Recording on-lending of borrowed funds in government finance statistics and PSDS

Let’s say a state-owned enterprise wants to
borrow $100 to finance some of its investment activities. External borrowing would have been much cheaper
for the state-owned enterprise, but it’s not allowed to borrow abroad. So, instead, government borrows $100 on behalf of the state-owned enterprise
from a bank abroad, and then government on-lends these proceeds to the state-owned enterprise. So, here we have two separate financial claims. First, the foreign bank has an external financial
claim in the form of a loan on the government. The government has an external debt liability
in the form of a loan to the foreign bank. Of course, it is also possible that this debt
liability is in the form of debt securities, or another
debt instrument. Second, because of the on-lending, the government
has a domestic financial claim, typically in the form of a loan,
on the state-owned enterprise. The state-owned enterprise has a domestic
debt liability in the form of a loan to the government. Because the government and the state-owned
enterprise are both public sector units, these stock positions will be eliminated in consolidation when statistics for these two units are combined. Typically, the unit to which government on-lends
is a resident inside or outside the public sector, but it could be a nonresident too. In that case, an external debt liability and external
financial claim are involved. The servicing of these two separate debt liabilities
should also be handled with caution. The repayment of each of the two debt liabilities
is recorded in the books of the unit in whose balance sheet each debt liability
appears. Thus, government has a debt liability
to the foreign bank. The repayment of this external debt liability
is recorded in the books of the government even if the borrowed funds were on-lent to
the state-owned enterprise and if the state-owned enterprise is, in practice, repaying the foreign bank directly. Similarly, the repayment of the state-owned enterprise’s domestic debt liability to the government is recorded in the books of the state-owned enterprise regardless of
what happened in practice. As you can see, we record these economic events
separately and do not offset them against each other.

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