## Annex I. The Role of Debt Management in Economic Policy

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### A. Role of Debt Management in Macroeconomic and Financial Policy Frameworks
- Effective debt management depends on the macroeconomic and institutional context and is integral to macro and financial stability, and financial and overall development.
- Debt management must be coordinated with other policy areas and balances domestic and external financing of various tenors to meet government funding needs at low overall cost and contained risk.
- The debt management strategy must accommodate forthcoming fiscal financing needs and consider:
  - effects on the size and currency composition of external capital flows;
  - monetary policy and exchange rate regimes;
  - foreign currency reserve levels;
  - the state of development of domestic markets; and
  - financing preferences and balance sheets of the private sector.
- Sound debt management contributes to reduced macro-financial risks and complements:
  - prudent fiscal management;
  - monetary policy implementation.
- Debt management affects monetary policy transmission, market liquidity, and financial market price discovery; it can help reduce crowding out, exchange rate pressures, or large swings in international reserves by covering external public financing requirements and avoiding undue bunching of debt service obligations.
- Debt management contributes to market and institutional development:
  - domestic sovereign debt market development assists banks in liquidity management, provides a saving tool, enables effective central bank monetary policy, and supplies a benchmark yield curve for private sector borrowing;
  - active debt management requires timely and accurate debt and fiscal data;
  - fostering the investor base through predictable issuance and regular communication improves effectiveness;
  - transparency and accountability of debt managers are directly linked to their effectiveness.

### B. The Medium-Term Debt Management Strategy (MTDS) Framework — Steps and Purpose
- The MTDS framework consists of a methodology and an analytical tool (AT) to facilitate sound debt management. A debt management strategy (DMS) operationalizes debt management objectives given constraints and government preferences on cost-risk trade-offs.
- Key steps in formulating an MTDS:
  - Step 1. Identify objectives and scope of the MTDS.
    - Identify main objectives (examples): Meet the financing needs; Minimize cost; Maintain risk at a prudent level; Develop the domestic debt market; Establish a reference or benchmark for private sector issuance.
    - Ensure objectives are documented where not set in law.
    - Define scope: central government, general government, or wider public sector; contingent liabilities.
  - Step 2. Identify current debt management strategy and cost and risk of existing debt.
    - Provide a benchmark to evaluate alternatives.
    - Identify outstanding debt and composition; determine debt servicing profile.
    - Calculate basic cost and risk indicators; identify sources of vulnerability.
  - Step 3. Identify and analyze potential funding sources, including cost and risk characteristics.
    - List existing and potential instruments (domestic and external) and describe financial characteristics.
    - Evaluate potential quantum of borrowing available through each instrument/creditor type.
    - Identify constraints impeding availability of funding.
    - Discuss instruments by cost/risk characteristics.
  - Step 4. Identify baseline projections and risk in key policy areas—fiscal, monetary, external and market.
    - Identify baseline medium-term projections for key fiscal and monetary policy variables.
    - Identify external constraints relevant for MTDS formulation: anticipated change in exchange rate or capital account regime; required financing of international reserves.
    - Identify baseline medium-term projections for market rates.
    - Clarify assumptions about likely pricing of non-market instruments based on creditor information and other sources.
    - Determine specific risk scenarios (including those identified in DSF and shocks to global liquidity conditions).
  - Step 5. Review longer-term structural factors (examples): Commodity price vulnerability; Access to concessional financing; Trends in real effective exchange rate; Inflation trends.
  - Step 6. Assess and rank alternative debt management strategies on cost-risk trade-off.
    - For alternative strategies: Assess cost changes under various risk scenarios; Assess mitigation of portfolio vulnerabilities; Assess how each meets primary and secondary debt management objectives; Assess feasibility given potential funding sources.
  - Step 7. Review implications with fiscal and monetary policy authorities, and for market development.
    - Outline preferred and candidate strategies to fiscal and monetary authorities; discuss interactions; confirm debt sustainability indicators align with DSA.
    - Review potential debt market implications with financial market authorities where relevant.
  - Step 8. Propose and approve the MTDS.
    - Document preferred and a small number (e.g., one or two) alternative strategies and why preferred is superior.
    - Clearly describe key associated costs and risks and relationship with broad objectives.
    - Present proposal to the highest responsible authority and agree the MTDS.
    - Once determined, disseminate the agreed MTDS.

### C. DeMPA Framework and Results (Diagnostic Tool Findings)
- DeMPA overview:
  - DeMPA assesses government debt management through performance indicators.
  - Launched February 2008; revised 2009 and 2014.
  - Current DeMPA comprises 14 debt management performance indicators (DPIs) and 33 subordinate dimensions spanning five core areas: Governance and strategy development; Coordination with macroeconomic policies; Borrowing and related financing activities; Cash flow forecasting and cash balance management; Debt recording and operational risk management.
- Coverage and impact:
  - By end-2016, 113 DeMPA missions fielded in 78 countries; 31 countries received repeated assessments.
  - More than 80 percent of beneficiary countries are low or lower-middle income countries.
  - DeMPA findings contributed to debt management reform plans in over 46 countries focusing on institutional arrangements, governance and managerial structure, formulation of debt strategies, improved domestic markets, and mitigating operational risk.
- Results for countries with repeated DeMPAs (In percent):
  - Overall: Up-grade 16; Down-grade 8; Stable 69; Share of score A, B, or C Latest DeMPA 37; First DeMPA 29.
  - I. Governance and Strategy Development: Up-grade 15; Down-grade 8; Stable 65; Share A/B/C Latest 39; First 29.
  - II. Coordination w/ Macroeconomic Policies: Up-grade 19; Down-grade 15; Stable 61; Share A/B/C Latest 58; First 57.
  - III. Borrowing and Related Financing Activities: Up-grade 12; Down-grade 4; Stable 74; Share A/B/C Latest 33; First 27.
  - IV. Cash Flow Forecasting and Cash Balance Management: Up-grade 6; Down-grade 5; Stable 87; Share A/B/C Latest 13; First 15.
  - V. Debt Recording and Operational Risk Management: Up-grade 21; Down-grade 9; Stable 69; Share A/B/C Latest 30; First 17.
- Observations:
  - Coordination with macroeconomic policies generally relatively strong.
  - Improvements seen in governance (including the DMS indicator) and borrowing operations capacity.
  - Significant improvements in debt recording and operational risk management, though these remain weak in several debt offices.
  - Cash flow forecasting and cash balance management show weak and stagnant scores, suggesting technical capacity deficits and deeper structural budget formation and execution issues.
- Subnational DeMPA:
  - Subnational DeMPA (August 2012; revised December 2016) comprises 13 DPIs and 31 dimensions.
  - Applied to 15 subnational governments (five in Sub-Saharan Africa, three in South Asia, two in LAC, two in EAP).
  - Results reveal significant gaps in most key debt management areas except debt recording, legal frameworks, and managerial structure.
  - Note: small sample that may be biased toward countries with highly developed institutional arrangements for subnational debt management.

