## _030513

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---

### Executive summary — program background and purpose
- In 2009, the Boards of the IMF and World Bank jointly endorsed a capacity building program to help developing countries strengthen their public debt management frameworks.
- A key aspect was to help developing countries implement the Medium-Term Debt Management Strategy (MTDS) framework developed by staffs.
- Continued use of the complementary framework—the Debt Management Performance Assessment (DeMPA) (developed in 2007)—to assess effectiveness of the broader institutional arrangements for public debt management was supported.
- This paper provides an update on implementation of the program since its endorsement in 2009.

### Rationale and context
- The global financial crisis reinforced the importance of the debt management agenda by highlighting:
  - the need to manage sovereign debt well even if direct effects on many developing countries were limited;
  - the scale of investment needs and potentially reduced access to concessional financing, implying greater reliance on nonconcessional and market-based financing and attendant changes in debt portfolio risk profiles.
- The program focuses on countries eligible to borrow from either the International Development Association (IDA) or the Poverty Reduction and Growth Trust (PRGT).

### Delivery, uptake, and capacity building activities
- Since 2009, 59 countries have received technical assistance under this program.
- Individual country missions have been supported by knowledge transfer through training and workshops.
- Complementary support has included:
  - debt management reform plans;
  - targeted TA on analytical and operational issues, including domestic government securities market development.
- Delivery modalities varied: discrete engagements or comprehensive and sustained follow-up programs.
- Collaboration: joint Bank-Fund MTDS TA program and the Bank and Fund MTDS Practitioners Group meet regularly.
- DMF (Debt Management Facility) launched November 2008 and has supported work in over 50 developing countries.
- Training since 2009:
  - 51 training events delivered.
  - Training reached over 300 country participants.

### Outcomes, progress, and DeMPA findings
- Overall program impact:
  - Bank and Fund efforts are having a positive impact though much work remains.
  - Preliminary findings of the external evaluation of the Bank‟s Debt Management Facility recognize positive impacts.
- DeMPA coverage and follow-up:
  - Since 2007, a total of 54 developing countries have been assessed using the DeMPA tool; about sixty percent of these have received subsequent TA under the program.
  - DeMPA follow-up missions show improvements in organizational structures, legal frameworks, borrowing procedures, debt management strategy development, and operational risk management.
  - Little or no improvement observed in audit and evaluation of debt management operations and cash management.
- Cross-country strengths and weaknesses:
  - Strengths: legal framework, debt recording, coordination with monetary policy.
  - Weaknesses: key analytical functions (development of robust debt management strategies), assessment of cost effective and beneficial terms for external borrowing, cash flow forecasting and cash management, operational controls, business continuity planning, and independent auditing of debt management.

### Key statistics and selected portfolio risk indicators (preserved exactly)
- Since 2009, 59 countries received TA under the program.
- For the median low-income country: real GDP growth is estimated at around 5 percent in 2011.
- On average, around 12 percent of revenues are used in servicing debt.
- Table 1 (selected portfolio risk indicators):
  - Outstanding debt/GDP (%) — Average: 39%  Max: 73%  Min: 13%
  - Foreign exchange debt/Total debt (%) — Average: 71%  Max: 94%  Min: 50%
  - Average time to maturity (years) — Average: 11.0  Max: 17.5  Min: 6.0
  - Average time to maturity (domestic debt) — Average: 3.6  Max: 9.1  Min: 0.5
  - Average time to maturity (external debt) — Average: 13.5  Max: 20.0  Min: 6.6
  - Debt maturing in next 12 months (% of total debt) — Average: 15%  Max: 34%  Min: 2%
  - Average time to re-fixing total debt (years) — Average: 10.3  Max: 15.3  Min: 4.0
  - Debt re-fixing in next 12 months (% of total debt) — Average: 23%  Max: 56%  Min: 3%
- Financing and policy context:
  - Net ODA by members of the OECD Development Assistance Committee fell by 2.7 percent in 2011.
  - Country programmable aid was anticipated to stagnate between 2013 and 2015.

### MTDS TA program, tools, and institutional reforms
- Objective: help authorities assimilate the MTDS framework and build capacity in use of the MTDS Analytical Tool.
- Delivery: TA missions complemented with workshops; tool revised in response to user feedback, field-tested, externally peer-reviewed, and released on Bank and Fund websites.
- Progress in formal strategies:
  - Countries publishing or regularly updating formal strategies: Ghana and Kenya.
  - Countries that recently presented their first formal strategy to ministers, cabinet or parliament: Cape Verde, Malawi, Moldova, Mozambique, and Tanzania.
  - Countries using MTDS analysis internally without publishing: Bangladesh.
  - Follow-up DeMPAs show progress in almost half the assessed countries (e.g., The Gambia, Malawi, Mongolia).
- Institutional and organizational reforms (examples preserved):
  - Institutional coordinating committees: Bangladesh, Bhutan, Togo.
  - Front, middle and back-office structures: Moldova, Maldives, Malawi, Tanzania, Vietnam.
  - Strengthened middle office capacity: Bangladesh, Papua New Guinea.
  - Debt data reporting/creation of debt statistical bulletins: Bhutan, Burkina Faso, Mali, Mozambique, Nigeria.
  - Strengthened debt recording/management software systems: Guinea Bissau, Tanzania.
  - Enhanced back-up procedures and operational risk management: Maldives, Bhutan, Togo.
  - Cash management improvements: Maldives, Malawi, Bangladesh (publication of Treasury bills/bonds issuance calendars, single treasury account, cash management committees).

