## _032707m ## Source details **Canonical URL:** [_032707m](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/2007/eng/_032707m.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/2007/eng/_032707m.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/2007/eng/_032707m.pdf.json) --- ### Executive Summary — Background and Emerging Trends - In 2001, the World Bank and the IMF developed and disseminated sound practices in public debt management (PDM); a joint Bank-Fund pilot program ran in 2002 covering 12 countries: Bulgaria, Colombia, Costa Rica, Croatia, Indonesia, Kenya, Lebanon, Nicaragua, Pakistan, Sri Lanka, Tunisia, and Zambia. - Definition: PDM is the framework, system or process within which the required amount of government funding is raised, in a manner that is consistent with the authorities’ risk and cost objectives, and which meets any other debt management goals set by the government. - Box 1 — Six Principles of Sound Practice in Public Debt Management: - Debt management objectives and coordination; Transparency and accountability; Institutional framework; Debt management strategy; Risk management framework; Development and maintenance of an efficient market for government securities. - Observed structural improvements: - Maturity profiles lengthened for domestic debt and international bond issues; over 2001-05 the average maturity of international issues for a sample of 18 emerging market countries increased from 8 to 13 years. - Several countries reduced reliance on foreign currency debt (examples: Brazil, Colombia, Mexico, Peru, and Thailand). - Issuance of more fixed rate debt in Brazil, Indonesia, Peru, and Mexico. - Use of debt exchanges or swap transactions to transform debt profiles (examples: Colombia, Mexico, Tunisia, and Uruguay). - Despite improvements, debt levels remain high and continue to represent significant sovereign risk; maintaining debt at sustainable levels remains necessary. - Development and publication of MTDS noted in several MICs (examples: Brazil, Bulgaria, Colombia, Costa Rica, Czech Republic, Hungary, Indonesia, Peru, Poland, Mexico, and Turkey); few LICs publish MTDS (examples: Tanzania and Papua New Guinea), and those published often lack systematic cost-and-risk analysis and are limited to external debt. - Market-development actions: benchmark bonds, publishing auction schedules, primary dealer systems; strengthened regulatory and legal environments in some countries. - Trend: proportion of emerging market domestic public debt maturing in less than a year declined across regions. ### Debt Management: Key Policy, Institutional and Operational Challenges - Priority reform areas: - Developing comprehensive MTDS: many MICs and most LICs are at an early stage. - Establishing effective governance frameworks and building institutional capacity; capacity constraints often acute in LICs. - Managing risk of re-accumulation of unsustainable debt in LICs that received HIPC and MDRI debt relief. - Fragmentation and data needs: - Fragmentation of debt management responsibilities persists; domestic and foreign debt may be managed separately; quasi-fiscal debt often managed by central banks (examples: Chile, Costa Rica, Guatemala, and Nicaragua). - Need for consolidated public debt databases—even when responsibilities are fragmented (example: Nicaragua). - Need for greater transparency and communication of debt composition and risk profiles (improvements noted in Colombia, Indonesia, Jamaica, Lebanon, Tunisia, Turkey, Sri Lanka, and Zambia). - Market and operational impediments: - Many MICs and LICs require substantial public debt market reforms to deepen liquidity and reduce interest rate volatility. - Institutional innovations observed: semi-autonomous debt management agencies (examples: Nigeria and Hungary) and consolidated PDM units (examples: Colombia, Indonesia, and Uruguay). - Policy implication: focus on maintaining debt sustainability and implementing MTDS that systematically analyze cost and risk; strengthen governance, capacity, and coordination between fiscal, monetary, and debt management functions. ### The Special Case of LICs - LIC-specific challenges: - Few LICs publish comprehensive MTDS; those that do often limit strategies to external debt and lack systematic cost-risk analysis (examples: Tanzania and Papua New Guinea). - Post-HIPC and MDRI environments create increased borrowing space, heightening the need for robust PDM frameworks to prevent re-accumulation of unsustainable debt. - The World Bank Independent Evaluation Group review of the HIPC Initiative indicates potential deterioration in PDM quality in some LICs. - Consequence: increased borrowing capacity without robust frameworks risks imprudent borrowing and debt sustainability problems. ### Bank and Fund Support — Historical and Forward Program - Historical joint outputs: Guidelines for Public Debt Management (March 2001; revised December 2003), Handbook (July 2001), Accompanying Document (2003) with 18 case studies; pilot program insights published in Managing Public Debt: From Diagnostics to Reform Implementation and Developing the Domestic Government Debt Market: From Diagnostics to Reform Implementation, World Bank, 2007. - Forward program highlights: - Continued Bank-Fund support with intensified efforts for LICs. - Special effort to support development and implementation of effective MTDS in LICs comprising joint Bank-Fund capacity building work over an initial 4-year period (2008–2011). - Periodic measurement of debt management performance will complement joint work to track progress. - Modes of support: respond to individual country demand, undertake capacity building and knowledge dissemination, and monitor and analyze financial risks in debt structures. ### A. Developing a Medium-Term Debt Management Strategy (MTDS) - Purpose and scope: - MTDS guides new financing decisions and other portfolio operations to meet debt management objectives; should identify desired portfolio composition considering cost-risk trade-offs and other policy settings. - Coverage and practice: - Almost all OECD countries have a published debt management strategy; only half the sampled developing countries have a debt management strategy and even fewer publish it. - 2006 BDM survey: sample of 71 countries; 61 percent of OECD countries express their strategies as targets or benchmarks compared to 38 percent in the case of the non OECD countries surveyed. - Shortcomings where de facto strategies used: - Trade-offs between foreign currency concessional loans and domestic debt often not adequately taken into account (examples: Kenya, Pakistan, Sri Lanka and Zambia). - Actions to reduce risk or cost in one sub-portfolio conflicted with another (example: Pakistan). - Short-term expediency sometimes outweighed prudent risk management (example: Sri Lanka). - Excessive use of short-term financing because of lower immediate cost but higher rollover and interest rate risk. - Key elements and challenges: - Formalizing practices highlights constraints (monetary/fiscal credibility, market development, institutional shortcomings). - Evaluating costs and risks requires systematic frameworks; LICs must account for exogenous risks (terms of trade shocks, aid volatility). - MTDS should be within a rigorous MTFF; many countries have not linked MTFF with annual budget process. - Integrating debt strategy analysis within a DSA can link impacts of key variable variations on long-term macro-fiscal projections. - Fiscal policy is the principal tool for solvency; debt management mitigates liquidity crises and reduces costs and risks but cannot assure solvency alone. - DSA and debt strategy analysis interplay: - DSF/DSA provide objective assessment of debt sustainability and stress tests; DSA often simplifies yield curve/term structure effects. - Debt strategy analysis can explicitly model market risk variables and present outputs in nominal debt servicing costs within budgetary context. - Complementarity exists; efficiency gains if same agent conducts both analyses—particularly relevant in LICs. - Cash management and operational considerations: - Effective cash management reduces cost and mitigates liquidity/rollover risk; weak cash management impedes debt objectives. - Problems: proliferation of government bank accounts, large cash balances, cash rationing, borrowing from central bank; TSA implementation challenges in LICs. - Independence between debt management and monetary policy desirable but often infeasible in weak institutional settings (examples: Kenya, Pakistan, Sri Lanka, Zambia). - Central bank issuance of its own securities to control liquidity or finance quasi-fiscal deficits may undermine monetary policy credibility (examples: Costa Rica, Indonesia, Nicaragua). - Contingent liabilities: - Few countries incorporate explicit and implicit contingent liabilities into debt strategies. - Explicit guarantees can be significant fiscal risks, particularly in LICs and with PPP reliance. - Regular recording and monitoring of guarantees recommended; valuation techniques exist but no common methodology to reflect such risks in MTDS. - Implicit contingent liabilities (e.g., bank sector vulnerability) present similar valuation challenges. ### B. Governance Arrangements and Capacity - Governance and legal framework: - Effective PDM governance should delineate roles and responsibilities, include checks and balances, clear reporting lines, and ensure accountability and transparency. - Many legal frameworks do not fully support effective PDM: - Laws enacted at different times specify different levels of borrowing oversight (examples: Colombia, Costa Rica, Kenya, Lebanon, Mongolia, Panama, Tunisia). - Multiple authorities to borrow in some countries (examples: Lebanon and Sri Lanka). - Budget laws may set sub-limits that impede instrument choice and risk management (examples: Indonesia, Lebanon, Sri Lanka). - Minimal disclosure/reporting requirements affect transparency and market efficiency (examples: Côte d’Ivoire and Dominican Republic). - Institutional reform experience: - Constitutional or political constraints can impede legal reform (example: Tunisia). - Some countries consolidated legislation into budget system laws or debt management laws (examples: Bulgaria, Nicaragua, Serbia). - Secondary regulation used to implement urgent reform but can add fragmentation (examples: Colombia, Indonesia). - Organizational arrangements: - Fragmentation across ministries and departments raises coordination and information costs (examples: Costa Rica, Croatia, El Salvador, Indonesia, Kenya, Kazakhstan, Lebanon, Pakistan, Romania, Zambia). - Central bank roles as agent often not clearly defined; de facto central bank involvement can cause policy conflicts (example: Zambia). - Consolidation experiences mixed: ministry consolidation (examples: Brazil, Uruguay); separate debt offices (examples: Hungary, Nigeria); transfers from central banks difficult in some cases (examples: Costa Rica, Nicaragua, Sri Lanka); coordination offices/committees used (examples: Pakistan, Costa Rica). - Operational risk and procedures: - Need for systematic operational risk management; weaknesses include lack of segregation of duties, absence of codes of conduct, inadequate written procedures. ### Multilateral Initiatives, Debt Statistics, and Capacity Constraints - TFFS outputs and milestones: - External Debt Guide (2003); QEDS (2004); ED DQAF (June 2005); Fund public sector debt statistics initiative (2005); JEDH launched March 2006. - Capacity building: since May 2002, over 500 government officials from about 140 emerging markets and low income countries trained in external debt statistics compilation. - TFFS composition: BIS, ComSec, Eurostat, ECB, IMF, OECD, Paris Club Secretariat, World Bank, UNCTAD; chaired by IMF. - Observed impact and limits: advances in external debt statistics availability, but some countries still lack well functioning debt recording/reporting systems (examples: Kenya, Zambia). - Capacity issues in debt units: - Staff shortages, IT systems capacity problems; short-run responses increase key person risk. - Remedies used: training (examples: Brazil, Colombia); incentives (example: Indonesia); fixed-term hires (example: Uruguay). - IT projects must align with business processes; incremental improvements can help (example: Nicaragua). - Domestic public debt market development: - Supply-side measures: benchmark bonds (Brazil, Costa Rica, Mexico, Tunisia); replace non-marketable bonds (Brazil, Bulgaria, Croatia, Indonesia, Tunisia); predictable issuance and public financing plans (Brazil, Bulgaria, Colombia, Mexico, Turkey); primary dealer systems (Brazil, Mexico, Turkey). - Demand-side measures: diversify investor base (Mexico, Turkey); retail debt programs (Indonesia); investor relations programs emphasizing transparency (Brazil, Mexico, Turkey). - Impediments: - Underdeveloped money markets, central bank issuance fragmenting markets, weak incentives to trade, asset valuation difficulties. - Financial stability: - Empirical note: in 2004 banks provided above one third of domestic financing for a sample of 18 large EM countries. - Risks from under-developed markets: reduced ability of banks to liquidate positions, lower asset quality, pricing distortions. ### LIC Comparative Statistics and Risks (2005) - Creditor composition of long-term PPG external debt: - LICs: Multilateral, 47%; Bilateral, 38%; Private, 15%. - MICs: Multilateral, 21%; Bilateral, 24%; Private, 55%. - Concessionality of long-term PPG external debt: - LICs, 2005: Concessional, 71%; Non-Concessional, 29%. - MICs, 2005: Concessional, 21%; Non-Concessional, 79%. - Implications: - As of 2005, multilateral and official bilateral creditors made up over 80 percent of public and publicly guaranteed external debt of LICs. - Over 70 percent of LIC external debt was concessional (grant element ≥ 35 percent definition). - Past reliance on concessional sources limited interest rate risk but increased currency risk. - Domestic debt and market development: - Domestic debt often accumulates passively; high external financing with low absorptive capacity may require domestic issuance to sterilize inflows, not conducive to market development. - Figure 4 sample sizes: Average Period Sample Size = 36.5 for domestic debt/GDP; LIC average period sample size = 29.9; MIC average period sample size = 42.0. - LIC-specific operational risks: weak organizational arrangements, vulnerability to natural disasters, loss of institutional memory, commodity price shocks, aid volatility. - Survey of 24 HIPC documents shows significant gaps in basic debt management capacity persisting through HIPC and MDRI rounds. - Market developments: Emerging Markets Traders Association data indicate sub-Saharan African debt traded in 2006 more than doubled that in 2005, increasing urgency for MTDS capacity. ### Implications of Access to Non-Concessional Financing (portfolio management and risks) - New borrowing opportunities allow active management of currency exposure to align with export revenue streams, but likely at expense of: - higher debt servicing costs; - potentially increased rollover risk; - potentially increased interest rate risk. - Rebalancing may increase domestic currency financing availability and scope to extend tenor of domestic debt. - Refinancing caveat: potential cost savings from switching domestic short-term high-cost debt to longer external debt must be carefully assessed; country-specific market movements may eliminate savings (example: recent movements in the Tanzanian Shilling suggest little cost savings). - Operational and communication risks increase with creditor/instrument diversity; obtaining a credit rating raises importance of PDM quality and MTDS communication as these influence credit ratings and costs. - Requirement: MTDS consistent with debt sustainability requires strong fiscal control and capacity-building support. ### Bank and Fund Capacity Building Activities and Resource Facts - Bank activities: - Collaborates with finance ministries/public debt offices; activities tied to Bank financing or TA; leverages Bank Treasury ALM experience. - Bank training: “Designing Government Debt Management Strategies” one-week workshop offered twice per year; since introduction in 2005, 38 countries have participated. - “Implementing a Debt Management Strategy” workshop scheduled from May 2007. - Published works: Sound Practice in Government Debt Management (2004) and Managing Public Debt: From Diagnostics to Reform Implementation (2007). - IMF activities: - Surveillance follow-up, sovereign balance sheet risk management, debt restructuring, MTDS development/implementation; involvement spans LICs to emerging and mature markets. - Joint activities: research, publications, conferences, seminars, training, external debt statistics dissemination; joint Bank-Fund FSAP program and FIRST Initiative funding. - FIRST Initiative: a US$53 million multi-donor program supporting capacity building and policy development projects in financial sectors, including debt management. - Example statistic: median NPV of external debt-to-exports ratio estimated to have fallen from 153 percent prior to MDRI debt relief to 55 percent post-MDRI. - Pilot program insights: - Capacity building is long-term and country-tailored; clear project management, country ownership, and political commitment are essential. - Comprehensive diagnostics should precede reforms and be integrated with credible macroeconomic frameworks. - Embedding PDM reform in multi-donor projects increases implementation success; coordination among TA providers improves sequencing and reduces overlap. ### Building Debt Management Capacity in LICs — Program Design and Monitoring - Complexity and urgency: - Building capacity in LICs is more complex due to institutional weaknesses and scarce skills; urgency acute for post-debt relief countries. - Objective of MTDS: debt consistent with development plans and macro program, sustainable, and minimizing borrowing costs over medium to long term consistent with prudent risk. - Proposed MTDS capacity building (initial period 2008-2011): - Demand-driven; preference for post-MDRI countries. - Initial targeting: 4–6 countries a year. - Impact review: every two years before potential scale-up. - First-phase: comprehensive diagnostic to form country-tailored reform plan; draw on existing assessments where possible. - Follow-up: missions and HQ support; training and outreach; use of resident or short-term advisors in very weak capacity settings. - Monitoring and performance indicators: - Bank and stakeholders developing indicators to periodically measure debt management performance for cross-country comparability. - Indicators assess governance, internal organization, staff capacity, policies/procedures, loan administration/payment operations, and transparent reporting of debt data. - Preliminary indicators being tested in 6 countries. - Beginning in FY08, intention to assess all low-income countries against these indicators over three years; thereafter refresh indicators for a third of countries each year, synchronized with CAS or AAA cycle. - Applying indicators in 60 LICs requires long-term donor funding; Bank to assume managerial oversight costs. - Governance, financing, coordination: - Broad stakeholder support required; initiative could be managed by the Bank. - Long-term donor financial commitments needed, subject to impact evaluations. - Intensive consultation and coordination with donors and TA providers; bulk of coordination at country level. - Design features to support country ownership: strong upfront country interest; participation in diagnostics and reform preparation; accountability for implementation. - If performance indicators show no improvement or deterioration, Bank and Fund would reconsider engagement. - Costing and financing (Annex III): - Bank costs over four years: about $10.8 million total, reflecting additional staffing costs of $0.9 million per year, and other costs ($1.6 million per year) expected to be financed through donor resources yet to be committed. - Annual activity estimates: - developing methodological and operational tools and country work for 4–6 LICs: est. $1.2 million/year; - assessing, applying, and disseminating performance indicators and training; reviewing and disseminating lessons learned: est. $1.1 million/year; - establishing a Debt Management Practitioners Program: $300,000/year. - Fund resource requirements over four-year period: up to 5.5 staff years ($1.25 million) total. - FY 2008: 1.2 staff years for MTDS tools, capacity building missions in 4 select countries, coordination/backstopping/review/follow-up. - From FY 2009 onwards: additional 1.45 staff years required each year for six countries a year. - Mission travel over four years estimated at $1.2 million. - Total Fund capacity building proposal cost estimate: $2.45 million (provisional). - Fund FY2008–FY2011 table highlights (presented): - Total resource costs (years): 1.2 1.4 1.4 1.4 5.5 - Total resource costs (US$): 473,605 638,848 659,505 680,023 2,451,982 - Mission travel (US$): 208,000 321,360 331,001 340,931 1,201,292 - Notes: Two IMF staff per mission (13 day visits, 2 missions/country); mission follow up one week per mission; costs based on standard costs for an A9-A15; travel costs assume cost inflation of 3 percent per annum. - Going forward: - Continue differentiated joint Bank-Fund engagement: specialized services for MICs; joint