings of debt for many frontier and emerging markets – debt to GDP ratios have increased considerably as have the types and numbers of sovereign creditors. The ability of many developing countries to meet debt obligations is under strain, and will continue to be so for years to come.
Since the start of the pandemic, economic and financial media coverage pointed out the need to increase borrowings, by everyone - governments, companies, international organizations, and individuals. No more telling were the additional trillions of dollars that the US Government borrowed to address the needs of an economy going through a Covid recession.
It is easier for the printer of a super currency to borrow - the US Treasury issues bonds and the US Fed prints money and buys those bonds. Other countries with super currencies are in similarly favored conditions. These are super borrowers and their sovereign bonds are backed by a healthy amount of good faith and credit - their political and economic systems, their infrastructure, their abilities to tax and spend, and the fact that these countries are not going to disappear.
The story is markedly different for many less developed countries. For lesser mortals, there is a cap on how much debt can be issued and how much money can be borrowed (and printed).
Traditionally, when an economy is in recession, governments reduce taxes and interest rates to spur demand. Governments also increase borrowings to spend, preferably on capital expenditures, which leads to increased capital investments on the part of companies, and to higher levels of growth and employment.
For less developed countries with heavy debt to GDP ratios, one way of increasing demand for goods and services within a given economy is to think of new ways of increasing the "velocity of money" without printing more currency or increasing the money supply – a relevant consideration when faced with various types of borrowing limitations and an inflationary cycle.
As defined by many, the velocity of money is the frequency at which one unit of currency is used to purchase domestically produced goods and services within a given time period. In other words, velocity measures the number of times one unit of currency is spent to buy goods and services per unit of time - the higher this number, the higher the demand is for goods and services within a given economy.
For countries that do not have the luxury of printing more of their local currencies but need to increase demand within their economies, monetizing debt obligations (as opposed to securitizing debt obligations) might offer a way out, at least for the time being.
Let us say, you are owed $1000 as a tax refund from your government. Instead of receiving those $1000 in currency, the government would issue you 1000 units of "payment credits". You can use these payment credits to pay for goods and services and make all sorts of purchases - to pay for your groceries, to pay your children's school tuition, to pay down your bank debt, etc.
And those payment credits can be in digital form, utilizing new e-payment methods. The added benefit of increasing the banked portion of a population (increasing financial inclusion in developing countries) goes without saying.
For debt stressed frontier and emerging markets, the issuance of payment credits would not constitute an increase in the money supply, leading to concerns of currency debasement and inflation. Monetizing debt obligations into payment credits would generate the desired effect of increasing the velocity of money within an economy without actually increasing the money supply.
Traditional money issued by government has three main functions: it is a medium of exchange, a store of value and wealth, and a unit of account. Payment credits would only function as a medium of exchange and as such are not a currency in the traditional sense.
The ability to monetize debt obligations and digitize these in the form of payment credits is something that we should consider, given that the borrowing environments for many frontier and emerging markets are becoming more challenging.