### Capacity constraints, operational risk, and staffing
- Capacity constraints and institutional fragility remain acute in many developing countries.
- Operational vulnerabilities:
  - Lack of adequate, explicit, and well understood procedures governing debt management operations.
  - Instances where debt transactions are entered into and verified by the same individual.
  - Missing or poorly implemented codes of conduct.
  - Staff turnover and dependence on one or two key qualified staff.
- TA response: preparation of formal procedure manuals and implementation of systematic business processes are key TA elements.
- Analytical capacity remains constrained; initiatives needed to augment incentives and retain skilled debt management staff.

### Changing financing landscape, market access, and risks
- Graduation and financing mix:
  - Economic growth will lead some countries to graduate from IDA eligibility, changing available official sector financing and reducing access to concessional financing.
  - This will likely imply higher cost while increasing available financial choices.
- Market-based financing challenges:
  - Refinancing and exchange rate risks; indirect challenges of absorption and cost of carry often not adequately assessed.
  - Trade-offs in issue size and liquidity: anecdotal evidence suggests paying up to 200–250 basis points on an illiquid issue.
  - Example carry-cost calculation preserved: borrowing $750 million for five years to finance a three-year investment at an all-in-cost of 5 percent, carry cost could amount to $25 million in the first year and $12.5 million in year two; the return on the associated investment has to be equivalent to at least 6 percent per annum over the five years of the bond just to help cover this cost.
- Syndicated loan market:
  - May be suitable for testing access; can complement eventual bond issuance; costs can be high and maturities may not be as long.
- Domestic market constraints:
  - Countries with an established local institutional investor base may access long-term funding (e.g., Kenya, Nigeria).
  - Where banks are the only viable investor, domestic markets remain small with short maturities.
- Risks from increased commercial borrowing:
  - Higher financing costs contributing to deterioration in debt dynamics.
  - Aggravation of portfolio risks due to bullet-payment structures increasing refinancing risk and external debt exposure increasing exchange rate risk.
- Demand for TA likely to increase; prioritization recommended:
  - Priority to countries with explicit commitments in a Bank loan or Fund program.
  - Maintain a broader pipeline for other countries with clear commitment to capacity building.
  - Consider conditionality for follow-up TA based on implementation of earlier recommendations or a country’s financing situation.

### Trends in accessing international capital markets and selected issuances
- Market access history:
  - Crisis caused a “sudden stop” in late-2008; market access reestablished with Senegal debut bond in December 2009.
  - Since then, seven different sovereigns issued a total of US$5.6 billion in debut issuance; three were African—Angola, Namibia, and Zambia.
- Key operational and transaction cost issues: advisory fees, trustees, paying agents, currency swaps.
- Selected recent international issuances (preserved exactly):
  - Ghana: Issuance Date 27-Sep-07; Maturity Date 4-Oct-17; Yield at issue (%) 8.500; Tenor 10; Volume ($ mn.) 750; Currency USD
  - Sri Lanka: Issuance Date 17-Oct-07; Maturity Date 24-Oct-12; Yield at issue (%) 8.250; Tenor 5; Volume ($ mn.) 500; Currency USD
  - Gabon: Issuance Date 6-Dec-07; Maturity Date 12-Dec-17; Yield at issue (%) 8.250; Tenor 10; Volume ($ mn.) 1,000; Currency USD
  - Georgia: Issuance Date 7-Apr-08; Maturity Date 7-Apr-13; Yield at issue (%) 7.500; Tenor 5; Volume ($ mn.) 500; Currency USD
  - Senegal: Issuance Date 15-Dec-09; Maturity Date 22-Dec-14; Yield at issue (%) 9.473; Tenor 5; Volume ($ mn.) 200; Currency USD
  - Belarus: Issuance Date 26-Jul-10; Maturity Date 3-Aug-15; Yield at issue (%) 9.207; Tenor 5; Volume ($ mn.) 600; Currency USD
  - Montenegro: Issuance Date 7-Sep-10; Maturity Date 14-Sep-15; Yield at issue (%) 8.000; Tenor 5; Volume ($ mn.) 254; Currency EUR
  - Albania: Issuance Date 28-Oct-10; Maturity Date 4-Nov-15; Yield at issue (%) 7.625; Tenor 5; Volume ($ mn.) 407; Currency EUR
  - Jordan: Issuance Date 8-Nov-10; Maturity Date 12-Nov-15; Yield at issue (%) 4.125; Tenor 5; Volume ($ mn.) 750; Currency USD
  - Nigeria: Issuance Date 21-Jan-11; Maturity Date 28-Jan-21; Yield at issue (%) 7.126; Tenor 10; Volume ($ mn.) 500; Currency USD
  - Namibia: Issuance Date 27-Oct-11; Maturity Date 3-Nov-21; Yield at issue (%) 5.835; Tenor 10; Volume ($ mn.) 500; Currency USD
  - Angola: Issuance Date 14-Aug-12; Maturity Date 16-Aug-19; Yield at issue (%) 7.186; Tenor 7; Volume ($ mn.) 1,000; Currency USD
  - Zambia: Issuance Date 13-Sep-12; Maturity Date 20-Sep-22; Yield at issue (%) 5.625; Tenor 10; Volume ($ mn.) 750; Currency USD
  - Bolivia: Issuance Date 22-Oct-12; Maturity Date 29-Oct-22; Yield at issue (%) 4.875; Tenor 10; Volume ($ mn.) 500; Currency USD
  - Mongolia: Issuance Date 5-Dec-12; Maturity Date 5-Jan-18; Yield at issue (%) 4.125; Tenor 5; Volume ($ mn.) 500; Currency USD
  - Mongolia: Issuance Date 5-Dec-12; Maturity Date 5-Dec-22; Yield at issue (%) 5.125; Tenor 10; Volume ($ mn.) 1,000; Currency USD
  - Average: Yield at issue (%) 6.930; Tenor 7; Volume ($ mn.) 607