work to build MTDS capacity in LICs with performance indicators and donor coordination. ### Initiatives, Partners, and Training Networks - Multilateral statistical and capacity initiatives: - QEDS launched 2004; JEDH launched March 2006; ED DQAF produced June 2005. - Initiative to assess consistency of external debt data and IIP data for SDDS countries. - Since May 2002, 18 joint capacity-building activities involving over 500 compilers from about 140 countries. - Regional and international partners and tools: - COMSEC: CS-DRMS adopted by 53 countries as of January 2006 (24 LICs). - UNCTAD/DMFAS: works with 65 low and middle-income countries, 34 LICs; assists installation/upgrading and training. - Debt Relief International (DRI): Capacity Building Program for 36 HIPC-eligible countries. - MEFMI, Pôle-Dette, WAIFEM, CEMLA, Crown Agents, UNITAR: regional training, legal aspects training, and capacity building partnerships. - Annex II — MTDS in LICs: MTDS seven elements: - (i) strategic objectives; (ii) macroeconomic context; (iii) assessment of current public debt position; (iv) indication of desired portfolio composition with supporting analysis; (v) financing plan for immediate fiscal period under baseline assumptions; (vi) scope for flexibility in implementation; (vii) institutional and market-development factors conditioning success. - Review and retrospection: - MTDS must be regularly reviewed and adjusted; retrospective analysis of successes/failures important to reinforce realism. *Source: IMF content unit "_032707m" (extracted sections: Executive Summary; Sections 11, 29, 46, 61, 80, 102; Annexes II–IV; Annex III costing tables and notes).* ### Executive Summary ...................................................................................................... ### Executive Summary ### Background - In 2001, the World Bank and the IMF developed and disseminated sound practices in public debt management (PDM), followed by a joint Bank-Fund pilot program in 2002 covering 12 countries to assist authorities design and implement PDM reform programs. - Definition: PDM is the framework, system or process within which the required amount of government funding is raised, in a manner that is consistent with the authorities’ risk and cost objectives, and which meets any other debt management goals set by the government. - Pilot program countries: Bulgaria, Colombia, Costa Rica, Croatia, Indonesia, Kenya, Lebanon, Nicaragua, Pakistan, Sri Lanka, Tunisia, and Zambia. - Box 1 — Six Principles of Sound Practice in Public Debt Management: - Debt management objectives and coordination: ensure government financing needs and payment obligations are met at the lowest possible cost consistent with a prudent degree of risk; develop a common understanding of debt management, monetary and fiscal policy objectives. - Transparency and accountability: publicly disclose PDM objectives, measures of cost and risk, and allocation of responsibilities. - Institutional framework: clarify legal authority to borrow/issue/invest; ensure clear roles and responsibilities; develop accurate and comprehensive debt data. - Debt management strategy: monitor, evaluate, and manage the risk structure of public debt; implement cost-effective cash management policies that minimize government liquidity and repayment risk. - Risk management framework: manage tradeoffs between cost and risk of government debt; consider contingent liabilities. - Development and maintenance of an efficient market for government securities: ensure policies and operations are consistent with market development. ### Emerging Trends - Structural improvements in debt portfolios have been observed in several developing countries: - Maturity profiles lengthened for domestic debt (examples: Colombia, Costa Rica, Czech Republic, and Peru) and international bond issues. - Over 2001-05, the average maturity of international issues for a sample of 18 important emerging market countries increased from 8 to 13 years. - Several countries reduced reliance on foreign currency debt (examples: Brazil, Colombia, Mexico, Peru, and Thailand). - Issuance of more fixed rate debt in countries such as Brazil, Indonesia, Peru, and Mexico. - Use of debt exchanges or swap transactions to transform debt profiles (examples: Colombia, Mexico, Tunisia, and Uruguay). - Despite improvements, levels of debt remain high (see Table 1) and continue to represent a significant risk to sovereign balance sheets; maintaining debt at sustainable levels remains necessary. - Development of MTDS: - Several MICs have developed and published debt management strategies (examples: Brazil, Bulgaria, Colombia, Costa Rica, Czech Republic, Hungary, Indonesia, Peru, Poland, Mexico, and Turkey). - Few LICs publish MTDS; those that do (e.g., Tanzania and Papua New Guinea) often lack systematic cost-and-risk analysis and limit strategies to external debt. - Market-development actions by debt managers: - Introduction of benchmark bonds, publishing auction schedules (examples: Brazil and Turkey), and primary dealer systems (examples: Colombia and Turkey). - Strengthened regulatory and legal environments to support market functioning (examples: Kenya and Nicaragua). - Observed trend in short-term maturities: proportion of emerging market domestic public debt maturing in less than a year declined across regions (Figure 1). ### Debt Management: Key Policy, Institutional and Operational Challenges - Significant remaining reform agenda, particularly acute in LICs; PDM quality may have deteriorated in some post-HIPC contexts. - Specific challenges include: - Developing comprehensive medium-term debt management strategies (MTDS); many MICs and most LICs are at an early stage. - Establishing effective governance frameworks and building institutional capacity; capacity constraints are often acute in LICs. - Managing the risk of re-accumulation of unsustainable debt in LICs that received significant HIPC and MDRI debt relief. - Fragmentation of debt management responsibilities persists in many countries: domestic and foreign debt may be managed separately; quasi-fiscal debt often managed by central banks (examples: Chile, Costa Rica, Guatemala, and Nicaragua). - Need for consolidated public debt databases—possible even with fragmented responsibilities (example: Nicaragua). - Need for greater transparency and communication of debt composition and risk profiles (examples of improved disclosure: Colombia, Indonesia, Jamaica, Lebanon, Tunisia, Turkey, Sri Lanka, and Zambia). - Market and operational impediments: - Many MICs and LICs require substantial public debt market reforms to deepen liquidity and reduce interest rate volatility. - Institutional innovations observed include semi-autonomous debt management agencies (examples: Nigeria and Hungary) and consolidated PDM units (examples: Colombia, Indonesia, and Uruguay). - Policy implications: - Strong focus on maintaining debt at sustainable levels and on implementing MTDS that systematically analyze cost and risk. - Strengthening governance, capacity, and coordination between fiscal, monetary, and debt management functions. ### The Special Case of Debt Management in Low-Income Countries (LICs) - LICs face distinct challenges: - Many LICs do not publish comprehensive MTDS; strategies that exist are often limited to external debt and lack systematic cost-risk analysis (examples: Tanzania and Papua New Guinea). - Post-debt relief environments (HIPC and MDRI) create increased borrowing space, heightening the need for strong debt management frameworks to prevent re-accumulation of unsustainable debt. - The latest World Bank Independent Evaluation Group review of the HIPC Initiative indicates potential deterioration in PDM quality in some LICs. - Consequences: - Without robust PDM frameworks, increased borrowing capacity risks imprudent borrowing and debt sustainability problems. ### Bank and Fund Support for Public Debt Management - Historical support: - Joint development of Guidelines for Public Debt Management (March 2001; revised December 2003), a Handbook (July 2001), and an Accompanying Document (2003) with 18 case studies. - The Bank and Fund provided technical assistance both within and outside the pilot program; PDM has been included in FSAPs for several countries. - The Bank led pilot-program insights published in Managing Public Debt: From Diagnostics to Reform Implementation and Developing the Domestic Government Debt Market: From Diagnostics to Reform Implementation, World Bank, 2007. - Forward program: - Continued Bank-Fund support for strengthening PDM, with intensified efforts for LICs. - Special effort to support development and implementation of effective MTDS in LICs comprising joint Bank-Fund capacity building work over an initial 4-year period (2008–2011). - Consultation on methodology will be carried out as needed with other institutions, including the private sector. - Periodic measurement of debt management performance will complement joint work to track progress. - Initiatives will be tailored to individual countries, complement existing programs, and be undertaken in close consultation with country authorities, other providers of technical cooperation, and bilateral donors. - Modes of support: - Respond to individual country demand, undertake capacity building and knowledge dissemination, and monitor and analyze financial risks in debt structures. ### Conclusions and Issues for Discussion - Progress has been made in many MICs in strengthening PDM frameworks, lengthening maturities, reducing foreign-currency exposure, and deepening domestic public debt markets, thereby reducing vulnerabilities relative to the mid-1990s. - Nevertheless, significant challenges remain: - Many countries—especially LICs—need comprehensive MTDS, stronger governance arrangements, improved capacity, deeper domestic debt markets, and better transparency. - The Bank and Fund will intensify joint capacity building for LICs, focusing on MTDS development and implementation, supported by periodic performance measurement and consultation with other stakeholders. - Issues for discussion include prioritization of capacity building, coordination with other technical assistance providers and donors, and the modalities of the proposed 4-year joint Bank-Fund program for LICs (2008–2011). *Executive Summary — IMF-World Bank joint paper on Public Debt Management (contents as provided).