Definition of objectives:
Governments should set clear objectives
for public debt management. A survey conducted in 2000 by countries
of the Organization for Economic Cooperation and Development (OECD)
identified several overall policy objectives for debt management,
which were to:
- Mobilize the financing needs of governments
efficiently
- Ensure that the debt service payments
of governments are made promptly
- Minimize borrowing costs
- Keep risks at an acceptable level
- Support the development of domestic
markets
These objectives are
appropriate for a country with a well-developed domestic capital
market that can access international capital markets. Many developing
countries and emerging markets give priority initially to obtaining
the financing needs of the public sector at low costs and to ensuring
that debt service payments of governments are made on time. As
their access to international capital markets increases, the objectives
are expanded to take into account the risk preferences and tolerances
of governments. The push to strengthen and deepen domestic capital
markets and develop secondary markets would take place with the
liberalization of the capital account of the balance of payments
when borrowers begin to exercise a choice between the domestic
and international capital markets.
The important issues for public debt management
are the legal and regulatory framework; institutional
arrangements, staff and training requirements;policy
framework for macroeconomic and debt management; and management
information system.
Legal
and regulatory framework:
Governments should establish
a clear legislative framework for public debt management, setting
out the responsibilities of agencies authorized to borrow, issue
guarantees and undertake financial transactions such as on-lending
on behalf of the government in unambiguous terms. The framework
should give clear responsibility for debt management to one agency
when this is possible. The numbers of agencies involved should
be kept to a minimum in the interest of achieving a transparent
and effective institutional structure. The legislative framework
should also take into account the merger of the domestic and external
borrowing operations of the public sector and the need to formulate
annual or multi-year borrowing plans based on the borrowing policy
of the government. A new public debt management law would be required
to:
- Authorize borrowing for public purposes
from both domestic and external sources
- Authorize the issue of government guarantees
for both domestic and external borrowings
- Authorize on-lending borrowed funds
by the government
- Assign responsibility for public debt
management and the formulation of a borrowing policy and plan
for the public sector that includes both guaranteed and non-guaranteed
loans
Institutional
arrangements:
Debt management encompasses
more than the mere mobilization of domestic and external resources,
recording this debt and making timely debt service payments. A
transparent legislative and regulatory framework is required for
the full range of debt management functions to be performed effectively.
The changes in the international economic
environment and the resulting priorities for debt management
make it necessary for countries to review their institutional
arrangements and institute changes. Emerging markets and developing
countries that are liberalizing their capital accounts need
to undertake these reviews as a matter of priority, noting that
public debt management covers all the activities of a loan cycle
as before. Debt management offices should develop the capacity
for more advanced debt management due to the greater complexity
of the loan portfolios covering both domestic and external loans.
The functional organization for debt
management that is emerging-often based on the advice provided
by international financial institutions (IFIs)-is similar to
that of an investment institution. While many offices responsible
for debt management are structured as in these institutions,
the three main groups of activities required to perform the
full range of debt management functions are:
- Resource mobilization
- Debt and risk management
- Loan operations and the Management Information
System (MIS)
They are named differently in various countries
depending on the needs of each country.
Policy
formulation:
There should be effective
coordination of policy formulation among the agencies and staff
responsible for debt management, fiscal, monetary and exchange
rate policies of the government while maintaining separate responsibility
for each of the activities. It would be difficult to implement
the macroeconomic policies of the government effectively without
this separation and coordination. Borrowing policies should ensure
the long-term sustainability of the fiscal deficit. At the same
time, debt management policy should not become subordinate to
monetary policy, as this may cause tension between the agencies,
making it less likely that debt management decisions would be
based on sound portfolio management. The central bank may, for
example, propose the issue of foreign currency debt to reduce
the risk of inflation while the debt management office could argue
that such a move could increase the overall risk to the government's
loan portfolio if it already had a significant foreign currency
exposure. A government's exchange rate policy can have an impact
on the strategic benchmarks chosen for debt management that specify
the desired currency composition of the foreign currency debt
of the government. In view of these considerations, the institutional
arrangements should clarify the objectives of the government in
these policy areas and separate accountability for each of them.
Debt
information systems:
There is a growing demand
in debt management offices for an integrated, user-friendly MIS.
Given the range of functions that these offices are expected to
perform, the functionalities of the software should include debt
recording, debt service payments authorization, loan monitoring,
debt analysis and risk assessment. This would require the specification
and development of new software or the customization of off-the-shelf
software to the extent that is necessary. Until then, newly established
debt offices would have to download data from existing databases
onto spreadsheets and develop links between these and off-the-shelf
risk management software. The experience of other debt management
offices in developing their management information systems should
be studied before embarking on a major software development, which
would be time-consuming and expensive.
The financial crises
in Asia and Latin America in the latter half of the 1990s brought
to light several important aspects of debt management. Firstly,
they raised the importance of government contingent liabilities
beyond the explicit guarantees provided mainly to State enterprises
and less often to private firms. Implicit guarantees covering
a range of financial activities such as non-guaranteed borrowings
of State enterprises and the private sector, due to government
policies that encouraged these borrowings, added a further dimension
to the level of contingent liabilities. The payments that could
arise from deposit insurance and unfunded pension schemes of the
central government are also a potential burden.
Secondly, the external
changes made it necessary for governments to assess and manage
risks in their loan portfolios by adopting guidelines and targets
or benchmarks. Thirdly, the growing volume of international capital
flows arising due to globalization increased the vulnerability
of economies with liberalized capital accounts. In some countries,
short-term debt has become a large component of total external
debt outstanding, introducing the possibility of a rollover risk
when the payments position deteriorates. Fourthly, they highlighted
the importance of monitoring external borrowing by the public
sector.