### Lessons, challenges, and implications for future work
- Overarching lesson: debt management reform and capacity building is complex and takes time; success depends on analytical capacity and enabling institutional structure.
- Specific lessons and implications:
  - Strong country ownership is critical for success; support should be prioritized to countries where senior policymakers are committed to follow-through.
  - Building analytical capacity remains fundamental as debt portfolios become more complex and access to nonconcessional and market-based financing rises.
  - Embedding debt management reform within Bank loan or Fund program design supports more sustained progress.
  - Exogenous factors (natural disasters, conflicts) have impeded efforts in some cases.
  - Demand for debt management TA is growing; resource constraints require prioritization and possible conditionality for follow-up support.
- Bank and Fund staffs remain committed to continued support, subject to resource constraints that both institutions face.

*Source: INTERNAL IMF/World Bank content provided in the supplied PDF excerpt.*

### EXECUTIVE SUMMARY

### _030513 - EXECUTIVE SUMMARY

### Program background and purpose
- In 2009, the Boards of the IMF and World Bank jointly endorsed a capacity building program to help developing countries strengthen their public debt management frameworks.
- A key aspect was to help developing countries implement the Medium-Term Debt Management Strategy (MTDS) framework developed by staffs.
- The Boards supported continued use of the complementary framework—the Debt Management Performance Assessment (DeMPA) (developed in 2007)—to assess effectiveness of the broader institutional arrangements for public debt management.
- This paper provides an update on implementation of the program since its endorsement in 2009.

### Rationale and context
- The global financial crisis reinforced the importance of the debt management agenda, highlighting:
  - the need to manage sovereign debt well even if direct effects on many developing countries were limited;
  - the scale of investment needs and potentially reduced access to concessional financing, implying greater reliance on nonconcessional and market-based financing and attendant changes in debt portfolio risk profiles.
- Consequently, countries need sufficient analytical capacity to design robust debt management strategies, leverage new financing sources effectively, and manage resultant portfolio risks.
- The program focuses on countries eligible to borrow from either the International Development Association (IDA) or the Poverty Reduction and Growth Trust (PRGT).

### Delivery and uptake
- Since 2009, 59 countries have received technical assistance under this program.
- Individual country missions have been supported by knowledge transfer through training and workshops.
- The MTDS and DeMPA have in some instances been complemented by:
  - support to develop debt management reform plans;
  - other targeted technical assistance, including efforts to develop domestic government securities markets.
- A range of technical assistance providers have partnered in these efforts.
- Feedback from recipient governments has been very positive, and demand is growing.
- Country authorities indicated the MTDS framework is useful and sufficiently flexible to accommodate country-specific issues; some have already published a formal debt management strategy.

### Outcomes, progress, and performance
- Experience to date indicates Bank and Fund efforts are having a positive impact, though much work remains to be done.
- Preliminary findings of the external evaluation of the Bank‟s Debt Management Facility are being finalized and recognize positive impacts.
- Evidence from follow-up DeMPAs shows clear gains in:
  - organizational structures;
  - legal frameworks;
  - borrowing procedures.
- Significant progress has been made in:
  - integration of debt management responsibilities and data reporting and recording;
  - improved procedures to mitigate operational risks.
- Nevertheless, overall DeMPA results across the full sample highlight ongoing weaknesses in critical areas.

Key statistics and indicators preserved from the report:
- Since 2009, 59 countries received TA under the program.
- For the median low-income country: real GDP growth is estimated at around 5 percent in 2011.
- On average, around 12 percent of revenues are used in servicing debt.
- Table 1 (selected portfolio risk indicators):
  - Outstanding debt/GDP (%) — Average: 39%  Max: 73%  Min: 13%
  - Foreign exchange debt/Total debt (%) — Average: 71%  Max: 94%  Min: 50%
  - Average time to maturity (years) — Average: 11.0  Max: 17.5  Min: 6.0
  - Average time to maturity (domestic debt) — Average: 3.6  Max: 9.1  Min: 0.5
  - Average time to maturity (external debt) — Average: 13.5  Max: 20.0  Min: 6.6
  - Debt maturing in next 12 months (% of total debt) — Average: 15%  Max: 34%  Min: 2%
  - Average time to re-fixing total debt (years) — Average: 10.3  Max: 15.3  Min: 4.0
  - Debt re-fixing in next 12 months (% of total debt) — Average: 23%  Max: 56%  Min: 3%
- Financing and policy context:
  - Net ODA by members of the OECD Development Assistance Committee fell by 2.7 percent in 2011.
  - Country programmable aid was anticipated to stagnate between 2013 and 2015.

### Links with Bank and Fund policy changes
- Changes to Bank and Fund debt-related policies underscore the importance of effective debt management capacity:
  - Review of the Bank-Fund Debt Sustainability Framework (DSF) for Low Income Countries (LICs).
  - Greater flexibility in limits on nonconcessional borrowing in Bank and Fund program arrangements.
- These changes reflect recognition that countries may need to borrow on nonconcessional terms to finance key infrastructure investment.