* ### 11. The remainder of this section points to three priority areas for strengthening ### 11. The remainder of this section points to three priority areas for strengthening ### A. Developing a Medium-Term Debt Management Strategy (MTDS) - Purpose and scope: - A debt management strategy offers a framework to guide new financing decisions (preferred instrument choice) and other portfolio operations so that the debt management objective is met. - It should identify the authorities’ desired debt portfolio composition, taking account of the cost-risk trade-off and other policy settings, such as exchange rate or monetary policy. - Current coverage and practice: - Almost all OECD countries have a published debt management strategy. But only half the sample developing countries have a debt management strategy and even fewer publish it. - Many developing countries follow implicit or de facto strategies (examples cited: Colombia, Kenya, Lebanon, Nicaragua, and Tunisia). - Fragmentation of responsibilities, and the lack of adequate information and analytical capacity in debt units has hindered progress from de facto to formal debt strategies. - Footnote data: a survey conducted in 2006 by the Banking and Debt Management Department (BDM) of the World Bank sampled 71 countries consisting of 30 OECD countries, the 12 countries of the pilot program, 10 countries where the Bank is conducting follow-up work and other IBRD countries that responded to a questionnaire; 61 percent of OECD countries express their strategies as targets or benchmarks compared to 38 percent in the case of the non OECD countries surveyed. - Observed shortcomings where de facto strategies were followed: - Trade-offs between foreign currency concessional loans (very low interest rates and long maturities) and domestic debt (typically shorter maturities and higher interest rates) were often not adequately taken into account (examples: Kenya, Pakistan, Sri Lanka and Zambia). - Actions to reduce risk or cost in one sub-portfolio have conflicted with another (example: Pakistan). - Short-term expediency to reduce budgetary costs sometimes outweighed prudent risk management (example: Sri Lanka). - Short-term financing instruments may be used excessively because they are cheaper given a term premium but carry more rollover and interest rate risk than longer-dated debt (see reference to Annex II for MTDS elements). - Key elements and challenges in developing an MTDS: - Formalizing existing practices is a natural first step; this often highlights constraints (lack of monetary or fiscal policy credibility, market development, institutional shortcomings). - The strategy should identify plans to relax constraints (e.g., regular issuance of benchmark securities, formalizing information sharing procedures). - Evaluating relevant costs and risks is not straightforward: many countries lack a systematic framework and a clear definition of cost and risk; LICs must explicitly recognize exogenous risks such as terms of trade shocks and aid volatility. - Developing MTDS that balance cost against fiscal risk should be accomplished within a rigorous and fully operational medium-term fiscal framework (MTFF), but many countries have not linked a theoretical MTFF with the annual budget process. - Integrating debt strategy analysis within a debt sustainability framework (DSF) can provide a suitable alternative to link impacts of key variable variations on long-term macro-fiscal projections and debt. - Fiscal policy remains the principal tool for achieving and maintaining debt sustainability; effective debt management helps mitigate liquidity crises and reduce costs and risks but cannot assure solvency without appropriate fiscal and macroeconomic policy. - Inter-relationship between Debt Sustainability Analysis (DSA) and Debt Strategy Analysis (Box 2): - DSF provides an objective assessment of debt sustainability given a macroeconomic framework; a DSA applies the DSF and considers stress tests of debt burden indicators (usually the ratio of the NPV of debt to GDP, exports or tax revenue) to macroeconomic shocks. - DSA often makes simplifying assumptions about yield curves; the term structure is usually not explicitly modeled nor is the impact of debt composition on the exchange rate modeled. - Debt strategy analysis evaluates performance of financing strategies under a given path for the primary balance and other macro variables; it may explicitly model market risk variables (interest rate sensitivity of cash flows, determinants of term structure, exchange rate). - Outputs are typically presented in terms of nominal debt servicing costs and can be set within budgetary context (e.g., proportion of tax revenues). - The two approaches share common assumptions (future path of the primary balance). Complementarity is noted and potential efficiency gains exist if the same agent carries out both analyses—particularly relevant in the LIC context. - DSA focuses on evaluating fiscal policies (fiscal policy maker remit); the debt manager focuses on how a preferred fiscal stance should be financed. There is scope to bridge the gap by including term structure details and tailored risk assessment techniques in the DSA to improve its usefulness for debt strategy analysis. - Cash management and operational considerations: - Improving effectiveness of cash management reduces cost and helps mitigate liquidity and rollover risk; weak cash management can impede debt management objectives. - Examples where bond sale timing was driven by cash management needs rather than market development: Croatia, Indonesia, and Tunisia. - Proliferation of government bank accounts in many LICs has been a major factor in inefficient cash use; use of large cash balances, cash rationing, or borrowing from the central bank increases costs and hinders liquidity forecasting and monetary policy implementation. - Many MICs and LICs struggle to improve cash flow forecasting; LICs face particular challenges implementing a treasury single account (TSA). - Desirability of setting debt management and monetary policy objectives independently; in practice independence is often infeasible due to weak institutional structures and underdeveloped financial markets (examples: Kenya, Pakistan, Sri Lanka, Zambia). - Central bank issuance of its own securities to control liquidity or finance quasi-fiscal deficits may undermine monetary policy credibility (examples: Costa Rica, Indonesia, and Nicaragua). - Contingent liabilities: - Few countries incorporate contingent liabilities (explicit and implicit) into debt strategies. - Explicit contingent liabilities (government guarantees) can be significant fiscal risk, particularly in LICs and with increasing reliance on PPPs. - Managing these risks requires recording and monitoring guarantees regularly; valuation techniques exist but no common methodology is available to reflect such risks in a MTDS. - Implicit contingent liabilities (e.g., from banking system vulnerability) present similar valuation and inclusion challenges. ### B. Governance Arrangements and Capacity - Overarching problem: - Impediments to effective public debt management (PDM) also result from poor governance and capacity constraints. - Accountability and legal framework: - Governance structure supporting PDM should delineate clear roles and responsibilities for relevant institutions, include appropriate checks and balances, clear reporting lines, and ensure accountability and transparency through disclosure of activities and outcomes. - Many public debt legal frameworks do not fully support effective PDM: - Many laws enacted at different times specify different levels of oversight for borrowing (examples: Colombia, Costa Rica, Kenya, Lebanon, Mongolia, Panama, and Tunisia) or multiple authorities to borrow (examples: Lebanon and Sri Lanka). - Budget laws generally focus on aggregate borrowing requirements but often set sub-limits that impede instrument choice and risk management (examples: Indonesia, Lebanon, and Sri Lanka). - Minimal disclosure and reporting requirements affect transparency and market efficiency (examples: Côte d’Ivoire and Dominican Republic). - Legal and institutional reform experience: - Institutional and political realities often impede legal reform (for example, constitutional amendment may be required in some cases, e.g., Tunisia). - Some countries consolidated legislation into new budget systems laws or debt management laws (examples: Bulgaria, Nicaragua, and Serbia). - Introduction of multi-annual budgeting frameworks supported a medium-term focus in some countries (examples: Colombia, Croatia, and Pakistan). - Some countries used secondary regulation (decrees, regulations, ministerial authority) to implement urgent reform—partial solutions that can add to fragmentation (examples: Colombia and Indonesia). - Organizational arrangements and coordination: - Fragmentation of responsibilities across ministries and departments increases coordination and information costs and hinders aggregate portfolio strategy development (examples: Costa Rica, Croatia, El Salvador, Indonesia, Kenya, Kazakhstan, Lebanon, Pakistan, Romania, and Zambia). - Central bank roles as agent in management of domestic or external public debt are often not clearly defined; de facto central bank principal involvement can contribute to policy conflicts (example: Zambia). - Attempts to consolidate debt management responsibilities have had mixed results: - Some consolidated within the ministry of finance (examples: Brazil and Uruguay) or established separate public debt management offices (examples: Hungary and Nigeria). - Transfers of domestic debt responsibility from the central bank have proven difficult in some countries (examples: Costa Rica, Nicaragua, and Sri Lanka). - Alternatives used include coordination offices (example: Pakistan) or coordination committees (example: Costa Rica), but these can add complexity. - Operational risk management and procedures: - Systematic management of operational risk must be improved in most countries. - Specific weaknesses observed: - Debt transactions were sometimes entered into and verified by the same unit and individuals, reducing data integrity and increasing fraud risk. - Where debt management involves market interface, codes of conduct are necessary but rarely implemented. - Most countries lack adequate, written, and well understood procedures governing debt management operations. * _032707m - 11. The remainder of this section points to three priority areas for strengthening_* ### 29. In this context, Bank-Fund initiatives on the collection, availability, and quality ### 032707m - 29. In this context, Bank-Fund initiatives on the collection, availability, and quality ### Multilateral initiatives to improve availability and quality of debt statistics - Inter-agency Task Force on Finance Statistics (TFFS) initiated efforts to improve availability and quality of debt statistics. - Key outputs and milestones: - External Debt Statistics: Guide for Compilers and Users (External Debt Guide) (2003). - World Bank Quarterly