### D. Questionnaire Results on Debt Management Strategy Capacity
- Survey design:
  - A questionnaire was sent to 110 countries (including those not benefiting from MTDS TA) covering six broad areas.
  - Of the 110 countries, 62 responded, of which 37 received MTDS TA.
- Key findings:
  1. Presence of formal DMS:
    - Most countries indicated having a formal debt management strategy.
    - For those without one, lack of expertise and limited human resources were cited as main reasons.
    - Many without a formal DMS reported a passive strategy that maximized concessional borrowing before resorting to domestic debt issuance.
  2. Publication of DMS:
    - Majority confirmed publication of DMS reports.
    - DMS documents are regularly published either as independent documents or as attachments to the annual budget.
    - Publication promotes transparency and accountability and can strengthen the debt manager’s position to implement strategy and facilitate communication with market participants and stakeholders.
  3. Legal framework and approval:
    - In many cases, DMS formulation was underpinned by a dedicated legal framework.
    - One third of respondents confirmed a legal requirement to prepare a DMS.
    - Approval by highest authorities (Cabinet, Council of Ministries, or Minister of Finance) was obtained in almost all cases.
  4. Diversity of DMS features:
    - Cost and risk features of existing debt portfolios principally determined countries’ DMS choices.
    - Market risks ranked top: refinancing, exchange rate, interest rate, and liquidity risks; contingent liabilities followed.
    - Operational risk was highlighted as a source of risk for government bond market functioning.
    - Horizon of DMS typically 3 years; period ranged from 3 to 5 years with annual reviews in many cases; low-income countries reviewed less frequently.
    - Default debt coverage was central government debt; a few countries used consolidated public sector debt; inclusion of guaranteed loans was rare.

### Execution of DMS and Annual Borrowing Plans (ABP)
- Execution of a strategy largely depended on the capacity to develop an annual borrowing plan (ABP) (Figure IV.2d).
- Some countries planned their ABP based on the adopted DMS, but actual borrowing diverged due to factors outside the control of debt managers: fiscal slippage; delay in implementation of large projects; ministerial decisions.
- Some countries indicated lack of capacity to develop an ABP consistent with the debt management strategy as a reason for inconsistent ABP with that of DMS.
- Execution of DMS through an ABP is less common in the low and lower middle income countries, in part due to factors outside the control of debt managers.

### Usefulness and Challenges of the MTDS Analytical Tool (AT)
- The formulation of MTDS was often supported by quantitative analysis, including utilization of the MTDS AT (Figure IV.2e).
- Countries that did not use the MTDS AT reported owning an internal quantitative model.
- Reported benefits and challenges of MTDS AT:
  - Helpful tool for countries that used it.
  - Challenging aspects included: projecting baseline interest and exchange rates; determining shock scenarios; ensuring consistency with the macroeconomic framework.
  - The main challenge in using the MTDS AT was the difficulty of obtaining fiscal and macroeconomic data and the time it took to set up the AT.
- Looking ahead, linking the MTDS AT with the macro framework and guidance on strategy identification would be important to assist users of the tool.

### Capacity Constraints, Staffing, and Institutional Issues
- Understaffing and lack of technical expertise contribute to the challenge debt management offices face in developing a DMS.
- High staff turnover meant retention of capacity was a recurring challenge; debt management offices were seldom fully staffed.
- Lack of support from higher management was another challenge reportedly faced by debt management offices.
- Some countries had an approved DMS but were unable to execute it due to:
  - Significant SOE involvement requiring better coordination within the public sector (examples: Ethiopia, Mozambique).
  - Lack of institutional mechanisms to approve, update and monitor the strategy (examples: Tanzania, Mongolia, and several others).
  - Limited capacity to develop annual borrowing plans.
- Suggested future TA focus:
  - Linking DMS with annual borrowing plans.
  - Strengthening the overall institutional framework for debt management.
  - Longer-term capacity development that builds on previous TA missions and assesses implementation status of prior recommendations.

### TA Delivery, Effectiveness, and Preferred Modalities
- Countries that received TA from IMF and WB found workshops and international trainings to be most helpful (Figure IV.2f).
- The Debt Management Practitioners’ Program is popular among participants.
- Workshops and international training were slightly preferred for TA delivery, probably due to peer-to-peer learning opportunities.

