## _wp15147 ## Source details **Canonical URL:** [_wp15147](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp15147.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp15147.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp15147.pdf.json) --- ### I. Introduction — purpose, role of law, and public debt management (PDM) - PDM defined: “the process of establishing and executing a strategy for managing the government’s debt in order to raise the required amount of funding at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk.” - Key observations: - “Sustainable public debt was as important a policy objective in the eighteenth century as it is today.” - “Unsustainable public debt does not only affect economic and fiscal stability, but can be inextricably linked with instability of the financial sector.” - Legal framework importance: - A robust legal framework promotes “discipline, transparency, and accountability,” which are “critical to achieving sustainable debt.” - Guidance from international organizations (IMF and World Bank, OECD, Commonwealth Secretariat) recommends legal and procedural soundness and appropriate legal advice for transactions. - Paper structure (as provided): - Part II — overview of the PDM legal framework; - Part III — legal framework design considerations; - Part IV — key elements of the PDM legal framework; - Part V — institutional arrangements for PDM; - Part VI — transparency, accountability and reporting; - Part VII — conclusion. ### II. What constitutes the legal framework for PDM — sources and components - Broad definition: - “The PDM legal framework encompasses the legal norms and institutions that govern public sector debt,” reflecting both public law and private law components. - Public law component: - Regulates government authority to borrow, roles/responsibilities of PDM players, and substantive/procedural matters. - Private law component: - “Comprises the body of law as may be reflected also in contractual arrangements that govern the economic interests or rights and obligations of Government and its relevant counterparties (such as creditors, and agents).” Examples: loan agreements, bond indentures, prospectuses, derivatives contracts, agency agreements. - Multi-level sources of law: - Supranational: treaties of monetary unions (example: Treaty of Maastricht; Stability and Growth Pact; WAEMU, CEMAC, ECCU). - Domestic: Constitutions; primary legislation (PFM laws, dedicated public debt laws); secondary/subsidiary legislation (regulations, rules, circulars). - Box 1 (preserved elements): - Supranational — Treaties of Monetary Union Members - Constitutions — distribute political and fiscal powers and institutional arrangements; authority to borrow; audit and reporting requirements - Primary Legislation — PFM legislation; Dedicated debt legislation; Others (Central Bank laws) - Secondary Legislation — Regulations; Rules, Circulars (e.g. Government Securities Market Rules or Circulars, etc) ### III. Legal framework design considerations — consolidation, allocation, and pragmatism - Reform approach: - “Designing PDM legal frameworks involves several important considerations.” Reforms should be “pragmatic and should be carefully calibrated to help meet reform objectives.” - Consolidation vs fragmentation: - Benefits of consolidation: “clarity, ease of reference, and consistency in the overall governance framework affecting public debt.” - Where multiple laws exist, ensure “no overlaps, inconsistencies, or gaps.” - Objective: provide “a clear, comprehensive, and unambiguous framework for effective PDM.” - Use of PFM or budget laws: - Some jurisdictions prefer an overarching PFM law (examples: Canada’s Financial Administration Act; South Africa’s Public Finance Management Act of 1999 (amended through 2007); Kenya’s Public Finance Management Act of 2012; Uganda’s Public Finance Management Act of 2015) which “deal extensively with public debt management as part of the broader PFM framework.” - For civil law traditions, elevating PDM to an Organic Budget Law may entrench PDM more than an ordinary law. - Primary vs secondary legislation allocation: - “Good practices in PDM require that the legislature establishes the broad framework for PDM, while operational details and guidelines could be left to the Minister to determine.” ### IV. Scope of public debt — definitions, institutions, and instruments - Definition and public institutions: - No universally-accepted definition of “public debt”; legal definitions affect which institutions and instruments fall under PDM requirements. - Examples of legal definitions: - Mauritius’ Public Debt Management Act of 2008 includes central Government, Rodrigues Regional Assembly, local Government, public enterprises (whether or not loans are guaranteed), advances from the Central Bank to any public sector entity, and debt guaranteed wholly or partly by the State. - Moldova’s Organic Law No. 419 (2006) defines public debt to include “all State Debt, the Debt of the National Bank of Moldova, of administrative-territorial units, of public institutions financed in whole or in part from State or Local budgets, and the debt from internal and external borrowings of enterprises where the State or/and administrative-territorial unit own more than 51 percent.” - Public debt instruments and contingent liabilities: - Recommended scope: “cover all debt instruments representing liabilities of the public institutions contemplated in the law,” including marketable and non-marketable debt. - Debt may explicitly include: - direct loans, advances, overdrafts, securities; - payment arrears, suppliers’ credit arrangements, judgment debt, other final compensation claims (examples: Tanzania; Nigeria; Brazil). - Guarantees and contingent liabilities: - Inclusion of guarantees/contingent liabilities may be used to subject them to safeguards and ceilings; statistical practice treats specific contingent liabilities as memo items. - Alternative instruments — sovereign sukuk: - Examples of sovereign sukuk issuances: - U.K. 2014 sovereign sukuk: 200 million pounds sterling or US$ 307 million. - Luxemburg example: 200 million Euros