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(a) Institutional
framework for debt management.
The framework and functional organization
for debt management that is being established in many countries
is similar to that of an investment institution. While all offices
responsible for debt management may not be structured as in these
institutions, three operational offices can be set up to correspond
to the three categories of debt management functions. These are
referred to as the front,
middle and back
offices. Straddling all three offices should be a legal group
whose principal function should be to support the activities of
the front and back offices. The three offices should be interdependent
and exercise checks and balances over each other in the interests
of transparency and accountability.
(b) Can a case be made
for the establishment of a public debt management office (PDMO)?
[more]
(c ) Where should a
PDMO be located?
Establishing a public
debt management office either in the MOF or the Central Bank or
an office that is independent of both has both the pros and cons.
[more]
Institutional framework
for debt management.
The framework and functional organization
for debt management that is being established in many countries
is similar to that of an investment institution. While all offices
responsible for debt management may not be structured as in
these institutions, three operational offices can be set up
to correspond to the three categories of debt management functions.
These are referred to as the front,
middle and back
offices. Straddling all three offices should be a legal group
whose principal function should be to support the activities
of the front and back offices. The three offices should be interdependent
and exercise checks and balances over each other in the interests
of transparency and accountability.
The front office should
be responsible for resource mobilization and make the major decisions
on foreign and domestic borrowings based on the approved borrowing
plan. It should also take responsibility for on-lending and guarantee
operations and hedging and derivative transactions of the government.
Middle office:
The middle office should
be responsible for debt and risk management and should undertake
portfolio analyses, develop a risk management strategy and borrowing
scenarios, and compare the emerging debt indicators with agreed
benchmarks. This would enable sustainable levels of public sector
borrowings to be estimated and a borrowing policy and plan for
the public sector to be prepared.
Back office:
The back office should be responsible for
loan operations and the MIS and make debt service payments based
on creditor invoices that are cross-checked with its own database,
monitor loan utilization, and prepare accounting and other reports
required by creditors and the government.
Can a case be made
for the establishment of a public debt management office (PDMO)?
The answer should be based on the debt
management functions that are currently being undertaken and those
that need to be done in the context of the country's needs. A
case should be made on whether a unified structure would be more
effective in performing all the required functions.
Where should a
PDMO be located?
Establishing a public debt management
office either in the MOF or the Central Bank or an office
that is independent of both has both the pros and cons.
The status of a debt management office
is important for it to function effectively. While establishing
an autonomous office functioning independent of the ministry
of finance is an attractive idea, there is not an overwhelming
need for this in an emerging market. One compelling argument
for establishing a debt office outside the government administration
is that it could recruit staff with the required debt and
risk management skills, paying the salaries of the market
place. Establishing an autonomous office, which would tend
to become elitist, is not straightforward given that some
of the functions of a DMO are being performed to varying degrees
of efficiency and effectiveness by different agencies of the
government. This makes it necessary to examine the possibility
of establishing the office within the ministry of finance.
A debt management office at the highest
departmental level within the ministry of finance would be
the most effective institutional arrangement. It should involve
the amalgamation of the functions of external and domestic
borrowings, debt service payments, loan accounting, debt analysis
and maintenance of loan databases. These are currently undertaken
in various departments and divisions of the ministry of finance.
One possibility is to leave these functions where they are
located and attempt to establish strong links from these sites
to the office responsible for debt and risk management. The
MIS should link all the offices that perform debt management
functions. The second choice is to amalgamate all the functions
in one office in the ministry of finance and cope with the
problems such a move would precipitate as they arise.
Most countries have to consider the
institutional dynamics between their ministry of finance and
central bank in determining an appropriate location for a
debt management office. A decision can be based on the logic
that responsibility for debt management should rest with the
ministry of finance as the Minister of Finance is legally
authorized to borrow, on-lend and issue guarantees on behalf
of the government. An extension of this argument would suggest
that the central bank should take explicit responsibility
for monitoring the volume and maturity structure of a growing
private sector debt. This arrangement would ensure that monetary
and debt management policies are kept separate. However, effective
public debt management needs institutional capacity for undertaking
analytical work. Often, this is available in the central bank
and not the ministry of finance. This requires some departure
from the logic set out above to use the institutional capability
where it exists.