### TA Components, Shock Scenarios, and Strategy Analysis (Annex V summary)
- TA missions covered the first six steps of the MTDS framework and adapted analyses to country-specific circumstances.
- Incorporation of broader public sector debt and potential liabilities (for example, liabilities of state owned enterprises; potential liabilities from public private partnerships).
- Structural factors and sensitivity factors (for example, collapse in relevant commodity prices) were considered.
- Potential funding sources evaluated included Eurobond issuances and inflation-linked bonds.
- Shock scenarios in the MTDS AT:
  - The AT allows five scenarios, including the baseline, by varying interest and exchange rate risks.
  - Shocks were generally applied in the second year of the MTDS analysis period.
  - Extreme exchange rate shock is usually set at 30 percent; the moderate one at the range of 15–20 percent, against major currencies.
  - In Zambia and Kyrgyz Republic, shocks were calibrated based on historical data where depreciations exceeded those levels.
  - Interest rate shocks were linked to borrowing instruments; baseline projections for capital market instruments were generally based on forward yield curves with shocks applied as parallel shift or change in slope.
  - Loans from multilateral institutions on concessional terms were rarely subjected to interest rate shocks; bilateral loans were considered case by case.
  - Mission teams determined size and timing of shocks in discussion with authorities; sensitive rationale for shocks or probability assessments were often omitted from reports.
- Analysis of borrowing strategies:
  - Alternative strategies identified through discussion with officials.
  - Common trade-off: lengthening maturity of domestic securities (higher cost, lower refinancing risk) versus reliance on short-term securities (lower cost, higher refinancing risk).
  - Desire to gradually extend domestic debt maturity profile.
  - Introduction of new instruments in some countries (examples: inflation-linked bond in Zambia; diaspora bonds and Sukuk in Nigeria).
  - External debt topics commonly included assessing Eurobond issuances and debut Eurobond analysis (examples: Uganda and Ethiopia).
  - Mitigation options to smooth redemption profiles included amortizing bonds (Zambia) and accessing commercial loans (Benin).

### TA Recommendations (selected)
- DMS formulation, implementation, and communication:
  - Publish and update the DMS
  - Align the development of the DMS with the medium-term fiscal framework
  - Ensure that the budget statement includes the DMS approved by the Cabinet
  - Present MTDS analysis to senior management, recommending a specific strategy
  - Extend coverage for future DMS by including explicit guaranteed debt
  - Improve coordination between public debt management units to enable implementation of DMS
  - Increase coordination with Central Bank for the management of foreign currency reserves
  - Increase investor communications
  - Develop an ABP and ensure consistency between the DMS and the ABP
- Cost-risk analysis:
  - Maximize concessional financing
  - Ensure an appropriate balance of concessional and non-concessional financing
  - Closely monitor refinancing risk related to international market issuance
  - Establish broad targets for debt portfolio risk indicators
  - Increase domestic debt issuance, combined with semi-concessional financing to reduce vulnerability
- Institutional:
  - Review debt management laws to clarify objectives, roles, borrowing purposes, and DMS mandate
  - Establish a DMO with front, middle and strong back-office function
  - Improve debt management institutional arrangements by appointing a principal debt management unit
  - Complete a reorganization of the debt management unit and strengthen analytical capacity
  - Appoint and train staff for the central debt management unit
- Data-related:
  - Consolidate and reconcile debt and government guarantees data into a single debt recording system
  - Publish a debt statistical bulletin covering key debt portfolio indicators
  - Enhance monitoring of contingent liabilities
  - Enhance reporting and recording of SOE debt
  - Cover all government accounts
  - Improve capacity in cash flow forecasting
- Market development:
  - Reduce market fragmentation, develop investor base and revise primary dealers’ framework
  - Improve incentives for domestic market development by avoiding administered rates
  - Inform market participants when Treasury bills are issued for deficit financing and for sterilization
  - Establish price reporting of secondary market transactions and strengthen custody arrangements
  - Introduce quarterly auction calendar

### TA Effectiveness, Debt Developments, and Challenges
- Debt-to-GDP ratios increased considerably between 2010 and 2015 in 13 of the 18 select countries, with widely varying amounts; average increase was around 10 percentage points in three years for the sample.
- Countries with high foreign currency debt that suffered substantial currency depreciation (examples: Ghana and Zambia, Mongolia, and Mozambique) saw more significant surges.
- Several countries resorted to Eurobond issuance between 2012–2015 (examples include Zambia (2012), Mongolia (2012), Ethiopia (2014), Kenya (2014), and Cameroon (2015)); some others like Ghana accelerated international market borrowing.
- External debt continues to dominate in countries traditionally reliant on concessional financing (examples: Kyrgyz Republic, Malawi, Mozambique).
- Countries part of a regional currency union (Benin, Ivory Coast) or with more developed domestic markets (Kenya, Vietnam, Pakistan) were able to reduce share of foreign currency denominated debt.
- In the context of increasing debt-to-GDP ratios, 9 of the 18 countries achieved either a risk reduction or stability in management of foreign exchange, interest rate and refinancing risks:
  - Foreign exchange risk decreased or was stable in 12 of the 18 countries.
  - Interest rate risk decreased or was stable in 13 of the 18 countries, mainly due to increased issuance of fixed rate debt.
  - Refinancing risk was reduced in 13 of the 18 countries due to longer maturities, but deteriorated in 5 countries that resorted to shorter maturities in their domestic market.
- Challenges to DMS implementation:
  - Compiling debt portfolio data for analytical purposes posed a hurdle; additional TA on debt recording and basic cost and risk monitoring would be helpful.
  - Deploying skills to utilize the AT was challenging for some low-income countries; a simplified AT for countries with a large share of concessional debt could be easier to implement.
  - Coordination across public sector and institutional mechanisms were needed where SOEs are significant.
  - Capacity development over longer periods and follow-up on prior TA recommendations are important for sustained effectiveness.