or US$ 240 million. - Hong Kong example: US$ 1 billion. - South Africa example: US$ 500 million. - Legal design notes: - Sovereign sukuk often issued indirectly through wholly-owned SPVs/SPEs; are “trust certificates” rather than conventional debt instruments. - PDM law should clarify sukuk treatment, ensure Shari’ah compliance, and address SPV structuring and accounting treatment. ### V. Objectives, strategy, and analytical tools - Objectives of PDM: - Typical statutory objective: “ensuring that the government’s financing needs and its payment obligations are met at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk.” - Jurisdictions may include additional objectives (example: Jamaica’s PDM Act of 2012 includes objectives (b)–(e) such as developing markets and ensuring MTDS compatibility with macroeconomic targets). - Fiscal responsibility frameworks can provide overarching principles; example: Nigeria’s Fiscal Responsibility Act 2007 (s. 41) requires borrowing “on concessional terms with low interest rates and with a reasonably long amortization period” and public debt proportion of national income to be prescribed by the National Assembly. - Medium-Term Debt Management Strategy (MTDS): - MTDS articulates medium-term policy in volumes, instruments, maturities, and currency mix; increasing number of jurisdictions prepare MTDS; some make it mandatory. - Legal design for MTDS should: - Clarify scope (typically central Government borrowing); - Assign responsibility (Minister of Finance; operationally DMO); - Require coordination (MoF, Central Bank); - Provide for Cabinet approval and publication after approval. - Example of legal mandate: Sierra Leone’s Public Debt Management Act of 2011 requires compliance with the MTDS (Section 6). - Debt Sustainability Analyses (DSAs): - DSAs are commonly used to assess sustainability and inform strategies; statutory basis can formalize frequency, responsibility (Ministry of Finance technical preparation), presentation to Cabinet, and laying before Parliament. ### VI. Legal mandate to borrow — authority, scope, and purposes - Authority and permitted operations: - Law should provide explicit authority for borrowing and debt operations including: buy-backs, exchanges, prepayments, reopening issues, and hedging (interest rate swaps, currency swaps, interest rate futures). - Sources and definitions of external/domestic debt: - Legal frameworks should specify permissible sources (resident and non-resident individuals, institutions, Governments) and clarify definitions of external debt: - By creditor residence; - By currency of denomination; - By jurisdiction of issuance and governing law (many jurisdictions use this third approach). - Who exercises borrowing authority: - May be vested in Legislature or delegated to Executive (typically Minister of Finance). Example: Canada vests borrowing authority in the Governor in Council (Cabinet) who may authorize the Minister. - Debt service appropriations: - Many jurisdictions provide permanent appropriations for public debt service instead of periodic appropriations (examples: New Zealand Public Finance Act 1989 section 65ZH; constitutional provisions in Ghana Article 182 and Jamaica Article 119). - Canada’s Financial Administration Act, section 55 authorizes payment out of the Consolidated Revenue Fund for sinking funds, registrar remuneration, costs/expenses, and contractual payments related to public debt. - Borrowing purposes — spectrum of legal approaches: - General fiscal purposes examples: - Botswana—Section 10, Finance and Audit Act 1970 (amended as of 2007): “Government may borrow locally to meet current requirements.” - Lesotho—Section 3 (1), Loans and Guarantee Act 1967 (as amended): issue government securities and raise loans “to defray expenditures which may lawfully be defrayed.” - Tanzania—Sections 3 and 6, Governments Loans, Guarantees and Grants Act, 1974 (amended as of 2003): raise foreign and local loans “to defray expenditures which may be lawfully defrayed.” - Specific borrowing purposes examples: - Jamaica—Section 10, Public Debt Management Act 2012: lists seven specific permissible purposes (i)–(vii), including financing fiscal deficit, refinancing public debt, financing investment projects approved by the House, payment of guarantees called, cash management, national security, disaster/emergency response. - Moldova—Art. 3(4), 12, 23(1) and 2710, Law no.419-XVI: enumerates purposes including fostering development, exports, job creation, disaster relief, refinancing, financing state deficit, on-lending. - South Africa—Section 71, Public Financial Management Act 1999 (amended as of 2009): lists purposes (a)–(f) including finance national budget deficits, refinance maturing debt, obtain foreign currency, regulate internal monetary conditions, or “any other purpose approved by the National Assembly by special resolution.” - Capital/“Golden Rule” examples: - Brazil, Federal Constitution: “Credit operations may not exceed the sum of capital expenditures in the fiscal year, except those authorized by the Legislature by absolute majority, and with a precise purpose.” - Japan—Article IV, Public Finance Law (Law No. 34 of 1947): “Government may only borrow to finance public works, the scope of which is approved by the Diet.” - Nigeria—Section 41, Fiscal Responsibility Act 2007: borrowing “may only be used for capital expenditures and human development.” - Central bank/monetary policy purposes examples: - Sweden—Act on State Borrowing and Debt Management 1998, section 1: Government authorized to borrow to fulfill Central Bank’s currency reserve requirements. - United Kingdom—National Loans Act of 1968 section 12: authorizes borrowing for fiscal purposes and for “promoting sound monetary conditions.” - Lesotho—Loans and Guarantee Act 1967: allow issuance to conduct monetary policy. - Moldova—Organic Law #419 authorizes state securities for National Bank capital or reserve fund coverage. - Sierra Leone—Section 3 (1), Public Debt Management Act 2011: borrow to “meet requests by the Bank of Sierra Leone to issue Government securities for the sole purpose of supporting monetary policy