Kuwait: Have you ever heard the term financial stability and wondered what it means, and how does it help countries grow their economies? Marwan Salamah explained what the term means and its importance and significance in today’s financial world.
He began explaining the term by applying it to an example to simplify the idea. “Financial sustainability is a fancy modern term for an ancient concept, meaning that without the ability to conserve resources and produce in the future, they cannot continue and lead to failure.” He said. He said.
“History tells us that in the first agricultural revolution 10,000 years ago, early humans would likely starve to death if they did not save some of their crop seeds to replant (invest) the next season. If they take care of their garden plot (environment), it will deteriorate and the yield will decrease year by year. poor management), they will suffer from labor shortages next season,” he said. It’s an old example of ,” explains Salamah.
“The social and environmental parts of sustainability fall within the responsibility and control of governments, and governments should enact and enforce laws to ensure they are addressed by the private sector. As for the profitability part, it is purely within the private sector: Entrepreneurs can ensure that their projects and businesses are economically viable, without compromising environmental or social responsibility. , we must set out to manage it wisely to ensure it is profitable.”
Definition of financial stability
The term financial sustainability refers to the ability of a nation to continue spending policies over the long term without reducing its financial solvency, exposure to bankruptcy risk, or failure to meet future financial obligations in the light of its current financial situation. financial situation. Earnings.
Fiscal sustainability depends not only on long-term future revenues, but also on spending expectations, and depending on these expectations, current policies can increase spending, reduce spending or revenues, or reduce the cost of spending programs. , or by allowing them. Grow within a certain rate, find new revenue streams, or increase your current rate of return.
Sustainable finance themed activities include sustainable funds and green bonds, impact investing and microfinance, active ownership and credit of sustainable projects, and developing the entire financial system in a more sustainable way. , but not limited to: In addition, sustainable finance refers to all forms of financial services that integrate environmental, social and governance (ESG) criteria into their business or investment decisions for the lasting benefit of their clients and society at large.
Fiscal sustainability depends on long-term expectations for future spending and revenue. Depending on these expectations, current policies will be modified by increasing or decreasing spending and income.
On the other hand, there is a difference between financial sustainability and sustainable development. Because the latter refers to achieving economic growth considering the environmental aspects of ensuring the conservation of natural resources and not wasting them. It will include taking into account social dimensions, including social protection programs for low-income earners and those adversely affected by rapid economic growth and its policies.
Benefits of financial stability
Sustainability encourages people, politics and business to make decisions for the long term. As such, acting persistently encompasses timeframes of decades rather than months or years and is viewed as more than an associated gain or loss.
A strategic plan sets the organization’s strategic goals for the next three to five years, accompanied by a potentially costly budget. A funding strategy sets out how an organization raises funds to cover those costs. This helps the fundraising strategy become an integral part of determining the opportunities and activities pursued by the organization.
The legal and economic capacity to limit or rate increases in the costs of current spending programs, or to find new sources of income, while ensuring the continued financial sustainability of countries. is required. Or to increase your current rate of return.
Impact of loss of financial stability
Countries are trying to achieve fiscal sustainability to enable borrowing and cover their budget deficits on concessional terms. A country’s loss of fiscal sustainability, or a decline in market confidence in its ability to meet its obligations, will lead to creditor suspension. Give them loans or raise interest rates on their loans to high levels and set controls and terms for their borrowing.
Achieving fiscal sustainability enables countries to increase their spending on public projects and obtain the funds they need to serve their citizens. Fiscal sustainability reflects the level of success of fiscal policy and gives the private sector the confidence to invest in a country that enjoys it.
Also, the rapidly increasing rate of public debt to GDP is the factor most adversely affecting countries’ continued enjoyment of fiscal sustainability. There are many other factors that affect a country’s fiscal sustainability, the most important of which are real interest rates, real GDP growth, and spending and revenue growth.