(a) Definition of public debt?
Among the World Bank, IMF and European Union,
the definition adopted by the World Bank results in the most comprehensive
estimates of public debt [more]
(b) What types of debt are included
in public sector debt?
All borrowings of the public sector with
an original maturity exceeding one year (classified as long and
medium-term debt) and an original maturity of less than one year
(classified as short-term debt) are included in public sector
debt [more]
(c) What public
sector loan operations need to be managed and monitored?
Public sector loan operations
that needs to be managed and monitored [more]
(d) What are the main
groups of debt management functions that a country needs to perform?
They are Resource
Mobilization, Debt and Risk Management,
and Loan Operations and the Management
Information System. [more]
Definition of public
debt?
Among the World Bank,
IMF and European Union, the definition adopted by the World Bank
results in the most comprehensive estimates of public debt. The
World Bank defines external public debt as the sum of public and
publicly guaranteed debt as follows:
(i)
public debt is the sum of all the external obligations of the
central government; states, provinces or similar political subdivisions
and their agencies; and autonomous public bodies such as state
enterprises and subsidiaries in which they have joint ownership
and a major shareholding with the private sector; and
(ii) publicly guaranteed debt is the sum of all external obligations
of the private sector that are guaranteed for repayment by a public
entity.
When the borrowings of the Central Bank including those from the
IMF under its various facilities are added, this definition appears
to capture all public and publicly guaranteed external debt. A
similar definition can be used for public and publicly guaranteed
domestic debt with the sum of the two categories providing estimates
of total public debt.
What types of debt
are included in public sector debt?
All borrowings of the public
sector with an original maturity exceeding one year (classified
as long and medium-term debt) and an original maturity of less
than one year (classified as short-term debt) are included in
public sector debt. These differ from borrowings that have a remaining
maturity of one year and have already been included in long and
medium-term debt. All domestic and external payments that have
been in arrears for a period exceeding three months should also
be included in the estimates of public debt. Whether these arrears
are short, medium or long-term would depend on the length of time
that the payments have remained in arrears.
The IMF and World Bank
classify the debt of a country as external or domestic on the
basis of the residence of the lender. Both foreign and domestic
currency debt held by non-residents is classified as external
debt and those held by residents as domestic debt. This distinction
will not have any implications for total public sector debt.
What
public sector loan operations need to be managed and monitored?
The public sector loan
operations that need to be managed and monitored are
(i) direct borrowing by
the government from foreign and domestic sources;
(ii) guarantees issued by the government for foreign and domestic
borrowing of non-government and other public sector agencies;
(iii) government counter guarantees for guarantees issued by foreign
national and international institutions;
(iv) funds borrowed by the government and on-lent to state enterprises
and government owned companies; and
(v) borrowing from foreign and domestic sources by state enterprises
and government owned companies without government guarantees.
What are the main
groups of debt management functions that a country needs to perform?
They are Resource
Mobilization, Debt and Risk Management,
and Loan Operations and the Management
Information System.
Resource
mobilization:
It may be necessary to have separate resource mobilization activities
for project and programme finance and capital market borrowings,
the latter to meet emerging budget deficits. Further, sub-activities
may be required for foreign and domestic borrowings depending
on the state of development of the domestic debt market. Activities
requiring both foreign and domestic borrowings should be dealt
with in a holistic manner and not separately as occurs when foreign
and domestic borrowings and their management are the responsibility
of different agencies. The main functions required for resource
mobilization are to:
- Implement the public
sector borrowing plan based on the strategy approved by the
government
- Raise resources for
financing public sector projects and programmes and emerging
budget deficits from foreign governments, international financial
institutions, and foreign and domestic commercial banks and
capital markets based on the borrowing strategy adopted by the
government. These may be separated into those from foreign and
domestic sources as follows:
Foreign Sources
- Negotiate loans from international financial institutions
and foreign governments
- Negotiate loans from foreign commercial banks and other
foreign financial institutions
- Access international capital markets
Domestic Sources
- Access the domestic capital market by conducting auctions
and other measures
- Negotiate loans from domestic commercial banks and other
domestic financial institutions
- Mobilize short-term
resources from capital markets to meet the government’s
emerging liquidity requirements
- Organize and execute
hedging transactions
- Identify and execute
derivative transactions
- Develop the domestic
debt market
- Develop the domestic
secondary market
- Process applications
for government guarantees, issue guarantees and conclude agreements
with borrowers
- Process applications
for on-lending borrowed funds and conclude agreements with the
borrowers
- Function as a clearing
house for requests of information from donors, international
financial institutions, commercial banks and other creditors
Debt and risk
management:
Debt and risk management,
as well as the other debt management functions, require close
coordination and consultation with the staff engaged in resource
mobilization and loan operations and the MIS. Although the work
is analytical in nature and involves research, it underpins loan
operations and requires a detailed knowledge of lenders and capital
markets. While the capacity to undertake the analytical work necessary
for debt management can be developed in the DMO, close links should
be established with outside departments and agencies. Borrowing
forecasts should be tested for macroeconomic consistency, necessitating
liaison with the department responsible for maintaining a macroeconomic
model. Similarly, links should be established with the department
responsible for budget operations to obtain up-to-date forecasts
of government revenue and expenditure and the Treasury for forecasts
of cash requirements. Links are also needed with the agency responsible
for balance of payments forecasts—specifically for forecasts
of exports of goods and services—and economic policy in
other areas. It would be counterproductive for the DMO to be self-sufficient
in preparing the output required from these agencies as it would
result in overlapping activities, particularly when there is a
shortage of skills.