objectives (...).” ### VII. Debt ceilings — forms, scope, and enforcement - Prevalence and mixed evidence: - “A number of jurisdictions impose ceilings on public debt although evidence on their effectiveness appears mixed.” - Modalities for establishing ceilings: - Political commitments (Canada, Cape Verde); - Supranational ceilings (WAEMU and CEMAC: debt to GDP ratio of 70 percent; ECCU: debt to GDP ratio of 60 percent as a benchmark/target); - Constitutional ceilings (Hungary: 50 per cent of GDP under Fundamental Law of 2012; Poland: Constitutional ceiling 60 percent of GDP); - Statutory ceilings (public debt law, fiscal responsibility law, budget law; examples include U.S. Congressional Budget Act of 1974; Jamaica’s Financial Administration and Audit Act). - Annual ceilings set by Parliament (Argentina, Brazil, Canada, Japan, Moldova, New Zealand, Spain). - Ministerial action by secondary legislation (risk of excessive discretion). - Types of ceilings: - Nominal ceilings (absolute currency amounts); example note: Australia previously had a debt ceiling increased to $300 billion in May 2012 and repealed in December 2013. - Relative ceilings (percentage of GDP); example: Maastricht treaty ceiling of 60 percent of GDP. - Stock versus flow ceilings: stock limits outstanding debt; flow limits net new debt within a period. - Coverage and recommendations: - Best practice suggests covering the general government to avoid arbitrage; avoid multiple debt ceilings; where multiple exist, design should prevent circumvention. - Examples of multiple ceilings: external vs domestic (Lesotho, Tanzania); separate ceilings for Central Bank borrowing; certain exclusions (Moldova); separate ceilings for contingent liabilities (Tanzania). - Legal effect and enforcement mechanisms: - Legal effects vary: some jurisdictions render debt contracted in breach of ceiling invalid; others impose reporting, adjustment, or corrective measures. - Enforcement examples: - Brazil: audit courts warn constituents when debt/contingent liabilities exceed 90 percent of limits; non-compliant transactions are null and void (Fiscal Responsibility Law). - Hungary: Constitution 2011 debt ceiling 50 percent of GDP and requires Parliament to reject budget measures leading to exceedance. - Moldova: increases in internal debt limit reflected in state budget amendments. - Poland: Public Finance Law restrictions when debt exceeds 43 percent or 48 percent of GDP; constitutional limit 60 percent; thresholds adjusted in 2014. - Slovak Republic (2012 Fiscal Responsibility Law): graduated automatic enforcement when debt/GDP approaches 60 percent: - Minister must issue an open letter when the debt ratio reaches between 50 percent and 53 percent of GDP; - An expenditure freeze applies when it reaches between 55 percent and 57 percent of GDP; - A balanced budget requirement applies when the debt/GDP ratio reaches between 57 percent and 60 percent of GDP; - A confidence vote is required when the debt ratio exceeds 60 percent of GDP. - U.S.: Treasury has no authority to borrow above statutory ceiling; only Congress can suspend or increase the ceiling; Executive must deploy “extraordinary measures” until Congress acts. ### VIII. Borrowing mandates for public sector bodies, liability, and consistency - Distribution of borrowing authority: - Legal framework should clarify borrowing mandates across central government, general government entities, and wider public sector (SOEs). - Local governments: may have independent borrowing authority subject to ministerial approval or thresholds (example: Ghana’s Local Government Act 1993, Act 462, section 88). - Parastatals/statutory bodies: may require prior written approval for loans above thresholds (Lesotho Loans (Statutory Bodies) Act 1975, Act No. 22, Section 3). - SOEs: often possess corporate borrowing powers; some statutes confer broad authority (New Zealand’s SOE Act 1986); Tanzania’s Public Corporations Act (Cap 257) grants borrowing authority to public corporations where Government is sole shareholder. - Liability principles: - General rule: public sector entities primarily liable; central government not generally liable for separate entities absent explicit guarantees or assumptions. - Governments may assume liabilities through guarantees, transfers, or direct assumption for economic/political reasons. - Eurostat rulings can treat SOE debt as government liability in certain circumstances (implications for Stability and Growth Pact). - Courts may find “alter ego” liability for statutory corporations in particular facts (example: Klomega v. Attorney General and others, Supreme Court of Ghana, 2013). - Controls and consistency: - Legal frameworks should subject public sector borrowing to controls consistent with central government frameworks: reporting requirements, borrowing limits, prior approvals, ministerial oversight. - Examples of constraints: - South Africa prohibits provincial entities from borrowing in foreign currency or on foreign markets (Public Finance Management Act 1999 as amended, Section 67); Minister may approve annual borrowing plans and impose conditions (Section 66). - Belgium requires reporting of foreign currency borrowing to the National Bank of Belgium (Article 11 of organic law of the National Bank of Belgium). ### IX. Contingent liabilities — eligibility, authority, risk management, and reporting - Eligibility for guarantees and indemnities: - Approaches vary: - Restrict eligibility to public sector entities (example: Mauritius: eligibility limited to regional/local governments and public enterprises). - Open-ended eligibility allowing guarantees to “a body corporate or individual” (example: Lesotho). - Kenya: may guarantee a loan of a county government or any other borrower. - Tradeoff: broad eligibility requires policy framework to limit fiscal risk; narrow eligibility needs provisions for extraordinary cases. - Permitted purposes: - Examples: - Moldova: guarantees only in “exceptional cases” for loans financing major investment projects. - Kenya: guarantees only for loans for capital projects (Public Finance Management Act 2012, section 58 (2) (a)). - Mauritius: allows guarantees for any purpose except loans to finance current expenditure. - Tanzania: guarantees for proceeds used in priority areas per Ministerial regulations. - Authority to issue guarantees: - Typically vested in the Minister of Finance, with permitted delegation for specialist agencies (example: Austria’s Export Credit Agency, OeKB). - Central Bank involvement may be allowed upon Government request (Ghana, Malawi examples), with safeguards such as counter-guarantees (Reserve Bank of Malawi Act). - Some laws prohibit public entities from issuing guarantees (example: Serbia). - Parliamentary approval required in many jurisdictions for guarantees (examples: Finland, Germany, Moldova). - Risk management and reporting: - Legal frameworks should require initial and ongoing risk assessments before guarantees are issued; examples: Kenya’s PFM Act sections 58 and 59. - Require payment of guarantee fees and establishment of reserve funds held by Treasury to meet potential calls on guarantees. - Legal framework should mandate reporting and disclosure of contingent liabilities because they are often off-balance sheet. ### X. Government lending and on-lending; safeguards - Legal authority: - Governments require explicit authority to lend and on-lend funds borrowed by Government; typically set out in debt or PFM laws. - Mitigation of credit and fiscal risks: - Require due diligence, market-based interest charges reflecting borrower risk, ongoing monitoring, collections, Cabinet/Parliament oversight where necessary. - On-lending terms should enable Government to meet primary loan debt service obligations without recourse to further borrowing. - Selected statutory provisions (Box 4 summaries): - Require Minister to explain public policy objective of lending; - Require risk assessment methodology for borrower’s ability to repay; - Cabinet approval for loans/advances over thresholds; possible Parliamentary approval; - Require recording and reporting of loans and advances to Parliament with the budget. ### XI. Institutional arrangements — roles, delegation, DMOs, committees, and fiscal agency - Legislature: - Should establish broad PDM framework, set objectives, and exercise oversight through reporting/accountability; minimize transactional approvals to avoid operational delay. - Examples of transactional approval regimes exist (Austria, Czech Republic, Ghana, Moldova require legislative approval for borrowing transactions). - Best practice: minimize Parliament’s transactional approval role; use budget process and statutory constraints to provide oversight. - Executive and delegation: - Provide explicit authority for Minister of Finance to exercise debt management powers on behalf of Government; allow delegation within statutory boundaries; other Ministers may have supporting/consenting roles (example: Albania requires counter-signature by Minister of Foreign Affairs for international borrowings). - Debt Management Office (DMO): - Centralization under a DMO reduces fragmentation and enhances coordination; primary legislation in some jurisdictions establishes and clarifies DMO status and functions. - DMO responsibilities: prepare MTDS and annual borrowing plans; maintain records of all debt liabilities and contingent exposures; provide technical analyses for borrowing/lending decisions. - Operational autonomy recommended, with options for technical decision-making authority within legal boundaries. - Committees: - Public Debt Management Committees (composition: MoF, Planning Ministries, Central Bank) typically coordinate, advise, or monitor debt management; statutory backing useful for role clarity. - Examples: - Austria: Advisory Council under Export Guarantee Act for guarantees above thresholds; - Iceland: Consultative committee (agreement between MoF and Central Bank) proposes issuance calendar and market arrangements; - Jamaica: Public Debt Management Committee (PDMC) and Public Debt Financing Committee (PDFC) with specific monitoring/advisory roles; - Tanzania: National Debt Management Committee (NDMC) and Technical Debt Management Committee (TDMC). - Agents, advisors, and primary dealers: - Common outsourcing: issuance, registration, clearing, settlement; Central Bank often fiscal agent; legal framework should clarify appointment authority for primary dealers and agents. - Central Bank as fiscal agent: - Legal alignment between PDM law and Central Bank law required; scope of agency relationship should be clear and consistent with central bank mandate. - Operational arrangements typically set out in fiscal agency agreements/MOUs covering roles, remuneration, reporting, indemnities, and protection of Central Bank assets. - Key fiscal agency agreement features (Box 6): - Scope of Central Bank’s role; responsibilities of Minister and DMO; Central Bank obligations; reporting; remuneration and expenses; cooperation arrangements; legal protection and indemnity. ### XII. Transparency, accountability, enforcement, and creditor protection - Transparency requirements (paragraph 100): - Publish MTDS on Government/MoF website and wide circulation newspapers; - Publish annual borrowing plan with the budget; - Periodic public disclosure of stock and composition of public debt (currency, maturity, interest rate structure), and financial assets (loans made by Government); - Maintain public debt records and schedule of repayment obligations; - Periodic publication of borrowing by other public sector entities; - Annual report to Parliament evaluating conformity with the MTDS and explaining variances. - Enforcement and sanctions (paragraphs 101–108): - Violations include unauthorized commitments by non-Minister officials, breach of approvals or debt limits, improper guarantees, or public entities borrowing above permitted ceilings. - Sanctions forms: personal or institutional; civil or criminal; administrative. - Civil remedies: court action to recover payments; example: Suriname authorizes recovery and declares non-compliant obligations voidable. - Criminal penalties examples: - Brazil: criminal sanctions under Fiscal Responsibility Law and Fiscal Crimes Law for officials authorizing