### Medium-term shift to domestic financing and country case studies
- Overview:
  - The DMS envisioned a gradual return to greater reliance on domestic financing.
  - Preparatory priorities: deepening the domestic debt market by strengthening the primary and secondary markets; market infrastructure and the operating environment; and risk management practices, with a focus on reducing domestic refinancing risk.
  - Non-resident investors returned in significant volume to Ghana beginning in late 2016, enabling the authorities to implement its strategy to lengthen domestic maturities and reduce refinancing risk.
- Selected country outcomes, analytical details, and shock parameters:
  - Indonesia: Used MTDS AT in 2012; built replica in Matlab; developed deterministic and stochastic in-house models; outcome: substantially increased analytical capacity.
  - Bosnia Herzegovina: Applied MTDS in subnational context; by 2015 all Entities published their DMS.
  - Nigeria: MTDS TA supported analysis of asset and liability portfolios and interaction with fiscal rule tied to a “budget oil price”.
  - Ethiopia: MTDS AT captured SOE-related borrowing; public debt ratio including SOE debt on a steeper upward trajectory.
  - Tanzania: MTDS TA incorporated PPP-like “fixed rental payments” and recommended recognizing such obligations as debt.
  - Kyrgyz Republic: Two TA missions (2011 and 2016); DMS 2015–17 approved and published; shock scenarios: exchange rate shocks set at 40 and 20 percent; external interest rate shock: increase of US Treasury yields by 200 basis points (bps) for a 1-year maturity and 400 bps for a 10-year maturity; domestic interest rates shock: parallel shift of the yield curve by 5 percent.
  - Lebanon: PDD developed first DMS (2014–16); MTDS AT used to analyze extreme and realistic scenarios despite currency peg.
  - Uganda: Two joint missions (April 2013 and December 2015); shock assumptions: exchange rate shocks of 15 and 30 percent in the second year; interest rate shock assumed to materialize in second year, taper in third, then fade away.
  - Vietnam: MTDS TA 2014–2015; noted challenges from approaching middle-income status and fragmented institutional responsibilities.
  - Zambia: Three missions (2009, 2014, 2016); 2014 shocks: extreme 30 percent depreciation vs US dollar in second year, moderate 15 percent vs US dollar; 2016 shocks: extreme and moderate foreign currency shocks of 25 and 50 percent respectively based on kwacha history; interest rate shocks derived from historical data.
- Cross-cutting lessons and policy implications:
  - Strengthening domestic market development (primary market focus, broadening investor base, consolidating benchmarks, secondary market infrastructure) is critical when shifting toward greater reliance on domestic financing.
  - Cost-risk analysis using MTDS AT (and tailored in-house models) supports evidence-based DMS formulation and capacity building in debt management offices.
  - Recognize and incorporate contingent liabilities (SOE debt, PPP-like rental obligations) into debt metrics to avoid misleading sectoral expenditure presentation and to surface vulnerabilities.
  - Scenario and shock design should reflect country history and specific exposures, with explicit parameters documented and applied in analysis.
  - High-level buy-in and programmatic engagement increase the likelihood of DMS implementation and institutional reforms.

*Source: Annex I and related annexes, "The Medium-Term Debt Management Strategy" (MTDS) — Annexes.*

### Annex I. The Role of Debt Management in Economic Policy

### Annex I. The Role of Debt Management in Economic Policy

### A. Role of Debt Management in Macroeconomic and Financial Policy Frameworks
- Effective debt management depends on the macroeconomic and institutional context and is integral to macro and financial stability, and financial and overall development.
- Debt management must be coordinated with other policy areas and balances domestic and external financing of various tenors to meet government funding needs at low overall cost and contained risk.
- The debt management strategy must accommodate forthcoming fiscal financing needs and consider:
  - effects on the size and currency composition of external capital flows;
  - monetary policy and exchange rate regimes;
  - foreign currency reserve levels;
  - the state of development of domestic markets; and
  - financing preferences and balance sheets of the private sector.
- Sound debt management contributes to reduced macro-financial risks and complements:
  - prudent fiscal management;
  - monetary policy implementation.
- Debt management affects monetary policy transmission, market liquidity, and financial market price discovery; it can help reduce crowding out, exchange rate pressures, or large swings in international reserves by covering external public financing requirements and avoiding undue bunching of debt service obligations.
- Debt management contributes to market and institutional development:
  - domestic sovereign debt market development assists banks in liquidity management, provides a saving tool, enables effective central bank monetary policy, and supplies a benchmark yield curve for private sector borrowing;
  - active debt management requires timely and accurate debt and fiscal data;
  - fostering the investor base through predictable issuance and regular communication improves effectiveness;
  - transparency and accountability of debt managers are directly linked to their effectiveness.

### B. The Medium-Term Debt Management Strategy (MTDS) Framework — Steps and Purpose
- The MTDS framework consists of a methodology and an analytical tool (AT) to facilitate sound debt management. A debt management strategy (DMS) operationalizes debt management objectives given constraints and government preferences on cost-risk trade-offs.
- Key steps in formulating an MTDS:
  Step 1. Identify objectives and scope of the MTDS.
  - Identify main objectives (examples):
    - Meet the financing needs;
    - Minimize cost;
    - Maintain risk at a prudent level;
    - Develop the domestic debt market;
    - Establish a reference or benchmark for private sector issuance.
  - Ensure objectives are documented where not set in law.
  - Define scope: central government, general government, or wider public sector; contingent liabilities.
  Step 2. Identify current debt management strategy and cost and risk of existing debt.
  - Provide a benchmark to evaluate alternatives.
  - Identify outstanding debt and composition; determine debt servicing profile.
  - Calculate basic cost and risk indicators; identify sources of vulnerability.
  Step 3. Identify and analyze potential funding sources, including cost and risk characteristics.
  - List existing and potential instruments (domestic and external) and describe financial characteristics.
  - Evaluate potential quantum of borrowing available through each instrument/creditor type.
  - Identify constraints impeding availability of funding.
  - Discuss instruments by cost/risk characteristics.
  Step 4. Identify baseline projections and risk in key policy areas—fiscal, monetary, external and market.
  - Identify baseline medium-term projections for key fiscal and monetary policy variables.
  - Identify external constraints relevant for MTDS formulation:
    - anticipated change in exchange rate or capital account regime;
    - required financing of international reserves.
  - Identify baseline medium-term projections for market rates.
  - Clarify assumptions about likely pricing of non-market instruments based on creditor information and other sources.
  - Determine specific risk scenarios (including those identified in DSF and shocks to global liquidity conditions).
  Step 5. Review longer-term structural factors.
  - Set out long-run structural features to consider (examples):
    - Commodity price vulnerability;
    - Access to concessional financing;
    - Trends in real effective exchange rate;
    - Inflation trends.
  Step 6. Assess and rank alternative debt management strategies on cost-risk trade-off.
  - For alternative strategies:
    - Assess cost changes under various risk scenarios;
    - Assess mitigation of portfolio vulnerabilities;
    - Assess how each meets primary and secondary debt management objectives;
    - Assess feasibility given potential funding sources.
  Step 7. Review implications with fiscal and monetary policy authorities, and for market development.
  - Outline preferred and candidate strategies to fiscal and monetary authorities; discuss interactions; confirm debt sustainability indicators align with DSA.
  - Review potential debt market implications with financial market authorities where relevant.
  Step 8. Propose and approve the MTDS.
  - Document preferred and a small number (e.g., one or two) alternative strategies and why preferred is superior.
  - Clearly describe key associated costs and risks and relationship with broad objectives.
  - Present proposal to the highest responsible authority and agree the MTDS.
  - Once determined, disseminate the agreed MTDS.