Country
experiences - structures of debt management offices in some
developed countries
Ireland
The National Treasury Management
Agency (NTMA) of Ireland was set up by the National Treasury Management
Agency Act, 1990, Ireland to "borrow moneys for the Exchequer
and to manage national debt on behalf of and subject to the control
and general superintendence of the Minister of Finance and to
perform certain related functions and to provide for connected
matters." This Act enabled the government to delegate the borrowing
and debt management functions of the Minister of Finance to the
NTMA. Prior to this, they were the responsibility of the Department
of Finance with the central bank being responsible for short-term
debt.
The Minister of Finance
appoints the Chief Executive who is directly responsible to him.
The Advisory Committee (as opposed to a board) advises the NTMA
on matters that may be referred to it and the Minister on the
appointment and terms and conditions for the Chief Executive.
Under the provisions of the Act, the NTMA produces a written report
on its activities for the Minister who submits it to Parliament.
The main objective of the
NTMA is to finance maturing national debt and the annual borrowing
requirements of the government. When the government has a budgetary
surplus (as it has in most of the past several years), the borrowing
programme is required to finance only the maturing national debt
less the amount of the surplus. In pursuing this objective the
NTMA is expected to minimize borrowing costs and keep risks at
an acceptable level.
(i) Structure
The structure of the NTMA
that has evolved is similar to that of many DMOs in developed
countries. Originally, the main functional offices in the Agency
were for borrowing and debt management, strategy and risk management,
and operations. These corresponded to the front, middle and back
offices framework that was described in the section on institutional
framework. There is a fourth office, which provides legal services
to the Agency. This is a requirement in all DMOs, although the
services are provided through different mechanisms.
This structure has changed
with the change in borrowing requirements of the government. The
debt management functions are being performed in two offices-Funding
and Debt Management, and Finance, Technology and Risk. The fundamental
role of the NTMA remains that of borrowing for the government
and its management. Since 2000, its role has been expanded to
include other asset and liability management functions. The NTMA
manages the National Pensions Reserve Fund as the agent of the
commission that is responsible for the Fund. The National Development
Finance Agency operating through the NTMA provides financial advice
and when necessary, funding and guarantees for major public investment
projects. The NTMA also borrows on behalf of the Housing Finance
Agency.
New Zealand
In New Zealand the Minister
of Finance has the power to borrow on behalf of the government.
The day-to-day operations arising from this authority have been
delegated to the New Zealand Debt Management Office (NZDMO), a
unit of the Treasury since 1988. government borrowing and debt
management have been the responsibility of this Office, based
on guidelines that are approved by the Minister of Finance. The
NZDMO is headed by the Treasurer who reports through the Manager
of the Asset and Liability Branch to the Secretary to the Treasury,
who in turn is responsible to the Minister. The Advisory Board,
consisting of private sector representatives, assists the Secretary
to supervise the performance of the NZDMO and provides advice
on a range of operational and strategic issues.
The objective of the
NZDMO is to "maximize the long-term economic return on the government's
financial assets and debt in the context of its fiscal strategy,
particularly its aversion to risk". It pursues this objective
while managing the government's gross borrowing and cash requirements
and interest bearing assets within a risk management framework
covering the six principal types of risk. It also lends to government
organizations and State enterprises and provides advice on capital
markets to other branches of the New Zealand Treasury and other
government departments and agencies.
(i) Structure and Functions
The structure of the
NZDMO follows that of a private sector financial institution with
functions that correspond broadly to those of the front, middle
and back offices. It has groups responsible for portfolio management,
risk policy and technology, and accounting and transactional services.