prohibited credit operations. - Suriname: “intentional breach” prison term up to ten years and a fine; “accidental breach” prison term up to five years and a lower fine. - Kenya: PFM Act 2012 imposes a maximum prison term of two years and a fine on a public officer who borrows or issues a guarantee in violation of law. - Reporting and remedies: - Require immediate and end-of-year reporting when activities deviate from MTDS or borrowing plan; legal consequences for non-compliant debt vary (void, voidable, unlawful). - Examples of statutory invalidation of non-compliant debt (Box 7 summaries): - Brazil: non-compliant public debt null and void; refund of principal without interest; reserve set aside if refund not effected in same fiscal year. - South Africa: Public Finance Management Act 1999 (section 68) — borrowing/guarantees in breach are null and void. - Nigeria: Fiscal Responsibility Act 2007 (section 45 (2)) — loans by banks/financial institutions to Government in contravention are unlawful. - Suriname: National Debt Act 2002 (Article 4 (11)) — agreements in breach are null and void. - Sierra Leone: PDM Act 2011 (section 27) — Government not bound by loans contracted by unauthorized persons. - Creditor protection and due diligence: - Jurisdictions differ in whether they protect creditor claims despite procedural breaches: - Sweden: State liable for all loans entered into by National Debt Office; lender claims enforceable even if internal procedural breaches occur. - Moldova: “The State Debt is a sovereign Debt and represents an absolute obligation of the Republic of Moldova to its commitments in accordance with signed agreements.” - Tanzania: statute protects lenders by declaring Government bound by transactions even if conditions in sections 4 and 7 were not complied with. - Alternative approach: impose due diligence obligations on lenders (Brazil, Nigeria require financial institutions to request proof of compliance). - Design trade-offs and guidance (paragraphs 110–113): - Sanctions regimes should avoid unintended consequences (creditor uncertainty, higher borrowing costs). - Options include providing comfort to potential lenders, imposing due diligence on creditors, using reporting and corrective measures rather than automatic invalidation. - Overarching recommendation: be pragmatic and calibrated; assess existing legal framework against good practices appropriate to jurisdictional arrangements; balance flexibility with constraints to promote clarity, transparency, and discipline supporting debt sustainability. *Italic: Content derived from the provided IMF PDF extract (_wp15147).* ### REFERENCES _____________________________________________________________________ 55 ### _wp15147 - REFERENCES _____________________________________________________________________ 55 ### I. INTRODUCTION - Quote from Thomas Jefferson, Letters of Thomas Jefferson (1743–1826): “And to preserve their independence, we must not let our rulers load us with perpetual debt...” - Key observations: - “Sustainable public debt was as important a policy objective in the eighteenth century as it is today.” - Sovereign debt crises in developed and developing markets, especially in the wake of the global financial crisis, renewed attention to keeping public debt sustainable. - “Unsustainable public debt does not only affect economic and fiscal stability, but can be inextricably linked with instability of the financial sector.” (See Reinhart C., and K. Rogoff “From Financial Crash to Debt Crisis” 2010.) - Role of Public Debt Management (PDM): - “PDM is the process of establishing and executing a strategy for managing the government’s debt in order to raise the required amount of funding at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk.” - “Guidance for effective PDM has been provided over the years by international organizations such as the IMF and World Bank, the OECD, and the Commonwealth Secretariat, among others.” - Importance of legal framework: - “A robust legal framework is critical for effective PDM, given the centrality of law to public debt.” - A good legal framework promotes “discipline, transparency, and accountability,” which are “critical to achieving sustainable debt.” - Reforms to strengthen PDM legal frameworks have continued in many countries, sometimes motivated by near sovereign debt defaults or sovereign bond market debuts. - Existing literature suggests PDM legal frameworks are generally improving, but “further strengthening is required.” - Purpose and structure of the paper: - The paper “analyzes a comprehensive set of issues in the design of PDM legal frameworks,” drawing on multi-jurisdictional examples to provide guidance for policy makers, debt managers, and legal drafting teams. - Structure: Part II — overview of the PDM legal framework; Part III — legal framework design considerations; Part IV — key elements of the PDM legal framework; Part V — institutional arrangements for PDM; Part VI — transparency, accountability and reporting; Part VII — conclusion. ### II. WHAT IS THE LEGAL FRAMEWORK FOR PUBLIC DEBT MANAGEMENT? - Broad definition: - “The PDM legal framework encompasses the legal norms and institutions that govern public sector debt.” - It “reflects public law and private law components.” - Public law component: - Regulates government authority to borrow and conduct debt management activities, roles and responsibilities of PDM players, and substantive and procedural matters affecting public debt. - Private law component: - “Comprises the body of law as may be reflected also in contractual arrangements that govern the economic interests or rights and obligations of Government and its relevant counterparties (such as creditors, and agents).” - Examples include loan agreements, bond indentures, prospectuses, derivatives contracts, agency agreements. - Guidance and legal advice: - “The IMF and World Bank Revised PDM Guidelines (2014) recommend that debt management transactions should incorporate sound legal features, and that debt managers should ensure that they have received appropriate legal advice before undertaking transactions.” - Interaction and blurring