### C. DeMPA Framework and Results (Diagnostic Tool Findings)
- DeMPA overview:
  - DeMPA assesses government debt management through performance indicators.
  - Launched February 2008; revised 2009 and 2014.
  - Current DeMPA comprises 14 debt management performance indicators (DPIs) and 33 subordinate dimensions spanning five core areas:
    - Governance and strategy development;
    - Coordination with macroeconomic policies;
    - Borrowing and related financing activities;
    - Cash flow forecasting and cash balance management;
    - Debt recording and operational risk management.
- Coverage and impact:
  - By end-2016, 113 DeMPA missions fielded in 78 countries; 31 countries received repeated assessments.
  - More than 80 percent of beneficiary countries are low or lower-middle income countries.
  - DeMPA findings contributed to debt management reform plans in over 46 countries focusing on institutional arrangements, governance and managerial structure, formulation of debt strategies, improved domestic markets, and mitigating operational risk.
- Results for countries with repeated DeMPAs (Table III.1 summary; In percent):
  - Overall: Up-grade 16; Down-grade 8; Stable 69; Share of score A, B, or C Latest DeMPA 37; First DeMPA 29.
  - I. Governance and Strategy Development: Up-grade 15; Down-grade 8; Stable 65; Share A/B/C Latest 39; First 29.
  - II. Coordination w/ Macroeconomic Policies: Up-grade 19; Down-grade 15; Stable 61; Share A/B/C Latest 58; First 57.
  - III. Borrowing and Related Financing Activities: Up-grade 12; Down-grade 4; Stable 74; Share A/B/C Latest 33; First 27.
  - IV. Cash Flow Forecasting and Cash Balance Management: Up-grade 6; Down-grade 5; Stable 87; Share A/B/C Latest 13; First 15.
  - V. Debt Recording and Operational Risk Management: Up-grade 21; Down-grade 9; Stable 69; Share A/B/C Latest 30; First 17.
- Observations:
  - Coordination with macroeconomic policies generally relatively strong.
  - Improvements seen in governance (including the DMS indicator) and borrowing operations capacity.
  - Significant improvements in debt recording and operational risk management, though these remain weak in several debt offices.
  - Cash flow forecasting and cash balance management show weak and stagnant scores, suggesting technical capacity deficits and deeper structural budget formation and execution issues.
- Subnational DeMPA:
  - Subnational DeMPA (August 2012; revised December 2016) comprises 13 DPIs and 31 dimensions.
  - Applied to 15 subnational governments (five in Sub-Saharan Africa, three in South Asia, two in LAC, two in EAP).
  - Results reveal significant gaps in most key debt management areas except debt recording, legal frameworks, and managerial structure.
  - Note: small sample that may be biased toward countries with highly developed institutional arrangements for subnational debt management.

### D. Questionnaire Results on Debt Management Strategy Capacity
- Survey design:
  - A questionnaire was sent to 110 countries (including those not benefiting from MTDS TA) covering six broad areas.
  - Of the 110 countries, 62 responded, of which 37 received MTDS TA.
- Key findings:
  1. Presence of formal DMS:
    - Most countries indicated having a formal debt management strategy.
    - For those without one, lack of expertise and limited human resources were cited as main reasons.
    - Many without a formal DMS reported a passive strategy that maximized concessional borrowing before resorting to domestic debt issuance.
  2. Publication of DMS:
    - Majority confirmed publication of DMS reports.
    - DMS documents are regularly published either as independent documents or as attachments to the annual budget.
    - Publication promotes transparency and accountability and can strengthen the debt manager’s position to implement strategy and facilitate communication with market participants and stakeholders.
  3. Legal framework and approval:
    - In many cases, DMS formulation was underpinned by a dedicated legal framework.
    - One third of respondents confirmed a legal requirement to prepare a DMS.
    - Approval by highest authorities (Cabinet, Council of Ministries, or Minister of Finance) was obtained in almost all cases.
  4. Diversity of DMS features:
    - Cost and risk features of existing debt portfolios principally determined countries’ DMS choices.
    - Market risks ranked top: refinancing, exchange rate, interest rate, and liquidity risks; contingent liabilities followed.
    - Operational risk was highlighted as a source of risk for government bond market functioning.
    - Horizon of DMS typically 3 years; period ranged from 3 to 5 years with annual reviews in many cases; low-income countries reviewed less frequently.
    - Default debt coverage was central government debt; a few countries used consolidated public sector debt; inclusion of guaranteed loans was rare.

*Source: Annex I and related annexes, "The Medium-Term Debt Management Strategy" (MTDS) — Annexes.*

### 5.      The execution of a strategy largely depended on the capacity to develop an annual

### pp072817-annexes-the-medium-term-debt-management-strategy - 5.      The execution of a strategy largely depended on the capacity to develop an annual

### Execution of DMS and Annual Borrowing Plans (ABP)
- Execution of a strategy largely depended on the capacity to develop an annual borrowing plan (ABP) (Figure IV.2d).
- Some countries planned their ABP based on the adopted DMS, but actual borrowing diverged due to factors outside the control of debt managers:
  - fiscal slippage
  - delay in implementation of large projects
  - ministerial decisions
- Some countries indicated lack of capacity to develop an ABP consistent with the debt management strategy as a reason for inconsistent ABP with that of DMS.
- Execution of DMS through an ABP is less common in the low and lower middle income countries, in part due to factors outside the control of debt managers.