External Debt Statistics (QEDS) (2004) — a joint Fund-Bank initiative to centralize external debt statistics for SDDS subscribing countries. - External Debt Statistics Data Quality Assessment Framework (ED DQAF) produced in June 2005. - Fund public sector debt statistics initiative launched in 2005 to assemble existing statistical series on public sector debt (domestic and external). - Joint External Debt Hub (JEDH) website launched in March 2006 — joint BIS, IMF, OECD, and World Bank initiative to facilitate availability of external debt statistics from creditor/market and national sources. - Capacity building: since May 2002, over 500 government officials from about 140 emerging markets and the low income countries were trained in external debt statistics compilation methodologies. - TFFS composition and governance: - Established in 1992 under the United Nations Statistical Commission and the Administrative Committee on Coordination-Sub-Committee on Statistical Activities. - Chaired by the IMF; meets annually; comprises BIS, Commonwealth Secretariat (ComSec), Eurostat, European Central Bank, IMF, OECD, Paris Club Secretariat, World Bank and UNCTAD. - Observed impact and limits: - Significant advances in availability of external debt statistics and related capacity building. - Despite development assistance, some countries still lack well functioning debt recording and reporting systems (examples cited: Kenya and Zambia). ### Capacity constraints in debt management units - Main capacity issues: - Staff shortages and IT systems capacity often hamper effective public debt management. - Short-run responses (special advisors, ministers performing tasks) increase key person risk. - “Islands of excellence” approach can insulate debt management but impede coordination and oversight. - Measures countries have used to address staff capacity: - Providing training opportunities (examples: Brazil and Colombia). - Providing better incentives, including accelerated promotion, bonuses, occupational pay scales, and exemptions from ministry rotation policies (example: Indonesia). - Hiring staff on fixed-term assignments when new organizations are established (example: Uruguay). - IT systems considerations: - IT infrastructure development should be adapted to institutional arrangements and business processes; major IT projects that neglect business processes are unlikely to succeed (examples of problems: Croatia and Lithuania). - Incremental improvements can help (example: recording domestic debt data in the external debt system — Nicaragua). ### Developing domestic public debt markets - Rationale: - Well-functioning domestic markets reduce asset-liability mismatches, distribute risk, increase resilience to shocks, and enhance financial stability. - Many developing countries lack a robust and stable macroeconomic framework, and face weaknesses in legal frameworks, payment and settlement systems, regulatory frameworks, and concentrated investor bases. - Supply-side measures by debt managers: - Introduction of benchmark bonds to develop the yield curve (examples: Brazil, Costa Rica, Mexico, Tunisia). - Replacing non-marketable bonds with marketable instruments (examples: Brazil, Bulgaria, Croatia, Indonesia, Tunisia). - Predictable and regular issuance patterns and clear, publicly disseminated financing plans within MTDS frameworks (examples: Brazil, Bulgaria, Colombia, Mexico, Turkey). - Introduction of primary dealer systems (examples: Brazil, Mexico, Turkey). - Demand-side measures: - Diversify investor base; foreign institutional investors have facilitated longer-term fixed-rate local currency debt (examples: Mexico, Turkey). - Develop retail debt programs (example: Indonesia). - Establish investor relations programs grounded in transparency (examples: Brazil, Mexico, Turkey). ### Impediments to improving domestic public debt markets (Box 4) - Underdeveloped money markets: - Transition to inflation targeting and indirect market-based instruments hampered by weak money markets, increasing short-end yield curve volatility and impeding policy transmission. - Central banks issuing their own debt to sterilize excess liquidity weakens CB balance sheets and can fragment markets; solutions include repos or agreements to use Treasury bills for monetary policy (examples: Colombia, Croatia, Macedonia). - Poor incentives to trade: - Banks and institutional investors often have limited incentives to trade, impeding liquidity; buy-and-hold strategies are common. - Investment guidelines and prudential requirements have sometimes unintentionally hindered secondary market liquidity (example: Chile). - Excess banking sector liquidity can reduce trading incentives and increase asset-liability mismatches, aggravating financial stability risks. - Asset valuation difficulties: - Illiquid markets reduce price efficiency and complicate asset valuation for corporates, mutual funds, and governments, further reducing trading incentives. ### Financial stability considerations - When domestic financial sector is dominant holder of sovereign debt, a well-developed PDM framework supports financial stability by assuring credit quality of those assets. - Empirical note: - In 2004, banks constituted the largest group of investors for public debt and provided above one third of domestic financing for a sample of 18 large EM countries. - Risks from under-developed markets: - Reduced ability of banks to liquidate positions, lowering asset quality and increasing banking sector risk. - Poorly functioning primary/secondary markets or certain investment regulations can cause pricing distortions and capital misallocation. ### The special case of debt management in low-income countries (LICs) - Comparative characteristics: - LICs face more acute capacity, institutional, and governance challenges, but their instrument choice set is more limited. - Creditor composition and concessionality (2005): - LICs — Creditor composition of long-term PPG external debt: Multilateral, 47%; Bilateral, 38%; Private, 15%. - MICs — Creditor composition of long-term PPG external debt: Multilateral, 21%; Bilateral, 24%; Private, 55%. - Concessionality of long-term PPG external debt: - LICs, 2005: Concessional, 71%; Non-Concessional, 29%. - MICs, 2005: Concessional, 21%; Non-Concessional, 79%. - Source: World Development Indicators, World Bank 2006. - Implications of concessionality: - As of 2005, multilateral and official bilateral creditors made up over 80 percent of the public and publicly guaranteed external debt of LICs. - Over 70 percent of this debt was contracted on concessional terms with below-market interest rates and long maturity periods, including grace periods. - In contrast, 55 percent of the external debt stock in MICs was from the private sector and predominantly non-concessional. - Past reliance on concessional sources limited interest rate risk but increased exposure to currency risk. - Concessionality definition note: a loan is considered concessional if its grant element is equal to or exceeds 35 percent; concessionality increases with lower interest rate, longer grace and maturity periods, and more back-loaded repayment profiles. - Domestic debt and market development: - Limited scope for systematic domestic public debt market development; domestic debt often accumulates passively as residual financing after external sources are exhausted. - High external financing with low absorptive capacity may require domestic issuance to sterilize inflows, potentially accumulating domestic debt in ways not conducive to market development and limiting currency risk mitigation. - Figure 4 statistics (public sector domestic debt to GDP and financial depth M2/GDP): Average Period Sample Size = 36.5 for domestic debt/GDP; LIC average period sample size = 29.9; MIC average period sample size = 42.0. - LIC-specific risks: - Operational risks from weak organizational arrangements, systems, procedures, vulnerability to natural disasters, and loss of institutional memory or key persons. - Terms of trade trends and shocks due to narrow and volatile production and export bases; LICs more vulnerable to commodity price shocks which can be frequent and persistent. - Aid volatility: exposure to fluctuations in aid flows from external donor sentiment or perceived domestic changes; aid commitments often differ from actual disbursements, increasing need for effective cash management. - Capacity gaps and recent developments: - A survey of 24 HIPC decision and completion-point documents shows significant gaps in basic debt management capacity, including inadequate capacity to monitor and record debt information and new resource flows accurately; these constraints persisted through HIPC and MDRI rounds. - The new borrowing space from HIPC and MDRI debt relief creates opportunities and risks: - Some LICs can access non-concessional financing, new creditors, and new instruments, with increased foreign investor interest. - Example: Emerging Markets Traders Association data indicate the volume of sub-Saharan African debt traded in 2006 more than doubled that in 2005. - These developments increase the urgency of building capacity to develop and implement a Medium-Term Debt Management Strategy (MTDS) so governments can take informed borrowing decisions and manage the risk of re-accumulating unsustainable debt. *Source: IMF content unit "_032707m - 29. In this context, Bank-Fund initiatives on the collection, availability, and quality"* ### 46. Access to new sources of non-concessional financing changes the scope for ### _032707m - 46. Access to new sources of non-concessional financing changes the scope for ### Implications for public debt portfolio management - New borrowing opportunities enable actively managing currency exposure of the public debt portfolio to better match a country’s export revenue streams. - Such rebalancing is likely to be achieved at the expense of: - higher debt servicing costs; - potentially increased rollover risk; - potentially increased interest rate risk. - Greater foreign investor interest increases scope for domestic debt to play a more active role by: - increasing availability of financing resources in domestic currency; - increasing scope to extend the tenor of domestic debt. ### Refinancing opportunities and cautionary note - New instruments and markets may permit refinancing existing debt to secure cost savings or risk reductions, for example: - retiring short-term, high-cost domestic debt and refinancing at longer tenors in international capital markets. - Scope for actual cost savings must be carefully assessed; country-specific market movements may eliminate expected savings (example noted: recent movements in the Tanzanian Shilling suggest little cost savings from switching