of public vs private law: - Distinctions can be blurred because Government’s capacity to enter private-law contracts derives from public law, making a comprehensive legal framework critical. - Sources of PDM law: - Multi-level laws: supranational, national, sub-national. - Supranational examples: treaties of monetary unions prescribing convergence criteria that include constraints on public debt and fiscal policy (e.g., EU’s Treaty of Maastricht and the Stability and Growth Pact (SGP); treaties of the Eastern Caribbean Currency Union, the West African Economic and Monetary Union, and the Central African Economic and Monetary Union). - Domestic scope may include Constitutions, primary legislation (Acts of Parliament, Laws, Decrees), and secondary legislation (regulations, rules, guidelines, circulars). - Constitutions commonly address: - Political structure and powers: “Constitutions establish the general structure of government and the allocation of political powers.” - Fiscal powers: “Constitutions typically allocate fiscal powers, including taxing and borrowing authority.” Example: Austria’s federal system and autonomy to manage budgets and borrow; Bosnia and Herzegovina examples where sub-entities regulate their respective debts. - Institutional arrangements: broad foundation for public finances including debt management roles of executive and legislature. - Accounting and reporting framework: constitutional provisions for accounting and reporting requirements relating to public finances including debt. - Primary legislation examples: - Public Financial Management (PFM) legislation: budget system laws, fiscal responsibility laws; examples include Canada’s Financial Administration Act (R.S.C., 1985, c. F-11), Brazil’s Fiscal Responsibility Law of 2000 (as amended). - Dedicated public debt legislation: Sweden’s Act on State Borrowing and Debt Management of 1998; United Kingdom’s National Loans Act of 1968; Thailand’s Public Debt Management Act of 2005 (B.E. 2548); Turkey’s Law on Regulating Public Finance and Debt Management 2002 (Law No. 4749); Ghana’s Loans Act of 1970; Jamaica’s Public Debt Management Act of 2012; Mauritius’ Public Debt Management Act of 2009 (amended through 2012); Moldova’s Organic Law No. 419 of 2006 on Public Debt, State Guarantees and State On-lending; Sierra Leone’s Public Debt management Act of 2011. - Fragmented frameworks: some jurisdictions have borrowing provisions scattered across laws (examples: Belize, Botswana, Grenada, Lesotho, and Swaziland). - Specific exclusions: Moldova’s Organic Law No. 419 excludes borrowing from the IMF and other non-resident lenders (Articles 1 (3) and 21). - Other relevant legislation: - Central Bank enabling laws often contain provisions on central bank lending to Government (monetary financing), designate the central bank as Government’s fiscal agent and banker, and thereby affect PDM. - Secondary/subsidiary legislation: - Regulations, ministerial orders, rules, circulars issued by the Minister of Finance or delegated to the Central Bank as fiscal agent. - These may govern market rules for Government securities, methods and timing of sales, and terms and conditions on which securities are issued. - Box 1: Sources of PDM Legal Framework (items preserved verbatim) - Supranational - Treaties of Monetary Union Members - Constitutions - Distribute political and fiscal powers and basic institutional arrangements, establish broad public finance arrangements including the authority to borrow and pay for debt related costs and expenses, and requirements for audit and reporting; - Primary Legislation - PFM legislation—Include budget laws, public financial management/administration laws, fiscal responsibility laws; and establish the framework for budget preparation and execution, cash management, public debt, accounting, auditing, and reporting; - Dedicated debt legislation—Include public debt management laws, Government loan laws, treasury securities laws, or others, which provide more specifically for mandates, institutional, and operational matters relating to public debt management; and - Others—Include other relevant laws such as Central Bank laws. Central Bank laws typically provide for Government borrowing (if any) from Central Banks, and the central bank’s role as fiscal agent to Government. - Secondary Legislation - Regulations - Rules, Circulars (e.g. Government Securities Market Rules or Circulars, etc). ### III. LEGAL FRAMEWORK DESIGN CONSIDERATIONS - Overarching guidance: - “Designing PDM legal frameworks involves several important considerations.” - Reform approach should be “pragmatic and should be carefully calibrated to help meet reform objectives.” - Key questions: “What should be legislated and to what level of detail? Which law(s) should incorporate the framework for PDM?” - Consolidation vs fragmentation: - The legal framework “may be more consolidated in some jurisdictions than in others.” - Benefits of consolidation: “clarity, ease of reference, and consistency in the overall governance framework affecting public debt.” - Where multiple pieces of legislation exist, ensure “no overlaps, inconsistencies, or gaps” that could weaken PDM framework. - Overall objective: relevant sources of PDM law should provide “a clear, comprehensive, and unambiguous framework for effective PDM.” - Use of PFM or budget laws: - In some jurisdictions, an overarching PFM law that covers all aspects of public finance is preferred (examples: Canada’s Financial Administration Act; South Africa’s Public Finance Management Act of 1999 (amended through 2007); Kenya’s Public Finance Management Act of 2012; Uganda’s Public Finance Management Act of 2015), “which all deal extensively with public debt management as part of the broader PFM framework.” - For civil law traditions, elevating PDM framework to the level of the Organic Budget Law may entrench PDM more than an ordinary law. - Primary versus secondary legislation allocation: - Determine which matters should be in primary legislation versus left to Cabinet or Minister by secondary legislation. - “Good practices in PDM require that the legislature establishes the broad framework for PDM, while operational details and guidelines could be left to the Minister to determine.” - Institutional arrangements for this allocation are discussed further in Part V of the paper. *Source: Excerpt from the referenced IMF World Bank working paper content (INTRODUCTION, PART II, PART III).