The Portfolio Management Group:
- Handles the dealing operations of the
NZDMO and all borrowings of the government
- Manages the government's investment
portfolio and cash needs in New Zealand dollars
- Finances the foreign currency intervention
reserves of the reserve bank
- Promotes investment in government securities
- Provides advice on capital markets to
other government agencies
- Manages relations with investors and
rating agencies and compliance requirements of international
markets
The Risk Policy and Technology
Group:
- Advises on and continually improves
the risk management framework of the NZDMO
- Measures the performance of the Office
in adding value, measuring risk and monitoring compliance with
approved policies for managing the government loan portfolio
- Maintains the information technology
systems
The Accounting and Transactional
Services Group:
- Accounts for government loan operations
- Prepares debt service forecasts and
makes debt service payments arising from government borrowing
on time
- Ensures that the above are recorded
without any security breaches
While the NZDMO is responsible for managing
the government's domestic borrowing programme, some administrative
functions have been delegated to the reserve bank through an agency
agreement. Under this arrangement, the bank is responsible for
the tenders and transactions arising from treasury bills and government
bonds.
Sweden
The Swedish National
Debt Office (SNDO) dates back to 1789 and was under the control
of Parliament for 200 years. Following an amendment to the Swedish
Constitution and the Act on State Borrowing, Parliament delegated
the function of borrowing to the government in 1989, which in
turn delegated it to the SNDO. The Office's Board is chaired by
a Director-General who reports to the government through the Minister
of Finance. The main role of the Board is to lay down limits and
guidelines for the borrowing activities of the SNDO, which are
to finance:
- The primary balance arising from the
government's fiscal operations net of the State's expenditures
and interest
- Central government interest payments
- Changes in the borrowing and lending
of the SNDO to and from agencies and State-owned companies
Parliament controls the
increase in the State debt as it approves the budget, State lending
and the level of guarantees. The only exception is the borrowing
requirement for increasing the foreign currency reserves of the
central bank. There is indirect control even in these instances
as the central bank reports to Parliament.
An objective of the SNDO
is to manage the debt of the central government to achieve a minimization
of costs in the long run while taking risk management into consideration.
This is pursued by proposing a set of guidelines for government
borrowing in the following year. These guidelines become effective
when approved and guide the borrowing programme for the year.
The SNDO reports on its borrowing performance in the previous
year to the government, which in turn reports to Parliament. The
comments made by Parliament in its evaluation are incorporated
in the guidelines proposed by the SNDO for the following year.
(i) Structure and Functions
The activities of the
SNDO are conducted through four operational departments. They
are the Debt Management, Retail Market, Guarantees and Cash Management
Departments.
The Debt Management Department:
- Manages and finances the central government
debt by issuing nominal and inflation-linked government securities
in the Swedish and international fixed income markets
- Minimizes the cost of this debt while
taking into account possible risks
The Retail Market Department markets government
securities to households, small investors and institutional investors.
The Guarantees Department:
- Issues and manages guarantees and loans
to public authorities following approval from Parliament
- Assesses credit risks and charges premiums
from borrowers to cover them in the guarantee fees and interest
costs
- Monitors risks associated with the activities
of State undertakings across a wide range of areas, though mainly
in infrastructure and propert
The Cash Management Department
functions as the internal bank for State agencies and public enterprises.
It involves the provision of budgeted funds and loans for their
investments in fixed assets without subsidy. The State agencies
in turn are obliged to invest their cash surpluses with the SNDO.
It is also responsible for the government's cash management and
payments.
Other departments support
the work of the four operational departments and:
- Communicate with the media, investors,
public authorities, rating agencies and the public
- Forecast State debt service payments
and undertake statistical analyses of debt
- Provide legal support for SNDO activities
including the registration of debt
- Confirm and settle transactions that
are initiated by the operational departments
- Provide the MIS to support the borrowing
activities of the SNDO
- Develop capacity to identify and manage
risks and undertake risk analyses
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