### Lessons, challenges, and implications for future work
- Strong country ownership is critical for success.
- Specific lessons from implementation:
  - Debt management reform and capacity building is complex and takes time, requiring sustained commitment of senior policy makers; building capacity often entails significant legal, institutional and operational changes and addresses fragmentation challenges.
  - Building analytical capacity remains a fundamental challenge and is especially important as debt portfolios become more complex and the need to develop and implement effective debt management strategies becomes more acute.
  - Progress has been more sustained where complemented by related development solutions in a Bank loan or design elements of a Fund program arrangement and corresponding engagement of Bank and Fund country teams.
  - Exogenous factors (such as natural disasters and conflicts) have impeded efforts to improve institutional and operational capacity for debt management in a number of cases.
- The agenda will remain challenging as countries expand access to nonconcessional and market-based sources in both domestic and international capital markets.
- Both the Bank and Fund remain committed to supporting these efforts.

*Approved By José Viñals (IMF) and Otaviano Canuto (World Bank). Prepared by a team led by Udaibir S. Das and Luc Everaert (IMF) and Sudarshan Gooptu, and Phillip Anderson (World Bank), and co-authored by Allison Holland and Maria Oliva (IMF) and Abha Prasad, Bill Battaile and Lars Jessen (World Bank), with contributions from Guilherme Pedras, Gabriel Presciuttini, and a team from FAD (IMF), Ying Li, and Antonio Velandia (World Bank). Supervised by Robert Sheehy (IMF) and Jeffrey Lewis (World Bank). March 5, 2013.*

### 9.      Since 2009, Bank and Fund staffs have provided debt management support through a

### _030513 - 9.      Since 2009, Bank and Fund staffs have provided debt management support through a

### Integrated TA architecture and engagement approach
- An integrated architecture of instruments has been developed that has proven to be flexible enough to meet the large variety of individual country situations, including taking a programmatic approach when needed.
- Core steps to engagement:
  - (i) a formal diagnostic, such as the DeMPA;
  - (ii) a focused TA mission, including, for example, a joint Bank-Fund MTDS mission;
  - (iii) a more general TA mission; or
  - (iv) country self-assessment.
- After needs are identified, a capacity building action plan can be developed (for example, through a Bank-assisted Debt Management Reform Plan mission) and tailored TA on analytical and operational issues delivered to implement specific elements of the action plan.
- Bank and Fund have provided tailored TA on the legal and institutional aspects of debt management; other TA partners have helped address deficiencies in debt recording.

### Key components of the work program
- The Debt Management Performance Assessment (DeMPA), which assesses the strengths and weaknesses of a country‟s institutional arrangements for PDM.
- The MTDS program, which provides technical and operational guidance on how to determine a medium-term debt management strategy that targets a composition of the debt portfolio consistent with the government‟s preferences with regard to the cost-risk trade-off and long-term debt sustainability.
- The Debt Management Reform Plan which sets out a detailed and sequenced country-owned action plan that aims to alleviate the weaknesses identified in PDM institutions and operations; it details expected outputs and outcomes, actions, sequencing and milestones.
  - In the case of Bank-assisted Debt Management Reform Plans, it will also provide an estimate of budget and resources required to implement the plan.
- Targeted capacity building and TA, customized and sequenced according to country specific needs, priorities, and absorption capacity (e.g., drafting a legal framework to underpin borrowings and guarantees).

### Delivery, coverage and partnership
- Under the overarching program, 59 developing countries have received some assistance from the Bank and/or Fund to support capacity building efforts in the area of debt management.
- Delivery modalities varied by country: discrete engagements or more comprehensive and sustained follow-up programs.
- Collaboration and coordination between Bank and Fund staff reinforced by joint delivery of MTDS TA program and the Bank and Fund MTDS Practitioners Group that meets regularly.
- Partnership with other TA providers is an explicit feature; the MTDS program was designed to include participation by other international and regional TA providers.
- DMF (Debt Management Facility) supports coordination with implementing partners and has supported work in over 50 developing countries (DMF launched in November 2008).

### Pace of delivery and mission averages (as envisaged and actual)
- Initial program envisaged up to 20 DeMPAs per year and applying the MTDS framework in 4-6 countries (implying up to 12 missions taking into account the anticipated need for a follow-up mission) per year; this level of activity was costed in the 2007 paper.
- On average:
  - 13 DeMPAs have been undertaken per year.
  - 7 MTDS missions delivered per year.
  - An average of 6 Debt Management Reform Plan missions per year—following up on DeMPAs but not costed in the 2007 paper—were also delivered.
- Of those 23 countries that have received an MTDS TA mission, several have published or presented formal debt management strategies (examples listed in source).

### Expansion to sub-national level
- The Bank expanded its debt management TA program to strengthen capacity at the sub-national level in response to increased demand from sub-national entities borrowing in markets or from bi- and multi-lateral sources.
- A sub-national DeMPA tool was developed, taking into account inter-governmental framework and fiscal and procedural rules.
  - The sub-national DeMPA tool has been piloted in Lagos and Ondo states in Nigeria, Rio de Janeiro State in Brazil, DKI Jakarta in Indonesia and the metropolitan municipality of Lima, Peru.

### Role of other TA partners and experts
- A variety of short-term external experts helped resource delivery of the TA work program; participation helped ensure a wider population of debt management experts share a common understanding of key issues and allowed Bank-Fund staff to focus on priority cases.