* ### 19. Another key design issue relates to the range of matters to be covered in the legal ### _wp15147 - 19. Another key design issue relates to the range of matters to be covered in the legal ### Range of matters covered in the legal framework - The legal framework for public debt often covers Government borrowing and also provides for lending and/or on-lending by Government, given close links to Government debt and contingent liabilities. - In some jurisdictions the legal framework may also provide for the receipt and management of grants intended for Government. - In developing-country jurisdictions, Government debt may have grant components, and debt and grant management are sometimes managed by the same department/team in Finance Ministries. - Example cited: Tanzania’s Loans, Guarantees, and Grants Act of 1974 as amended in 2004. ### Relationship between PDM, PFM, and fiscal responsibility frameworks (Paragraphs 20–21) - Where PDM laws, budget-related laws, and fiscal responsibility frameworks all exist, they are often part of the same broad public finance management framework and should be coordinated. - Fiscal responsibility frameworks with binding fiscal rules (e.g., budget balance or debt rules) may have implications for PDM and require consistency. - The PDM legal framework should promote clarity in the interaction between PDM, budget execution, and cash management and be consistent with budget planning and execution, cash management, and accounting and reporting under the PFM framework. - Specific legal design points recommended: - a. Require public debt issuance to be reflected in the budget planning and execution phases to ensure they are well accounted for. - b. Support effective cash management by requiring all proceeds of debt issuance to be reflected in the consolidated fund. - Note: Some jurisdictions provide for separate accounts (e.g., special loan accounts), though these are increasingly rare due to treasury single account implementations. - Genuine exception: Government securities issued for monetary policy purposes where proceeds are “sterilized” into a separate account not accessible for Government’s general expenditures. - Example: U.K.’s “National Loan Fund” (National Loans Act of 1968) and the “Debt Management Account”. - c. Clarify the accounting, audit, and reporting framework for public debt, consistent with overall accountability for public finances. ### Key elements of sound PDM legal frameworks (Intro, Paragraph 22) - A good legal framework should establish broad parameters while providing sufficient clarity on several key issues. - Key elements are discussed in subsequent sections, notably scope of public debt. ### Scope of public debt — definition and implications (Paragraphs 23–28) - The legal framework should define what constitutes “public debt”; no universally-accepted definition exists. - Existing literature suggests that debt-to-GDP ratios for a country at any given time could range from 40 to over 100 percent depending on the definition of “public debt” used. - The legal definition matters because it affects which public institutions and instruments fall under PDM legal requirements. Public institutions (Paragraphs 25–26) - The scope should reflect the public institutions whose debt liabilities are subject to PDM requirements; “public debt” often refers to debt of the general government and sometimes the entire public sector. - Inclusion or exclusion of broader public sector debt varies by country, depending on political and institutional frameworks. - Example: Mauritius’ Public Debt Management Act of 2008 defines public debt to include debt incurred by: - (i) the central Government; - (ii) the Rodrigues Regional Assembly; - (iii) the local Government; - (iv) public enterprises, whether or not the loans are wholly or partly guaranteed by the Government; - (v) advances from the Central Bank to any entity in the public sector; and - (iv) debt guaranteed wholly or partly by the State. - Example: Moldova defines “public debt” as “all State Debt, the Debt of the National Bank of Moldova, of administrative-territorial units, of public institutions financed in whole or in part from State or Local budgets, and the debt from internal and external borrowings of enterprises where the State or/and administrative-territorial unit own more than 51 percent.” - The legal definition should promote prudent debt management for the public sector as a whole and support compilation of public debt-related statistics in accordance with international standards (Government Financial Statistics Manual, Public Sector Debt Statistics, International Public sector Accounting Standards). Public debt instruments (Paragraphs 27–29) - The legal scope should ideally cover all debt instruments representing liabilities of the public institutions contemplated in the law. - IMF and World Bank recommend PDM scope encompass main financial obligations over which the central government exercises control, including both marketable and non-marketable debt. - From a statistical perspective, total gross public debt is defined as all liabilities that are debt instruments (financial claims that require payment of interest and/or principal by the debtor to the creditor at a date, or dates, in the future). - Legal clarity is useful on which debt instruments are recognized; most jurisdictions explicitly provide for direct loans, advances, overdrafts, and securities. - The definition of debt may or may not include guarantees and other contingent liabilities. Inclusion may be used to ensure contingent liabilities are subject to safeguards including ceilings; from a statistical point of view specific contingent liabilities are not required to be included in the compilation of debt but reported as a memo item in public sector debt statistics. - Some jurisdictions explicitly