### Usefulness and Challenges of the MTDS Analytical Tool (AT)
- The formulation of MTDS was often supported by quantitative analysis, including utilization of the MTDS AT (Figure IV.2e).
- Countries that did not use the MTDS AT reported owning an internal quantitative model.
- Reported benefits and challenges of MTDS AT:
  - Helpful tool for countries that used it.
  - Challenging aspects included:
    - projecting baseline interest and exchange rates
    - determining shock scenarios
    - ensuring consistency with the macroeconomic framework
  - The main challenge in using the MTDS AT was the difficulty of obtaining fiscal and macroeconomic data and the time it took to set up the AT.
- Looking ahead, linking the MTDS AT with the macro framework and guidance on strategy identification would be important to assist users of the tool.

### Capacity Constraints, Staffing, and Institutional Issues
- Understaffing and lack of technical expertise contribute to the challenge debt management offices face in developing a DMS.
- High staff turnover meant retention of capacity was a recurring challenge; debt management offices were seldom fully staffed.
- Lack of support from higher management was another challenge reportedly faced by debt management offices.
- Some countries had an approved DMS but were unable to execute it due to:
  - Significant SOE involvement requiring better coordination within the public sector (examples: Ethiopia, Mozambique).
  - Lack of institutional mechanisms to approve, update and monitor the strategy (examples: Tanzania, Mongolia, and several others).
  - Limited capacity to develop annual borrowing plans.
- Suggested future TA focus:
  - Linking DMS with annual borrowing plans.
  - Strengthening the overall institutional framework for debt management.
  - Longer-term capacity development that builds on previous TA missions and assesses implementation status of prior recommendations.

### TA Delivery, Effectiveness, and Preferred Modalities
- Countries that received TA from IMF and WB found workshops and international trainings to be most helpful (Figure IV.2f).
- The Debt Management Practitioners’ Program is popular among participants.
- Workshops and international training were slightly preferred for TA delivery, probably due to peer-to-peer learning opportunities.

### TA Components, Shock Scenarios, and Strategy Analysis (Annex V summary)
- TA missions covered the first six steps of the MTDS framework and adapted analyses to country-specific circumstances.
- Incorporation of broader public sector debt and potential liabilities (for example, liabilities of state owned enterprises; potential liabilities from public private partnerships).
- Structural factors and sensitivity factors (for example, collapse in relevant commodity prices) were considered.
- Potential funding sources evaluated included Eurobond issuances and inflation-linked bonds.
- Shock scenarios in the MTDS AT:
  - The AT allows five scenarios, including the baseline, by varying interest and exchange rate risks.
  - Shocks were generally applied in the second year of the MTDS analysis period.
  - Extreme exchange rate shock is usually set at 30 percent; the moderate one at the range of 15–20 percent, against major currencies.
  - In Zambia and Kyrgyz Republic, shocks were calibrated based on historical data where depreciations exceeded those levels.
  - Interest rate shocks were linked to borrowing instruments; baseline projections for capital market instruments were generally based on forward yield curves with shocks applied as parallel shift or change in slope.
  - Loans from multilateral institutions on concessional terms were rarely subjected to interest rate shocks; bilateral loans were considered case by case.
  - Mission teams determined size and timing of shocks in discussion with authorities; sensitive rationale for shocks or probability assessments were often omitted from reports.
- Analysis of borrowing strategies:
  - Alternative strategies identified through discussion with officials.
  - Common trade-off: lengthening maturity of domestic securities (higher cost, lower refinancing risk) versus reliance on short-term securities (lower cost, higher refinancing risk).
  - Desire to gradually extend domestic debt maturity profile.
  - Introduction of new instruments in some countries (examples: inflation-linked bond in Zambia; diaspora bonds and Sukuk in Nigeria).
  - External debt topics commonly included assessing Eurobond issuances and debut Eurobond analysis (examples: Uganda and Ethiopia).
  - Mitigation options to smooth redemption profiles included amortizing bonds (Zambia) and accessing commercial loans (Benin).

### TA Recommendations (selected)
- DMS formulation, implementation, and communication:
  - Publish and update the DMS
  - Align the development of the DMS with the medium-term fiscal framework
  - Ensure that the budget statement includes the DMS approved by the Cabinet
  - Present MTDS analysis to senior management, recommending a specific strategy
  - Extend coverage for future DMS by including explicit guaranteed debt
  - Improve coordination between public debt management units to enable implementation of DMS
  - Increase coordination with Central Bank for the management of foreign currency reserves
  - Increase investor communications
  - Develop an ABP and ensure consistency between the DMS and the ABP
- Cost-risk analysis:
  - Maximize concessional financing
  - Ensure an appropriate balance of concessional and non-concessional financing
  - Closely monitor refinancing risk related to international market issuance
  - Establish broad targets for debt portfolio risk indicators
  - Increase domestic debt issuance, combined with semi-concessional financing to reduce vulnerability
- Institutional:
  - Review debt management laws to clarify objectives, roles, borrowing purposes, and DMS mandate
  - Establish a DMO with front, middle and strong back-office function
  - Improve debt management institutional arrangements by appointing a principal debt management unit
  - Complete a reorganization of the debt management unit and strengthen analytical capacity
  - Appoint and train staff for the central debt management unit
- Data-related:
  - Consolidate and reconcile debt and government guarantees data into a single debt recording system
  - Publish a debt statistical bulletin covering key debt portfolio indicators
  - Enhance monitoring of contingent liabilities
  - Enhance reporting and recording of SOE debt
  - Cover all government accounts
  - Improve capacity in cash flow forecasting
- Market development:
  - Reduce market fragmentation, develop investor base and revise primary dealers’ framework
  - Improve incentives for domestic market development by avoiding administered rates
  - Inform market participants when Treasury bills are issued for deficit financing and for sterilization
  - Establish price reporting of secondary market transactions and strengthen custody arrangements
  - Introduce quarterly auction calendar