domestic to external debt in this manner). - An effective Medium-Term Debt Management Strategy (MTDS) is required to assess trade-offs. ### Operational and communication risks - As instrument and creditor diversity increases, operational risk becomes more acute. - Obtaining a credit rating (e.g., when moving into international capital markets) raises the importance of: - quality of public debt management (PDM); - effectiveness of authorities’ communication of their MTDS. - These factors can directly influence debt servicing costs by influencing the credit rating. ### Requirement to maintain debt sustainability - Developing an MTDS consistent with maintaining debt sustainability will be a challenge and requires: - strong fiscal control; - a comprehensive MTDS that accounts for both domestic and external debt considerations; - capacity-building support to implement reforms and avoid re-accumulation of unsustainable debt. ### Bank and Fund support for public debt management (overview) - Bank and Fund staff intend to intensify coordinated technical assistance (TA) and advisory services to developing countries, building on pilot program insights and other country work. - Emphasis areas include: - identifying and managing sovereign balance sheet risks; - improving functioning of domestic public debt markets; - developing a diversified investor base with consideration of macroeconomic policy linkages; - helping countries develop and strengthen a MTDS integrated with debt sustainability analysis and policy dialogue; - progressing debt statistics, legal and institutional reform. ### Current capacity building activities (Bank and Fund) - World Bank: - Collaborates with finance ministries and public debt offices to build capacity for public debt management and market development, including front-, middle-, and back-office staff and infrastructure. - Activities often tied to Bank financing (project, development program, or TA loans) or other vehicles (policy notes, public expenditure reviews, Bank hedging products). - Leverages practical experience from Bank Treasury ALM strategy. - IMF: - Work arises from surveillance follow-up, focusing on management of sovereign balance sheet risks, debt restructuring, and development/implementation of debt strategies consistent with macroeconomic and financial sector policies. - Involvement may be linked to Fund-supported program design or direct advisory and TA activities; country coverage spans LICs to emerging and mature markets. - Joint and related activities: - Research, publications, conferences, seminars, training courses, and collection/dissemination of external debt statistics. - Increasing coverage through the joint Bank-Fund FSAP program and follow-up exercises often funded from the FIRST Initiative. ### Specific capacity-building outputs and numeric facts - FIRST Initiative: a US$53 million multi-donor program supporting capacity building and policy development projects in financial sectors, including debt management, in developing countries. - Bank training: “Designing Government Debt Management Strategies” intensive one-week workshop offered twice per year; since introduction in 2005, 38 countries have participated. - Further Bank workshop: “Implementing a Debt Management Strategy” scheduled from May 2007. - Published Bank works include Sound Practice in Government Debt Management (2004) and Managing Public Debt: From Diagnostics to Reform Implementation (2007). - Example statistic reported: median NPV of external debt-to-exports ratio estimated to have fallen from 153 percent prior to MDRI debt relief to 55 percent post-MDRI. ### Insights from pilot program and country work - Key observations: - Capacity building is a long-term endeavor requiring sustained technical, financial and political support. - Debt management programs must be tailored to country-specific economic and institutional circumstances. - Clear project management focus and allocation of key responsibilities increase reform durability. - Country ownership and political commitment are essential; multi-agency efforts are often required. - A comprehensive diagnostic is necessary before substantive reform to: - capture main building blocks of debt management; - identify interrelationships with macroeconomic policies, governance, and domestic debt market development; - help identify policy trade-offs and reform consequences. - Diagnostics and reform are more effective when integrated with a credible macroeconomic framework; narrowly focused diagnostics risk unrealistic recommendations. - Embedding PDM reform in broader, multi-donor projects can increase implementation success (examples cited: Kenya, Zambia, Lebanon, Croatia). - Coordination among TA providers improves quality and sequencing of assistance and reduces overlap; main partners include OECD Working Party on Public Debt Management, DMFAS (UNCTAD), Commonwealth Secretariat (COMSEC), and Debt Relief International (DRI), along with several regional bodies. ### Going forward — strengthening the process and client segmentation - Continued joint Bank-Fund engagement to build debt management capacity and accelerate reform, with differentiated focus: - Support for middle-income countries (MICs): - MICs generally have greater debt management capacity but demand for TA/advisory services is rising because: - many still experience significant debt-related vulnerabilities; - many lack explicit debt management strategies, effective coordination with macroeconomic policies, strong governance arrangements, or developed domestic public debt markets; - many are enhancing analytical capacity or restructuring debt portfolios to take advantage of market opportunities. - Fund interest: preventing fiscal and financial crises and focusing on macroeconomic links among debt, monetary, fiscal, and capital markets. - Bank mandate: long-term institutional development, capacity building, and knowledge transfer anchored in Treasury expertise. *Source: _032707m - 46. Access to new sources of non-concessional financing changes the scope for; canonical URL: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/2007/eng/_032707m.pdf* ### 61. Building debt management capacity in LICs, however, is more complex, not ### Building debt management capacity in LICs ### Complexity, urgency, and objectives - Building debt management capacity in LICs is more complex because of institutional weaknesses and scarcity of skills. - Urgency is acute for countries that have benefited from debt relief; for LICs that have not benefited from debt relief, focus remains on managing new borrowing prudently. - A carefully crafted MTDS is needed given macroeconomic vulnerability and limited development of domestic financial systems; developing an MTDS will require significant capacity strengthening. - Objective of MTDS: identify authorities’ preferred composition of debt and guide new financing decisions so borrowing: - (i) is consistent with the country’s development plans and macroeconomic program; - (ii) is sustainable; and - (iii) minimizes borrowing costs over the medium to long term, consistent with a prudent degree of risk. ### MTDS capacity building missions (scope and sequencing) - Proposed initial capacity building period: 2008-2011. - Demand-driven program with preference given to post-MDRI countries. - Initial targeting: 4–6 countries a year. - Impact review: every two years before considering scaling up across other LICs or developing countries. - Country selection criteria: expressed demand by authorities and assessment of where pressures for better debt management are most acute. - First-phase mission work: prepare a comprehensive diagnostic of a country’s debt management capacity in collaboration with authorities and stakeholders; the diagnostic forms the basis of a country-tailored reform plan to develop and implement an MTDS. - Where possible, staff will draw on existing assessments to accelerate reform planning. - Follow-up support: missions and HQ-based support likely required to help implement reform plans; other providers likely to be involved. - Training and outreach will be important to embed reforms; regional partners can be particularly effective. - In countries with very weak initial capacity, resident or short-term advisors may be used. ### Monitoring and ongoing support - Bank-Fund staff will mount periodic missions to monitor implementation of agreed reform plans and assist authorities with new challenges. - Preparation and implementation of initial MTDSs will highlight weaknesses in the PDM framework and help re-evaluate reform priorities. ### Performance indicators to measure debt management performance - The Bank, in collaboration with other stakeholders (including the Fund), is developing a set of indicators to periodically measure debt management performance. - Purpose: provide an international standard for evaluating performance, enable harmonization of support, and provide an objective measure of debt management capacity relative to peers and over time. - Indicators will assess, among others: - (i) governance (including the legal and institutional framework for debt management); - (ii) the internal organization across debt management functions; - (iii) staff capacity; - (iv) policies and procedures for borrowings and loan guarantees; - (v) loan administration and secure payment operations; - (vi) the transparent reporting of accurate and comprehensive debt data. - Assessment approach: close consultation with authorities, with central quality control and a common methodology to ensure cross-country comparability. - Use cases: authorities, donor and creditor community, and donors financing capacity building initiatives can use indicators as a yardstick for impact; supports practitioner programs and peer learning. - Testing and rollout: - Preliminary indicators being tested in 6 countries. - Beginning in FY08, intention is to assess all low-income countries against these indicators over three years. - Subsequently refresh indicators for a third of the countries each year, synchronized with the CAS or AAA cycle. - Coverage aim: applying the performance indicators in 60 LICs will require long-term donor funding; the Bank expected to assume cost of managerial oversight. ### Governance, financing, and stakeholder participation - Key governance and financing considerations: - Broad stakeholder support required: country authorities, technical assistance providers, donors, debt management specialists. - Initiative could be managed by the Bank, drawing on its convening power and expertise, using models such as the Public-Private Infrastructure Advisory Facility (PPIAF). - Long-term donor financial commitments will be needed, subject to periodic impact evaluations. - Coordination: - Intensive consultation, collaboration and coordination with donors and other TA providers required. - Bulk of coordination for MTDS development will need to be done at the country level; several activities require international coordination. - Staff will promote information flows across key partners before, during and after MTDS capacity building missions, and strengthen mechanisms for ongoing collaboration. - Consultation with the private sector on specific issues (e.g., operational framework for MTDS) may be considered. - Country ownership: - Success depends on demand from authorities, ownership of diagnostics and reform plans, and accountability for implementation. - Design features to support ownership: - (a) strong upfront country interest and ownership for MTDS preparation activities; - (b) participation by country authorities in diagnostics and reform plan preparation; - (c) accountability by country authorities for MTDS implementation and associated reforms. - If performance indicators show no improvement or deterioration, the Bank and Fund would reconsider continued engagement. ### Costing and financing details - The program entails significant resource costs. - For the Bank: - Assistance to support MICs will continue to operate on a fee basis. - Initiating work in LICs will require incremental Bank budget for staffing to initiate PDM capacity building and launch the performance indicator work; subsequent support expected to be allocated from existing country budgets. - Long-term donor funding critical to apply performance indicators in 60 LICs; Bank to assume managerial oversight costs. - For the Fund: - Support to MICs charged to current technical assistance budget. - Capacity building work on MTDS in LICs and other developing countries will entail a resource cost; includes original resource requirement identified in Applying the Debt Sustainability Framework for Low-Income Countries Post Debt Relief, November 2006. - That earlier paper identified a resource cost of 1–1.5 Fund staff years to cover: (i) developing MTDS templates and capacity building frameworks; (ii) outreach activities and collaboration with other agencies and internal staff dissemination; and (iii) backstopping including review work. (That estimate excluded costs associated with direct delivery of capacity building activities.) ### Conclusions and issues for discussion (key findings and Board questions) - Key findings: - Many countries have made progress in strengthening PDM frameworks and reducing debt-related vulnerabilities. - Countries still confront many policy, institutional and operational challenges; most are at an early stage of developing MTDS. Establishing effective governance and organizational arrangements for PDM and developing domestic debt markets remain challenging. - For LICs, challenges are greater due to institutional weaknesses and scarcity of skills. Global market conditions and the new borrowing space created by HIPC and MDRI have attracted new creditors, increasing urgency to strengthen PDM frameworks, including debt market development, to ensure debt sustainability. - Proposed intensification of Bank-Fund efforts: - For MICs, continue specialized financial and advisory services. - For LICs, undertake joint work to build capacity to develop and implement effective MTDS, complemented by development and application of debt management performance indicators. - Issues for Board discussion: - Do Boards agree with staffs’ assessment of the challenges that developing countries face in improving public debt management? - Do Boards agree that, when relevant, PDM issues should be incorporated to a greater extent in Fund surveillance, and in Bank country programs (e.g., CASs) when requested by country authorities? - Do Boards believe that the Bank and Fund are responding adequately to demand from MICs for advice and capacity building in public debt management? - Do Boards endorse the proposed joint Bank-Fund approach, and resourcing, for building capacity to develop MTDS in LICs, to be rolled out in FY08? - Do Boards endorse the complementary work to periodically measure debt management performance in LICs to assess progress and provide a common platform for donor support for PDM? ### Annex I highlights (multilateral initiatives to improve debt statistics) - QEDS and JEDH: - QEDS launched in 2004; countries reporting to QEDS continuing to increase. - JEDH brought together national data (QEDS) and creditor/market data (former JDS), providing basis for comparison and improvement. - TFFS agencies focus on increasing national source debt data, creditor/market debt data, and improving data quality. - Public sector debt statistics initiative: - IMF and TFFS implementing an initiative to assemble public sector debt (domestic and external) series in a single electronic source for balance sheet analysis. - Aims: (i) develop a uniform presentation of public sector statistics based on recognized methodologies such as GFSM 2001 and the External Debt Guide; (ii) promote public debt statistics via international cooperation, technical assistance, and IMF surveillance. - Data quality: - Fund and TFFS addressing debt data quality by promoting good practices based on the IMF’s ED DQAF and confirming quality via consistency checks. - ED DQAF uses: identify and promote good compilation/dissemination practices; design and monitor technical assistance; assess quality of national external debt statistics; serve as a self-assessment tool for authorities seeking donor support for capacity building. *Source: _032707m - 61. Building debt management capacity in LICs, however, is more complex, not* ### 80. In parallel with the work on the ED DQAF the Fund has started a new initiative to ### In parallel with the work on the ED DQAF the Fund has started a new initiative to ### Initiative to assess consistency of external debt and IIP data - Assess the consistency of external debt data reported by SDDS countries to the QEDS and corresponding data series produced by countries and reported in the international investment position (IIP). - Objective: improve countries’ external debt and IIP data for effective use in economic surveillance work. ### Capacity building by TFFS agencies and partners - Since May 2002, 18 joint capacity building activities involving over 500 compilers of debt statistics from about 140 countries. - COMSEC and UNCTAD have each developed capacity building modules on debt statistics and debt data validation. - Objective of modules: promote continuously validated debt databases and production of comprehensive debt statistics consistent with the External Debt Guide. ### Annex II — Medium-Term Debt Strategy (MTDS) in Low Income Countries (LICs): Purpose and scope - MTDS should lead to borrowing which: - (i) is consistent with the country’s development plans and macroeconomic program; - (ii) is sustainable; and - (iii) minimizes borrowing costs over the medium to long term, consistent with a prudent degree of risk. - MTDS should be linked to public debt sustainability analysis (DSA) and mitigate vulnerabilities identified in the DSA. - A comprehensive MTDS for a LIC typically contains seven elements: - (i) strategic objectives; - (ii) macroeconomic context; - (iii) assessment of the current public debt position; - (iv) indication of desired portfolio composition with supporting analysis; - (v) financing plan for the immediate fiscal period under baseline assumptions; - (vi) scope for flexibility in implementation; and - (vii) discussion of institutional and market-development factors conditioning success. ### Objectives and trade-offs in MTDS design - Borrowing needs arise from four principal imperatives: - (i) to cover a fiscal deficit; - (ii) to fill balance of payments needs; - (iii) to sterilize foreign currency inflows; and - (iv) to develop domestic capital markets. - MTDS should set clear priorities where objectives conflict and state circumstances under which each objective dominates. ### Macroeconomic context and coordination - MTDS should be formulated within a medium-term fiscal framework (MTFF) and grounded in the DSA. - The chosen strategy affects debt servicing costs and their volatility and should be reflected in medium-term fiscal projections. - MTDS must account for any formal borrowing limits or debt ceilings in the legislative framework. - Close coordination between debt and cash management is important to avoid arrears and manage liquidity risk (e.g., volatile aid disbursement) and to share information with the central bank for monetary policy implementation. ### Assessment of the current public debt position - Requirement: accurate and comprehensive information on current debt portfolio composition. - Capacities needed: record and monitor existing debt; track quantity, currency, maturity, instrument mix, interest rate profile; accurately forecast future debt servicing obligations. - Joint Bank-Fund Guidelines identify relevant risks: exchange rate, interest rate, liquidity or rollover, and refinancing risks. ### Indication of desired portfolio composition and analysis - Evaluate costs and risks of alternative debt strategies, considering: - alternative paths for aid and concessional finance and their impact on access to other financing; - assumptions about evolution of exchange rates and domestic and foreign interest rates. - Express costs as ratios of GDP and of fiscal revenues using baseline assumptions in the DSA. - Assess risks with stress tests incorporating key macroeconomic shocks; use LIC DSA framework to inform portfolio choice. - Near-term MTDS can set directional goals (e.g., increase share of local currency debt to reduce foreign currency risk; smooth amortization profile to reduce rollover concentration). ### Short-term financing plan - MTDS should be accompanied by a financing plan indicating intentions to meet financing requirements for the coming fiscal period, consistent with agreed strategy. - Assess market constraints and immediate access to grants and concessional debt. - Publicizing the financing plan may support market development and creditor relations. ### Flexibility in implementation - Allow contingency arrangements to respond to unexpected developments without full MTDS review, important for LICs exposed to fiscal shocks (e.g., growth or aid volatility). - Strategies often expressed as ranges for risk indicators or confidence intervals for macro variables (growth, aid, current account deficit, budget deficit) with guidance on how changes affect public borrowing at the margin. ### Institutional and market-development factors - MTDS must be consistent with institutional setting and include plans to strengthen capacity where needed: - record keeping, debt monitoring and reporting, technical