### Status of performance and cross-country findings (DeMPA results and main challenges)
- Since 2007, a total of 54 developing countries have been assessed using the DeMPA tool; about sixty percent of these have received subsequent TA under the program.
- Results across countries assessed post-2009 highlight key analytical, institutional and operational challenges.
- General performance observations:
  - Strengths: legal framework, debt recording, and coordination with monetary policy have been relatively strong.
  - Weaknesses: key analytical functions, including development of a robust debt management strategy, assessment of cost effective and beneficial terms for external borrowing, and cash flow forecasting and cash management.
- Specific findings:
  - Poor performance in the area of debt management strategy was generally related to the quality of the existing strategy and weaknesses in the associated governance process: many countries have a form of strategy that is often unpublished, does not have approval of highest policy makers, and is not supported by an institutional decision making process ensuring regular production, implementation, and updating; most strategies are not underpinned by robust cost-risk analysis of the debt portfolio.
  - Weaknesses related to policies and procedures for external borrowing are of particular concern given likely shifts in borrowing choices: less than one-third of countries in the sample analyzed met the minimum requirements in this area.
    - Scores show: (i) a low degree of assessment of the most beneficial/cost-effective borrowing terms and conditions; and (ii) a general absence of documented procedures for borrowing in foreign markets.
  - Deficiencies in operational controls, business continuity planning, and staff responsibilities increase overall risk as borrowing instruments become more complex.
  - Absence of effective and independent auditing of debt management policies, functions and performance undermines accountability and becomes an increasing problem as borrowing choices become more complicated.

### Evidence of progress where TA was sustained
- Where Bank-Fund TA engagement has been sustained (MTDS missions, Reform Plan missions, or other TA), countries show most progress.
- DeMPA follow-up missions show improvements in:
  - organizational structures,
  - the legal framework,
  - debt management strategy development,
  - operational risk management.
- Little or no improvement observed in:
  - audit and evaluation of debt management operations,
  - cash management.
- Progress is more sustainable when complemented by inclusion of debt management reform elements in Bank loan or Fund program design.

### Training and capacity building results
- Since 2009:
  - 51 training events covering a range of debt management related issues have been delivered by the Bank and Fund.
  - Training has reached over 300 country participants during the period.
- Hands-on training is a key element of Bank-Fund MTDS missions and promotes peer networks for practitioners.

### Summary of country-level steps taken (selected DeMPA indicators and countries reporting steps)
- Legal framework: Strengthened legal framework — Burundi, Haiti, Malawi, Sierra Leone, Togo, Mongolia, Sao Tome Principe, Sierra Leone.
- Managerial structure: Upgraded or modernized organizational structure — Burundi, The Gambia, Ghana, Kenya, Maldives, Malawi, Tanzania, Senegal.
- Enhanced institutional framework governing loan guarantees — Malawi, Senegal, Sierra Leone.
- Debt management strategy: Strengthened middle office — Bangladesh, Papua New Guinea, The Gambia, Liberia, Malawi, Nicaragua, Sierra Leone, Moldova.
- Debt management strategy development based on cost-risk analysis — Bangladesh, Burkina Faso, Ethiopia, Maldives, Cape Verde, The Gambia, Ghana, Malawi, Mali, Moldova, Mozambique, Nigeria, Nicaragua, Rwanda, Tanzania.
- Audit: Strengthened audit function — Malawi, Mongolia.
- Domestic borrowing: Deepening domestic market development — Bangladesh, Kenya.
- Cash Flow Forecasting & Cash Balance Management: Strengthened cash management — Burkina Faso, Malawi, Maldives.
- Segregation of Duties, Staff Capacity & BCP: Reduced operational risk — Bangladesh, Bhutan, Maldives, Rwanda, Togo.
- Debt Records and Debt Reporting: Improved debt recording and reporting — Bhutan, Burundi, Liberia, Burkina Faso, Malawi, Mali, Mozambique, Nigeria, Togo.
- Note: This reflects areas where countries have taken explicit steps to enhance capacity; it does not measure the effectiveness or completeness of the steps taken. This is based on information at the time of a mission visit.

### Analytical capacity and staff issues
- Analytical capacity remains constrained; initiatives are needed to augment incentives and retain skilled debt management staff.
- Initial DeMPAs show some countries have formal debt management strategies but deficiencies in analysis of cost and risk, a particular concern where countries contract significant amounts of nonconcessional or market-based debt.

*Source: Bank and Fund staff (content as provided in the source PDF).*

### 24.      To help address this deficiency, capacity building efforts have centered on the MTDS

### _030513 - 24.      To help address this deficiency, capacity building efforts have centered on the MTDS

### MTDS TA program and tools
- Objective: help country authorities assimilate the MTDS framework for developing a debt management strategy and build capacity in the use of the associated quantitative tool (MTDS Analytical Tool).
- Delivery: TA missions complemented with workshops that provide training for country officials on conceptual and operational aspects of debt management.
- Expected outcome: sound understanding of the framework and focused training should, over time, enhance the quality of debt management strategies and strengthen portfolio risk analysis.
- Tool improvements: revised in response to user feedback to be more user friendly and operationally more robust; extensively field-tested, externally peer-reviewed, and released on the Bank and Fund websites.22

### Progress in developing formal debt management strategies
- Countries publishing or regularly updating formal strategies: Ghana and Kenya.
- Countries that recently presented their first formal debt management strategy to ministers, cabinet or parliament: Cape Verde, Malawi, Moldova, Mozambique, and Tanzania.
- Countries using MTDS analysis internally without publishing a formal strategy: Bangladesh.
- Follow-up DeMPAs show progress in almost half the assessed countries (e.g., The Gambia, Malawi, and Mongolia).
- Use cases:
  - Malawi: quantitative tool quantified cost-risk mix of increasing access to international capital markets versus further reliance on domestic debt markets; examined borrowing constraints defined in an economic program (e.g., limits on net domestic financing).
  - Cape Verde, Ghana, Kenya, Nigeria, and Tanzania: used the MTDS quantitative tool to examine potential implications of contingent liabilities.23
- Key analytical insight: ranking of strategies by cost and risk does not necessarily change with the size of the financing requirement,24 but feasibility of a preferred strategy may be challenged when gross financing requirements rise (e.g., limits on availability of concessional financing when a strategy prescribes meeting 50 percent of financing needs through concessional financing).