### TA Effectiveness, Debt Developments, and Challenges
- Debt-to-GDP ratios increased considerably between 2010 and 2015 in 13 of the 18 select countries, with widely varying amounts; average increase was around 10 percentage points in three years for the sample.
- Countries with high foreign currency debt that suffered substantial currency depreciation (examples: Ghana and Zambia, Mongolia, and Mozambique) saw more significant surges.
- Several countries resorted to Eurobond issuance between 2012–2015 (examples include Zambia (2012), Mongolia (2012), Ethiopia (2014), Kenya (2014), and Cameroon (2015)); some others like Ghana accelerated international market borrowing.
- External debt continues to dominate in countries traditionally reliant on concessional financing (examples: Kyrgyz Republic, Malawi, Mozambique).
- Countries part of a regional currency union (Benin, Ivory Coast) or with more developed domestic markets (Kenya, Vietnam, Pakistan) were able to reduce share of foreign currency denominated debt.
- In the context of increasing debt-to-GDP ratios, 9 of the 18 countries achieved either a risk reduction or stability in management of foreign exchange, interest rate and refinancing risks:
  - Foreign exchange risk decreased or was stable in 12 of the 18 countries.
  - Interest rate risk decreased or was stable in 13 of the 18 countries, mainly due to increased issuance of fixed rate debt.
  - Refinancing risk was reduced in 13 of the 18 countries due to longer maturities, but deteriorated in 5 countries that resorted to shorter maturities in their domestic market.
- Challenges to DMS implementation:
  - Compiling debt portfolio data for analytical purposes posed a hurdle; additional TA on debt recording and basic cost and risk monitoring would be helpful.
  - Deploying skills to utilize the AT was challenging for some low-income countries; a simplified AT for countries with a large share of concessional debt could be easier to implement.
  - Coordination across public sector and institutional mechanisms were needed where SOEs are significant.
  - Capacity development over longer periods and follow-up on prior TA recommendations are important for sustained effectiveness.

*Source: pp072817-annexes-the-medium-term-debt-management-strategy (Annex V excerpt).*

### 14.      Over the medium-term, the DMS envisioned a gradual return to greater reliance on

### 14.      Over the medium-term, the DMS envisioned a gradual return to greater reliance on domestic financing

### Overview
- The DMS envisioned a gradual return to greater reliance on domestic financing.
- Preparatory priorities: deepening the domestic debt market by strengthening the primary and secondary markets; market infrastructure and the operating environment; and risk management practices, with a focus on reducing domestic refinancing risk.
- Non-resident investors returned in significant volume to Ghana beginning in late 2016, enabling the authorities to implement its strategy to lengthen domestic maturities and reduce refinancing risk.

### Country case studies — key findings, outcomes, and lessons learned

- Indonesia
  - Used the MTDS AT as a springboard to develop in-house tools for cost-risk analysis.
  - The Directorate General of Financing and Risk Management applied the MTDS AT in 2012 and then built a replica in Matlab.
  - Developed a deterministic model with greater granularity and a stochastic version; both models were applied side by side.
  - Outcome: substantially increased analytical capacity in the debt management office.

- Bosnia Herzegovina (BiH)
  - MTDS framework and AT applied in a subnational context with decentralized governance (two Entities: Federation of BiH (FBiH) and Republika Srpska (RS) having constitutional borrowing rights).
  - Adopted a “bottoms up” approach: Entity-level borrowing strategies dictated the State-level strategy.
  - Outcome: improvements in borrowing stance and debt management practices at the Entity level; by 2015 all Entities published their DMS; by late 2016 RS presented its 2017 auction calendar to investors after FBiH had adopted the practice.

- Nigeria
  - MTDS TA supported analysis of central government asset and liability portfolios.
  - Nigeria’s fiscal rule: fiscal revenue derived by a predetermined “budget oil price”; excess revenue when realized oil price is above budget oil price saved in a fund.
  - MTDS mission illustrated analysis of public debt path accounting for asset accumulation and how net debt evolved under different budget oil price assumptions and relative interest rates on assets and liabilities.
  - Outcome: generated discussions on when asset accumulation might make sense (despite cost of carry) and when to reduce the size of the balance sheet.

- Ethiopia
  - MTDS AT captured debt management issues related to SOEs, which play a critical role in public investments and borrowing.
  - Central government fiscal framework comprises a small portion of total public expenditure execution.
  - Vulnerabilities higher when including SOE debt due to reliance on commercial debt versus concessional central government borrowing.
  - Public debt ratio including SOE debt on a steeper upward trajectory.

- Tanzania
  - MTDS TA incorporated public-private partnership transactions into analysis.
  - Government had accumulated debt-like obligations where pension funds built structures leased to government with “fixed rental payments” over 15 years, transferring ownership at end of period.
  - “Fixed rental payments” effectively comprised interest and principal but were not recognized upfront as stock of debt; expenditures appeared under health and education rather than interest.
  - Outcome: MTDS assistance demonstrated benefits of recognizing these obligations as debt, reclassifying expenditures from hospital and education to interest payments, and supported authorities’ decision to cease similar opaque deals.

- Kyrgyz Republic
  - Received two TA missions (2011 and 2016) delivering training in cost-risk analysis and applying the MTDS AT; latter assisted in updating the DMS.
  - DMS covering 2015–17 was approved by Cabinet and published; guidelines included lengthening maturity profile and informing annual financing plans by market consultations.
  - Modeling: yield curves (spot and forward) based on US Treasury yield curves; credit spread applied for credit risk; exchange rate risk based on expected inflation differentials refined to allow gradual depreciation in line with Ministry of Finance forecast.
  - Shock scenarios (applied in second year): exchange rate shocks set at 40 and 20 percent; external interest rate shock based on increase of US Treasury yields by 200 basis points (bps) for a 1-year maturity and 400 bps for a 10-year maturity; domestic interest rates shock spanning 2016 and 2017 assumed a parallel shift of the yield curve by 5 percent.
  - Key issues and outcomes:
    - DMS development provided guidance for borrowing decisions.
    - Narrow investor base impeded development of domestic government securities market and consolidation of securities into fewer lines.
  - Lessons learned:
    - Given concessional debt have long maturities, currency shocks may have only a mild effect on debt service cash flows, but the effect on debt size can be more significant.
    - Missions should assess potential development of domestic government securities market with focus on primary market; short-term cost perspective may not favor market-based borrowing given access to concessional funding, but longer-term benefits may justify it.
    - Cost-risk analysis can increase awareness of debt portfolio risks and importance of developing government securities markets in medium term.