The capacity to undertake
debt and risk analyses can be built up only over time as this
requires expertise in risk management techniques and capital market
operations. Consultancy inputs and training are needed in the
initial period. The main functions necessary for debt and risk
management are to:
- Undertake frequent
portfolio analyses to assess future debt service prospects and
problems and propose action that should be taken to overcome
them
- Prepare debt sustainability
analyses to assess the long-term sustainability of projected
levels of public sector borrowing
- Adopt specific targets,
benchmarks or guidelines for various debt variables such as
the currency mix, share of the floating rate debt, foreign debt,
short-term debt in total debt outstanding, and maturity profiles
- Assess and manage market
movements (foreign exchange and interest rate) and rollover,
liquidity, credit, settlement and operational risks in the loan
portfolio including those that arise from on-lending and the
issue of guarantees
- Formulate a borrowing
policy and an annual borrowing plan for the government/public
sector. It could include the adoption of ceilings for total
disbursed outstanding debt (DOD) broken down into foreign and
domestic debt and targets for various stock and flow debt indicators
- Prepare a borrowing
strategy for implementing the annual borrowing plan involving
choices between domestic and foreign borrowings, creditor sources
and capital markets to be accessed, currency of borrowing, and
interest rate and maturity structures
- Assess external vulnerability
using debt and reserve adequacy indicators
- Formulate guidelines
for non-guaranteed borrowings of State enterprises and the private
sector
- Formulate policies to
regulate the issue of government guarantees and lending and
on-lending borrowed funds by the government, their monitoring
and management
- Estimate the level of
contingent liabilities and prepare estimates of loan loss provisions
that should be included in the expenditure estimates of the
government budget
- Prepare or provide inputs
on public debt to periodic economic and financial reports presented
to the government and Parliament or the National Assembly.
Loan
operations and the management information system:
Maintaining a loan database
for public sector borrowings by recording all loans and loan transactions
is a major activity in an MIS. This is facilitated by using software
that is adequate for both debt recording and analysis. The staff
responsible for the MIS should keep abreast of developments in
information technology and ensure that all the staff of the DMO
is provided with access to the updated database. The maintenance
of an accurate database underpins the analytical work that is
performed in debt and risk management tasks. It also facilitates
debt service payments being made on time. The main functions required
for loan operations and the MIS are to:
Manage the debt information
system and maintain an accurate and up-to-date loan database.
- Link the debt management
software to other software used for Treasury management and
accounting systems of the government.
- Prepare debt service
forecasts for public sector external borrowings as an input
to the balance of payments forecasts and of total domestic and
foreign government borrowings as an input to the expenditure
estimates of the fiscal budget.
- Process debt service
payments and effect them on time.
- Ensure that sinking
fund contributions are made in accordance with the approved
appropriations.
- Monitor the implementation
of loan agreements including the utilization of loans and the
obligations of the government.
- Monitor the performance
of loans guaranteed by the government and report non-performance
to the government.
- Monitor the performance
of lending and on-lending agreements and report defaults to
the government.
- Monitor all contingent
liabilities and ensure that adequate loan loss provisions are
made in the budget to meet likely defaults.
- Prepare forecasts of
government cash requirements to provide guidance on the volume
and timing of Treasury-bill issues.
- Prepare periodic statistical
and other reports on the status of public debt that are required
by the government and lenders.
- Maintain a website
for the DMO and provide critical information on public debt
to the public. The long-term goal should be to place an annual
status report on public debt on this website.
It is important that the
functions are performed in a government agency at the beginning
while institutional capacity for debt management is being developed.
The institutional structure for debt management that evolves would
be specific to each country based on the functions that have to
be performed. It also depends on the bureaucratic structures established
for loan operations.
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