### Institutional and organizational reforms
- Legal and back-office reforms supported through Bank-assisted debt management reform plan missions and tailored TA (examples: Malawi, Sao Tome & Principe, Sierra Leone; technical/back-office and audit capacity: Bhutan and Mongolia).
- Integration of debt management responsibilities:
  - Institutional coordinating committees established in some countries (e.g., Bangladesh, Bhutan, Togo).
  - Upgrades to existing debt offices (e.g., Ghana).
  - Front, middle and back-office structures implemented in Moldova, Maldives, Malawi, Tanzania, and Vietnam.
  - Strengthening of middle office capacity in Bangladesh and Papua New Guinea.
  - Ongoing fragmentation challenges: Vietnam, Pakistan, Zambia.
  - Central bank involvement can create role ambiguity and potential policy conflicts (examples: Zambia, Bhutan, Tanzania).
- Data reporting, recording, and operational risk procedures:
  - Improvements in debt data reporting/creation of debt statistical bulletins: Bhutan, Burkina Faso, Mali, Mozambique, Nigeria.
  - Strengthened debt recording/management software systems: Guinea Bissau, Tanzania.
  - Enhanced back-up procedures and operational risk management: Maldives, Bhutan, Togo.
  - More than half of the countries in the sample meet DeMPA requirements for timely and accurate debt data records for both external and domestic debt; facilitated enhanced debt monitoring across developing countries.25
  - Remaining challenges: timely data on commitments, disbursements, and loan guarantees (e.g., Bangladesh); past weaknesses in debt recording contributed to accumulation of debt arrears (now being addressed).
  - Recommendation: authorities should also consider risks associated with private sector debt, especially external debt, and strategies to monitor that.
- Cash management and domestic securities market development:
  - Improvements in cash management practices aided development of domestic government securities markets (examples: Maldives, Malawi, Bangladesh).
  - Measures included publication of Treasury bills/bonds issuance calendars, borrowing procedures, establishing a single treasury account, and setting up cash management committees to improve cash forecasting and coordination.

### Links with broader Bank and Fund policy agenda
- Debt management strength recognized as critical component of country economic programs; Fund programs incorporate structural conditionality aimed at enhancing debt management practices, particularly debt management strategy.
- Bank-Fund policy frameworks for nonconcessional borrowings allow more flexibility to countries with enhanced debt management capacity.27
  - Where CPIA and PEFA measures conflict, staff consider availability and quality of the debt management strategy, track record of accessing market financing and managing nonconcessional borrowing, and availability of timely debt data as necessary conditions for effective debt management.
- Examples of program support (Box 2 highlights):
  - Ghana: two successive structural benchmarks in 2010 and 2011 for publication of a medium term debt management strategy; analytic capacity embedded into Aid and Debt Management Department routines.
  - Kenya: sequenced capacity building from 2004 with Bank collaboration; by 2009 all but one reform action completed; 2011 Article IV praised prudent medium term debt strategy; MEFP for three-year ECF arrangement (approved January 31, 2011) incorporated commitments on contingent liabilities exposures.
  - Cape Verde: presentation of first medium term debt management strategy in November 2011 as a structural benchmark under PSI.
  - Mauritania: IMF ECF (2010) required design of overall external debt management strategy; joint Bank-Fund MTDS mission in June 2012 following a reform plan mission in March 2012.
  - Burundi: IMF ECF (2008) required DeMPA and action plan to increase staff capacity; DeMPA in April 2012 followed by reform plan mission in July 2012.
  - Comoros: HIPC Decision Point document (2010) included three triggers on debt management; DeMPA in 2011 followed by reform plan mission in 2012.
  - Other IMF programs incorporating strategy development/publication: Kyrgyz Republic (2011), Burkina Faso and Côte d’Ivoire (both 2012).
- MTDS and LIC DSF interaction:
  - MTDS focuses on debt composition; LIC DSF focuses on debt sustainability and risk of debt distress.
  - MTDS outcomes supplement a country’s DSA by providing granular assessment of how financing instrument characteristics and redemption profiles transmit shocks into debt stock and interest payments in the medium term.28
- Complementarities with PFM:
  - Effective debt management strategy design requires consistency with the medium-term fiscal framework, predictability in the budget process, and sound cash management practices.
  - Integrating debt management institutional reform into PFM capacity building has improved downstream implementation of debt management TA (examples: Bangladesh, Vietnam, Tanzania, Nigeria via PEFA linkage).
- International initiatives and data standards:
  - Inter-Agency Task Force on Finance Statistics (TFFS) reconvened in 1998 to enhance external debt and international reserves data quality.
  - TFFS produced the External Debt Statistics Guide (2003), currently being updated with a pre-publication version expected in 2013; Public Sector Debt Statistics Guide published in December 2011.
- Support for local currency bond markets (LCBMs):
  - An effective and published debt management strategy provides medium-term perspective and transparency to support market development.
  - G20 heads of state endorsed an action plan to support development of LCBMs in November 2011; Bank and Fund actively supporting this initiative.

### Lessons, gaps and forward challenges
- Overarching lesson: debt management reform and capacity building is complex and takes time; success depends on analytical capacity and enabling institutional structure.
- Specific lessons:
  - Effective debt management cannot be seen in isolation; building robust capacity requires strengthening parallel work streams and often organizational and legal changes with sustained senior policy maker commitment.
  - Capacity building requires on-going support and coordination with Bank and Fund country teams to ensure country ownership, tailoring of TA, and placement within broader country program context.
  - Embedding debt management within Bank loan or Fund program design elements or extensive TA engagement supports more sustained progress (evidenced in legal framework, strategy development, and operational risk management).
  - Strong country ownership is critical for success; support should be prioritized to countries where senior policymakers are committed to follow-through.
  - Demand for debt management TA is growing significantly, reflecting increased awareness of MTDS and DeMPA frameworks, links to debt limits and nonconcessional borrowing policies, and broader recognition of debt management significance.