- Lebanon
  - TA supported establishment of a debt management unit in the Ministry of Finance; program consisted of 4–5 peripatetic visits per year, hiring local junior consultants, and remote assistance.
  - PDD developed first DMS (2014–16) and published it after approval by the High Debt Committee; annual borrowing plan presented.
  - MTDS AT provided analytical foundation; analysis investigated extreme and realistic scenarios; risks analyzed with and without currency shocks despite the currency peg.
  - Key issues and outcomes:
    - Challenging political context for public debt management and TA delivery; publication of DMS based on detailed MTDS analysis was a major development.
    - Borrowing plans and debt issuance aligned with the DMS.
    - Technical achievements: creation of integrated debt management unit with centralized back-office and new front and middle offices; capacity built on MTDS and issuance of domestic securities; some staff gained expertise in MTDS AT.
  - Lessons learned:
    - A programmatic approach can be very effective.
    - Solid implementation of DMS requires strong high-level support; approval for implementation should be sought from decision-makers prior to TA delivery.

- Uganda
  - Two joint IMF-World Bank MTDS missions (April 2013 and December 2015); 2015 mission aimed to strengthen capacity and update DMS.
  - Legal framework requires annual reporting to Parliament evaluating debt management activities against the DMS; DMS updated annually since first formulation in 2013.
  - DMS objectives include evaluation of costs and risk trade-offs for all borrowings.
  - 2015 cost-risk analysis concentrated on reducing both cost and risk by maximizing (semi-) concessional financing, but 2015–2020 strategy anticipated gradual increase in non-concessional borrowing.
  - MTDS mission highlighted other borrowing strategies might become unavoidable: Eurobond issuance, more and longer domestic financing.
  - Shock assumptions: exchange rate shocks were standard DSA shocks of 15 and 30 percent in the second year; interest rate shock assumed to materialize in second year, taper in third, then fade away.
  - Key issues and outcomes:
    - Authorities capable of formulating a comprehensive DMS; DMS formally approved and published.
    - Access to concessional financing expected to decline as Uganda’s per capita income surpassed concessional eligibility criteria, prompting analysis of Eurobond issuance.
    - Issuance of domestic debt constrained by local market absorption capacity, particularly appetite for longer maturities.
  - Lessons learned:
    - Domestic market development issues should be addressed.

- Vietnam
  - DMS development part of programmatic TA; World Bank launched medium-term TA in January 2014 with DMS a component alongside process/procedure revisions and debt management law review.
  - MTDS TA delivered in 2014 and 2015.
  - Prime Minister formally approved the Public Debt and National External Debt Strategy over 2011–2020 and “Vision toward 2030”; MTDS workshop focused on 2015–2020 six-year analysis.
  - Key issues and outcomes:
    - As Vietnam approaches middle-income status, concessional and semi-concessional financing could become scarce.
    - Fragmented institutional responsibilities for debt management presented challenges for DMS formulation and implementation.
  - Lessons learned:
    - MTDS missions should, when relevant, widen scope beyond strict cost-risk analysis to include domestic market development issues.
    - A current multi-year program can be especially effective.

- Zambia
  - Three MTDS missions (2009, 2014, 2016) focused on MTDS capacity building for technical staff.
  - 2014 strategies considered more domestic financing, domestic maturity extension, and Eurobond issuance.
  - 2016 strategy started with maximum (semi-) concessional financing and considered domestic inflation-linked bonds, lengthening average domestic maturity, Eurobond issuance, and domestic market capacity.
  - Shock parameter differences:
    - 2014 extreme exchange rate shock: 30 percent depreciation against US dollar in second year; moderate shock 15 percent versus US dollar; moderate shock also considered against Chinese yuan.
    - 2016 mission used extreme and moderate foreign currency shocks of 25 and 50 percent respectively based on kwacha history.
    - Interest rate shocks derived from historical data.
  - Key issues and outcomes:
    - Ministry’s debt management unit produced its own DMS in 2008 and 2014.
    - Challenges noted in debt recording and reporting despite investment in DMFAS 6.
    - 2016 attention to domestic debt market development: broaden investor base, strengthen benchmarks, develop secondary market including central bank trading platform.
    - Lack of progress largely attributed to deterioration in macro-fiscal conditions leading to doubling of public debt; reduction of foreign currency risk hampered by domestic market absorption capacity, constraining issuance of longer maturities or larger amounts.
  - Lessons learned:
    - Give due attention to debt data collection and preparation prior to MTDS missions.
    - Implementation of DMS needs detailed addressing.
    - Strong early commitment from senior officials contributes to better DMS implementation.
    - A programmatic approach combining different types of training may enhance effectiveness and establish stronger up-front support from authorities.

### Cross-cutting lessons and policy implications
- Strengthening domestic market development (primary market focus, broadening investor base, consolidating benchmarks, secondary market infrastructure) is critical when shifting toward greater reliance on domestic financing.
- Cost-risk analysis using MTDS AT (and tailored in-house models) supports evidence-based DMS formulation and capacity building in debt management offices.
- Recognize and incorporate contingent liabilities (SOE debt, PPP-like rental obligations) into debt metrics to avoid misleading sectoral expenditure presentation and to surface vulnerabilities.
- Scenario and shock design should reflect country history and specific exposures (exchange rate shocks, interest rate shocks, credit spreads), with explicit parameters documented and applied in analysis.
- High-level buy-in and programmatic engagement increase the likelihood of DMS implementation and institutional reforms.

*Source: MEDIUM-TERM DEBT MANAGEMENT STRATEGY––ANNEXES (selected excerpts).*

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_Source: https://www.imf.org/-/media/files/publications/pp/2017/pp072817-annexes-the-medium-term-debt-management-strategy.pdf_