staff capacity, legal framework. - Strategy might outline plans to formalize information-sharing procedures across units to enable regular total public debt reporting and analysis. - Entry into international capital markets should be accompanied by plans to establish analytical and investor-relations functions within the debt management unit and manage additional operational risks. - MTDS must reflect market constraints and other access to financing, including IFIs; market demand and availability of financing affect implementability, costs, and risk assessment. - Debt managers should actively try to relax constraints (e.g., develop domestic government securities market in cooperation with the central bank; improve cash management and budget planning to mitigate liquidity risk). ### Review and retrospection - MTDS must be subject to regular review and adjustment according to financing availability, market development, or eligibility for grants and concessional debt. - Retrospective analysis of successes, failures, and departures from previous strategy is important to reinforce realism. ### Annex III — Resource costs for Bank-Fund capacity building proposal for LICs - Two-phase work: - (i) initial phase: develop methodological framework and operational tools for MTDS, building on existing DSA templates; - (ii) next phase: MTDS capacity building country work to develop MTDS in 4–6 LICs per year and assist implementation; complemented by performance indicator program applying to about 20 LICs per year. - Bank costs over four years: about $10.8 million total, reflecting additional staffing costs of $0.9 million per year, and other costs ($1.6 million per year) expected to be financed through donor resources yet to be committed. - Activities and estimated annual costs: - developing methodological and operational tools and country work for 4–6 LICs: est. $1.2 million/year; - assessing, applying, and disseminating performance indicators and training; reviewing and disseminating lessons learned: est. $1.1 million/year; - establishing a Debt Management Practitioners Program: $300,000/year. - Fund resource requirements over four-year period: up to 5.5 staff years ($1.25 million) total. - FY 2008: 1.2 staff years for (i) developing analytical and operational MTDS tools; (ii) capacity building missions in 4 select countries; (iii) coordination, backstopping, review, and follow-up. - From FY 2009 onwards (six countries a year): an additional 1.45 staff years required each year. - Mission travel over four years estimated at $1.2 million. - Total Fund capacity building proposal cost estimate: $2.45 million (provisional and may need upward revision). - Fund FY2008–FY2011 resource table (as presented): - Development of MTDS framework: 0.3 0.3 - Field time 1/: 0.8 1.2 1.2 1.2 4.4 - number of countries: 4 6 6 6 22 - number of missions: 8 12 12 12 44 - time/mission: 0.1 0.1 0.1 0.1 - Mission follow up 2/: 0.2 0.2 0.2 0.2 0.8 - Total resource costs (years): 1.2 1.4 1.4 1.4 5.5 - Total resource costs (US$) 3/: 265,605 317,488 328,505 339,092 1,250,690 - Mission travel (US$) 4/: 208,000 321,360 331,001 340,931 1,201,292 - Total Costs (US$): 473,605 638,848 659,505 680,023 2,451,982 - Notes from table: - 1/ Two IMF staff will participate per mission (13 day visits, 2 missions/country). - 2/ One week per mission. - 3/ Based on standard costs for an A9-A15. - 4/ Based on two 13 day missions per country and cost inflation of 3 percent per annum. ### Annex IV — The Commonwealth Secretariat (COMSEC) - COMSEC Debt Management Section (DMS) established an integrated assistance program beginning in 1985, including development of debt management software (CS-DRMS). - CS-DRMS records, reports, analyzes and manages external and domestic; medium/long-term and short-term; public and private debt flows. - DMS provides TA from data recording and reporting with CS-DRMS to advising on institutional and administrative arrangements for sound debt management. - Regional Adviser’s project launched in 2005 for four regions in collaboration with WAIFEM, MEFMI, ECCB and the Government of Fiji. - As of January 2006, 53 countries (including non-members) have adopted the CS-DRMS, of which 24 are LICs. *Italic: Source: _032707m - 80. In parallel with the work on the ED DQAF the Fund has started a new initiative to* ### 102. In 1982, UNCTAD designed a computer-based Debt Management and Financial ### 032707m - 102. In 1982, UNCTAD designed a computer-based Debt Management and Financial Analysis System (DMFAS) to help countries manage their external debt. ### UNCTAD / DMFAS - Designed in 1982: computer-based Debt Management and Financial Analysis System (DMFAS). - Current version facilitates recording and analyzing various types of debt: external and domestic; medium/long-term and short-term; public and private. - Geneva-based DMFAS Program: - Works directly with 65 low and middle-income countries, 34 of which are LICs. - Typically provides services to governments through technical cooperation projects. - Provides assistance in installation or upgrading of DMFAS software and related software training. - Technical assistance covers maintenance and system support, procurement of appropriate equipment, participation of government officials in DMFAS training seminars, study tours for government officials to other DMFAS user countries, and assistance in debt analysis and development of debt management strategies. ### Debt Relief International (DRI) - London-based non-profit established in 1997 to implement a Capacity Building Program (CBP). - Overriding objective: build capacity of HIPC governments to manage their debt strategy and analysis independently. - CBP coverage: 36 HIPC-eligible countries. - Implemented in close collaboration with four regional providers of debt management TA. - Advisory scope: institutional reform, external and domestic debt management, debt re-negotiations, macro-economic forecasting, and poverty reduction programming. - Coordinates regional and national workshops. - CBP finances: - short-term capacity-building advisors; - activities related to the HIPC Ministerial Network (biannual meetings of HIPC Ministers of Finance and their senior officials); - the HIPC Technical Network (comprising middle-level management); - newsletters, publications and a website that facilitate communication among HIPCs. ### Macroeconomic & Financial Management Institute of Eastern & Southern Africa (MEFMI) - Established in 1997; owned by 13 regional member countries: Angola, Botswana, Kenya, Lesotho, Malawi, Mozambique, Namibia, Rwanda, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe. - Manages training program focusing on macro-economic and financial sector management, including debt sustainability analysis, cash management and domestic public debt market development. - Training offered through workshops and seminars. - Works with DRI’s CBP to assist HIPC members build capacity in debt sustainability analysis and strategy formulation. ### Pôle-Dette (Regional Debt Management Training Center of Central and Western Africa) - Based in Yaoundé; manages the Debt Management Capacity Building Project established jointly by Training Centers of the Central Bank of Western African States (BCEAO) and the Bank of Central African States (BEAC) in 1999. - Membership encompasses 14 countries: Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Congo Republic, Cote d'Ivoire, Equatorial Guinea, Gabon, Guinea-Bissau, Mali, Niger, Senegal and Togo. - In addition, assistance is provided to Guinea and Mauritania. - Majority of seminars and workshops organized jointly with DRI. - Activities: training workshops in debt sustainability analysis and other areas covered by the CBP; Pôle-Dette and DRI organize joint missions to countries to evaluate capacity building requirements and assist with urgent debt strategy support. ### West African Institute for Financial and Economic Management (WAIFEM) - Established in 1996 by Central Banks in Gambia, Ghana, Liberia, Nigeria, and Sierra Leone (member countries). - Primary objective: building capacity for debt, macroeconomic and financial management. - Key mission: strengthen capacity of member countries to develop, present, and negotiate a case for debt relief through the HIPC Initiative. - Training subjects: debt management, financial sector management and macro-economic management. - Under the CBP, WAIFEM has extended activities to institutional and governance dimensions of human resource development and management in debt management. - Expanded audience to include legislators and the mass media to improve capacity to assess economic and financial policy issues and performance. ### Center for Latin American Monetary Studies (CEMLA) - Established in 1952; based in Mexico City. - Objective: promote better understanding among central bank and other financial agency personnel of monetary and banking matters, pertinent aspects of fiscal policy, and their relation with the economies of Latin America and the Caribbean. - Organizes seminars and special training courses, and publishes surveys and research studies. - After the launch of HIPC, in collaboration with DRI, began assisting HIPC members to develop debt management capacity to benefit from the HIPC Initiative and avoid future over indebtedness. ### Crown Agents - A limited company delivering capacity building and institutional development services in public sector transformation, including revenue enhancement and expenditure management, banking, public finance, training and procurement. - Has provided debt management services to developing countries worldwide. - Technical partnership with ComSec to install and service the CS-DRMS. - Links with debt management offices in a number of OECD countries that collaborate by providing technical advice, delivering training sessions, and receiving study tours. ### United Nations Institute for Training and Research (UNITAR) - Developed the 'legal aspects' for training and capacity building of debt managers in Africa. - Training conducted since 1987; partnerships with regional organizations like MEFMI, WAIFEM and Pôle-Dette started as early as 1998. - Since 2001, offering six-week e-Learning courses for capacity building and training of debt managers using new information and communication technologies. - Legal aspects training focuses on skill building of lawyers and non-lawyers in negotiating, drafting and structuring international financial transactions. - Developed a diagnostic tool to develop national profiles of existing legal infrastructure of developing nations to provide guidance and inputs in improving financial governance and transparency. *Source: Provided content unit.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/2007/eng/_032707m.pdf_