Explain the methods of repayment of debt.

1) Repudiation:It means refusal to pay a debt by governments. This method was followed by the USA after the civil war and by the USSR after the 1917
Revolution. This method is undesirable and has not been used recently
anywhere in the world. Repudiation shakes the confidence of the people in public debt and many provoke retaliation from creditor countries.

2) Refunding: Refunding is the process of replacing maturing securities with new securities. In some cases the bonds may be redeemed before the maturing date when the government intends to rearrange the maturity of outstanding debts or when current rate of interest is low. Generally, short-term borrowings are made in anticipation of tax collections for meeting current expenditure. However, excessive burden of new expenditure does not permit the retirement of the debt by means of revenue newly raised or by means of long term borrowing. Thus, there is necessity of refunding the loans by old lenders and renewing the loans at lower rate of interest for future period. The drawback of this method is that government is tempted to postpone its obligation of debt redemption. This leads to a continuous increase in the burden of public debt in future.

3) Conversion of Loans: It is a special type of refunding. Conversion of existing securities into new securities before maturity. It is generally resorted to reduce the burden of debt by converting high interest loans into low interest loans. According to Professor Dalton, the conversion does not reduce the burden of public debt on the state; because a reduction in interest rates reduces the ability of the creditors to pay taxes which may mean a loss of income to the governments there by reducing its capacity to repay loans.

4) Sinking Fund: Sinking fund is a special fund created for the repayment of public debt. There is a theoretical justification for creating this fund because it imposes a requirement on the government to pay the old debts regularly. According to this method, the government sets aside a certain amount out of the budget every year for this fund. The balances in the funds are also invested and the interest accruing on them is also credited in the fund.

Sinking fund is of two types: (i) certain sinking fund—here, the governments credit a fixed sum of money annually. (ii)Uncertain sinking fund—



the amount is credited when government secures a surplus in the budget.The one danger of this method is that the government may not wait till the end of the period of maturity and utilize the fund for some other purpose than the one for which the fund was created originally.

The practice of sinking fund inspires confidence among the lenders and the enhancement of the creditworthiness of governments.

5) Capital levy: Capital levy is a special type of “once for all” tax on capital imposed to repay war debts. All capital goods are taxed above a minimum level of assets possessed by residents of the country. Simply, capital levy refers to a very heavy tax on property and wealth. This tax was levied immediately after the First World War. This method has been advocated by economists like David Ricardo, Pigou and Dalton.Professor Dalton has suggested that capital levy as a method of debt redemption with least real burden on the society. It is useful on account of its deflationary character.

6) Surplus budget: Quite often, surplus budget may be used to clear public debt.
But in recent times due to the ever increasing public expenditure, surplus budget is a rare phenomenon.

7) Buying up of Loans: Governments redeems debt through buying up loans from the market.

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Judiesiz answered the question on July 10, 2018 at 07:03