*Source: _030513 - 24.      To help address this deficiency, capacity building efforts have centered on the MTDS*

### 40.      Capacity constraints and institutional fragility remain acute in many developing

### _030513 - 40.      Capacity constraints and institutional fragility remain acute in many developing

### Capacity constraints and institutional fragility
- Capacity constraints and institutional fragility remain acute in many developing countries.
- Exogenous factors and prioritization conflicts have impeded efforts to improve institutional and operational capacity for debt management.
- Continued support from the Bank and Fund is argued for if PDM policies and practices are to become fully resilient.
- Such progress requires significant time and sustained commitment on the part of country authorities.

### Operational risk and debt office capacity
- The systematic management of operational risk must be improved in most countries.
- Most countries do not have adequate, explicit, and well understood procedures governing their debt management operations.
- Examples of operational vulnerabilities:
  - Debt transactions entered into and verified by the same individual increase risk of mistakes and fraud and threaten data integrity.
  - Codes of conduct guiding debt management operations are often missing or rarely implemented.
  - Staff turnover and dependence on very limited resources (many debt offices depend on only one or two key qualified staff).
- Response in TA:
  - Preparation of formal procedures manuals and implementation of systematic business processes have been factored in as a key element in the staff-delivered TA.

### Impact and evaluation of the current work program
- The current work program has made significant progress in responding to demand by authorities for improving debt management capacity.
- The program has earned a reputation for facilitating the delivery of quality debt management services and products.
- Country authorities reported increased capacity as a consequence of receiving support under the program.
- Preliminary findings from the forthcoming external evaluation of the DMF affirm the program has contributed to positive achievements on the ground.

### Economic outlook and risks
- The near-term economic outlook remains broadly favorable, with positive growth rates supported by domestic demand, including from investment.
- Main risks to the outlook include:
  - Risk of an intensification of financial stress in the euro zone.
  - A sharp fiscal adjustment in the United States.
- Vulnerabilities are accentuated by policymakers not having time to restore policy buffers to pre-crisis levels, limiting scope for counter-cyclical measures if risks materialize.

### Changing nature of financing challenges
- Economic growth has led to higher income levels and implies some countries will graduate from International Development Assistance (IDA) eligibility.
- Graduation will change the nature of available official sector financing and reduce access to concessional financing, likely implying higher cost while increasing available financial choices.
- The depth and length of the current economic crisis is increasing fiscal pressure on official donors, which might reduce medium- and longer-term availability of aid.
- Domestic markets remain constrained in both size and tenors; progress needed on macroeconomic front and financial sector development to make domestic debt a stable source of financing.

### Market-based sources of financing: challenges (Box 3)
- Foreign investor demand for bonds from new issuers is strong in the current low interest environment (see Appendix II).
- Challenges and trade-offs when accessing international capital markets:
  - Refinancing and exchange rate risks are generally recognized; indirect challenges of absorption and cost of carry are often not adequately assessed.
  - Domestic markets are often constrained in size and tenors.
  - Need for progress on macroeconomic policy and financial sector development to support domestic debt market depth and stability.
- Specific trade-offs discussed:
  - Larger issue size: more likely to be liquid, allow inclusion in key indices, broaden investor base, and reduce direct borrowing cost.
  - Smaller issue size: easier to absorb, mitigates cost of carry, but typically carries an illiquidity premium (anecdotal evidence suggests paying up to 200–250 basis points on an illiquid issue).
  - Example carry-cost calculation: If a country borrows $750 million for five years to finance a three-year investment at an all-in-cost of 5 percent, given returns on safe assets are effectively zero, the carry cost could amount to $25 million in the first year and $12.5 million in year two; the return on the associated investment has to be equivalent to at least 6 percent per annum over the five years of the bond just to help cover this cost.
- Syndicated loan market as alternative:
  - May be suitable for testing access to international markets (lower volumes and more tailored structures).
  - Can complement eventual international bond issuance (e.g., Kenya) and mitigate rollover risks.
  - Costs can be high and maturities may not be as long as in the bond market.
- Domestic market constraints:
  - Countries with established local institutional investor base may access long-term funding for public investment (e.g., Kenya, Nigeria).
  - Where banks are the only viable investor, domestic markets remain small with short maturities; long-term financing likely limited and costly.
  - Enhancing domestic debt market access requires sustained policy commitment to financial sector deepening supported by a sound macroeconomic environment and will take considerable time.

### Risks from increased commercial borrowing and policy implications
- As countries move towards more commercial borrowing, a robust debt management strategy and sufficient implementation capacity become critical.
- Maximizing concessional financing tends to be a preferred strategy when available, but becomes less feasible as income rises.
- Substituting nonconcessional and market-based financing can lead to:
  - Higher financing costs contributing to deterioration in debt dynamics.
  - Aggravation of portfolio risks due to typical bullet-payment structures increasing refinancing risk and, where reliance on external debt continues, exchange rate risk.
- Critical need for analytical capacity to measure and monitor portfolio risks and evaluate alternative borrowing choices effectively.

### Demand for technical assistance (TA) and prioritization
- Demand for TA is likely to increase further.
- Limited TA resources—both skills and financial—imply competing demands will need prioritization.
- TA delivery should prioritize countries that show strong commitment to reform; possible two-track approach:
  - Priority to countries with explicit commitments set out in a Bank loan or Fund program.
  - Maintain a broader pipeline for other countries with clear commitment to capacity building.
- Possible conditionality and prioritization mechanisms:
  - Requests for follow-up TA could be explicitly dependent on the implementation of earlier recommendations or other evidence of progress.
  - A country’s financing situation could be considered—priority to countries facing near-term phasing out of IDA-financing and/or with specific plans to borrow from international capital markets or increase significantly domestic debt.
  - For other countries, emphasis could be on strengthening enabling framework elements (debt recording, institutional arrangements) rather than delivery of a Bank-Fund MTDS mission.

### Role of Bank-Fund TA and resource constraints
- Importance of the Bank-Fund TA work program will increase as countries expand access to nonconcessional and market-based sources.
- To ensure developments do not aggravate vulnerabilities, further development of analytical and risk management capacity is needed, coupled with strengthening institutional and governance arrangements.
- Bank and Fund staffs are committed to continued support, subject to resource constraints that both institutions face.
- Work is ongoing to address these constraints to sustain the work program into the medium-term.

### Trends in accessing international capital markets (Appendix II) — findings and risks
- Several developing economies have explored international capital markets as new funding alternatives due to limitations in domestic market financing.
- Pre-crisis, prospects for market access improved due to abundant global liquidity and investor search for diversification and yield.
- The crisis caused a “sudden stop” in late-2008, highlighting unpredictability of market access.
- Market access appears to have been reestablished; Senegal was the first low-income debut bond issuer post-crisis in December 2009.
- Since then, seven different sovereigns issued a total of US$5.6 billion in debut issuance; three were African—Angola, Namibia, and Zambia.
- New funding sources present challenges despite low interest rates:
  - Need for supportive broad macroeconomic environment and external investor risk appetite.
  - Issuers require sufficient technical capacity; operations are highly specialized.
  - Transaction costs can be significant (advisory fees, trustees, paying agents, fees for related transactions such as currency swaps).
- Key risk exposures requiring management:
  - Dealing with large issuance proceeds: carry cost and risk of inefficient allocation.
  - Substantial refinancing risk: bullet structures concentrate refinancing exposure and increase susceptibility to “sudden stop” and exchange rate shocks.

### Selected recent international issuances (Table 3)
- Ghana: Issuance Date 27-Sep-07; Maturity Date 4-Oct-17; Yield at issue (%) 8.500; Tenor 10; Volume ($ mn.) 750; Currency USD
- Sri Lanka: Issuance Date 17-Oct-07; Maturity Date 24-Oct-12; Yield at issue (%) 8.250; Tenor 5; Volume ($ mn.) 500; Currency USD
- Gabon: Issuance Date 6-Dec-07; Maturity Date 12-Dec-17; Yield at issue (%) 8.250; Tenor 10; Volume ($ mn.) 1,000; Currency USD
- Georgia: Issuance Date 7-Apr-08; Maturity Date 7-Apr-13; Yield at issue (%) 7.500; Tenor 5; Volume ($ mn.) 500; Currency USD
- Senegal: Issuance Date 15-Dec-09; Maturity Date 22-Dec-14; Yield at issue (%) 9.473; Tenor 5; Volume ($ mn.) 200; Currency USD
- Belarus: Issuance Date 26-Jul-10; Maturity Date 3-Aug-15; Yield at issue (%) 9.207; Tenor 5; Volume ($ mn.) 600; Currency USD
- Montenegro: Issuance Date 7-Sep-10; Maturity Date 14-Sep-15; Yield at issue (%) 8.000; Tenor 5; Volume ($ mn.) 254; Currency EUR
- Albania: Issuance Date 28-Oct-10; Maturity Date 4-Nov-15; Yield at issue (%) 7.625; Tenor 5; Volume ($ mn.) 407; Currency EUR
- Jordan: Issuance Date 8-Nov-10; Maturity Date 12-Nov-15; Yield at issue (%) 4.125; Tenor 5; Volume ($ mn.) 750; Currency USD
- Nigeria: Issuance Date 21-Jan-11; Maturity Date 28-Jan-21; Yield at issue (%) 7.126; Tenor 10; Volume ($ mn.) 500; Currency USD
- Namibia: Issuance Date 27-Oct-11; Maturity Date 3-Nov-21; Yield at issue (%) 5.835; Tenor 10; Volume ($ mn.) 500; Currency USD
- Angola: Issuance Date 14-Aug-12; Maturity Date 16-Aug-19; Yield at issue (%) 7.186; Tenor 7; Volume ($ mn.) 1,000; Currency USD
- Zambia: Issuance Date 13-Sep-12; Maturity Date 20-Sep-22; Yield at issue (%) 5.625; Tenor 10; Volume ($ mn.) 750; Currency USD
- Bolivia: Issuance Date 22-Oct-12; Maturity Date 29-Oct-22; Yield at issue (%) 4.875; Tenor 10; Volume ($ mn.) 500; Currency USD
- Mongolia: Issuance Date 5-Dec-12; Maturity Date 5-Jan-18; Yield at issue (%) 4.125; Tenor 5; Volume ($ mn.) 500; Currency USD
- Mongolia: Issuance Date 5-Dec-12; Maturity Date 5-Dec-22; Yield at issue (%) 5.125; Tenor 10; Volume ($ mn.) 1,000; Currency USD
- Average: Yield at issue (%) 6.930; Tenor 7; Volume ($ mn.) 607

*Source: INTERNAL IMF/World Bank content provided in the supplied PDF excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_030513.pdf_