recognize non-traditional government obligations as debt, including: - payment arrears, - suppliers’ credit arrangements, - judgment debt, - other final compensation claims. - Examples: - Tanzania’s legal framework explicitly recognizes Government’s payment obligations under suppliers’ credit arrangements as Government loans (Government Loans, Guarantees and Grants Act 1974, amended 2003). - Nigeria’s Fiscal Responsibility Act of 2007 recognizes unpaid judgment debts of the Government as part of Government debt (Section 42 (2): “Outstanding judgment debts not paid shall be considered part of the consolidated debts for the purpose of application of the respective limits set in pursuance of this section.”). - Brazil’s Fiscal Responsibility Law of 2000 (Article section 7) treats “judicial payments” not made during the execution of the budget in which they were included as part of the consolidated debt for debt limit purposes. Alternative instruments and sovereign sukuk (Paragraphs 29–30 and Box 2) - Alternative debt instruments such as sovereign sukuk are gaining popularity, including in non-Islamic jurisdictions. - Examples of sovereign sukuk issuances and authorities: - U.K. Finance Act 2008 and Government Alternative Finance Arrangements Regulations 2014 (S.I. 2014/1327). - The UK’s 2014 sovereign sukuk was 200 million pounds sterling or US$ 307 million. - Luxemburg’s Sukuk Law of July 2014 (200 million Euros or US$ 240 million issuance example). - Hong Kong (US$ 1 billion issuance example). - South Africa (US$ 500 million issuance example). - Turkey’s Law 4749 on Regulation of Public Financing and Debt Management (Article 7/A as amended in 2013). - Mauritius PDM Act of 2008 (Section 3 (3A)). - Legal frameworks for sovereign sukuk should be designed to ensure compliance with Shari’ah principles and reflect sukuk’s legal, accounting, and PDM idiosyncrasies: - Sovereign sukuk are often issued indirectly through wholly-owned SPVs/SPEs and are “trust certificates” rather than conventional debt instruments. - The PDM legal framework should clarify the legal status of sukuk in public debt management and be consistent with overall public financial management law. - Examples of legal provisions clarifying treatment and cash management for sovereign sukuk: - UK GAFAR provides for payment of monies from sukuk into and out of the National Loans Fund and for treating sukuk like Gilts for the purposes of the Debt Management Account; Treasury empowered to give financial assistance to companies involved in alternative finance arrangements and a permanent appropriation is established under the Regulations. - Turkey’s Law 4749 explicitly subjects sukuk or “lease certificates” to rules and principles applicable to securities issued by the Treasury and requires proceeds to be transferred to the Treasury. - Box 2 (stylized legal issues) notes: - Most sukuk require an underlying asset and are structured as murabahah, istisna, or ijara contracts. - Sukuk ijarah commonly involves sale (asset-backed) or lease (asset-based) of assets to an SPV which issues sukuk; SPV holds assets as trustee, leases or rents them to Government, distributes rental receipts (using a “profit rate”) to sukuk holders, and assets are typically re-purchased by Government on maturity. - Legal bases (statutory mandates) typically provide for structuring sukuk through an SPV and for underlying legal and contractual arrangements. - The IMF’s Government Financial Statistical Manual suggests SPE activities should be reflected in government accounts including borrowing, even if no actual economic flows are recorded between the government and the SPE for those fiscal activities. *Italic: Content derived from the provided IMF PDF extract (_wp15147).* ### 31. Public debt management must be guided by broad parameters set out in law. ### 31. Public debt management must be guided by broad parameters set out in law. ### Objectives of Public Debt Management - Clear articulation of medium-to long-term objectives of PDM in the primary legal framework facilitates effective debt management and promotes accountability. - Typical objective: “ensuring that the government’s financing needs and its payment obligations are met at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk.” - Jurisdictions may include additional objectives to reflect national development priorities. Example (Jamaica’s PDM Act of 2012 additional objectives): - “(b) developing and maintaining an efficient market for Government Securities; (c) ensuring that the debt is managed consistent with fiscal sustainability; (d) promoting the development of the domestic debt market; and (e) ensuring that the Medium-Term Public Debt Management Strategy is compatible with the targets of the macroeconomic objectives of the Government.” - Enshrining objectives in primary legislation helps improve transparency and accountability. - Fiscal responsibility frameworks can provide overarching principles to guide PDM (e.g., sustainable debt management, prudent fiscal risk management). Example (Nigeria): - Fiscal Responsibility Act 2007 (s. 41) provides for PDM based on rules ensuring borrowing at all tiers of Government is on concessional terms with low interest rates and with a reasonably long amortization period. - Law requires public debt as a proportion of national income to be held at a sustainable level to be prescribed by the National Assembly from time to time. ### Medium-Term Debt Management Strategy (MTDS) - The MTDS articulates the Government’s medium-term policy for debt and its strategy in terms of volumes, instruments, maturities, and currency mix to help achieve debt management objectives approved by the legislature. - Increasing number of jurisdictions prepare an MTDS; some make it mandatory under law. - A sound legal basis for MTDS preparation is useful; some jurisdictions require preparation on an annual rolling basis, consistent with the medium-term budget framework. - Legal frameworks that provide for MTDS should: - Clarify the scope of debt to be covered (typically central Government borrowing; exclude local government or SOEs except where they engage in quasi-fiscal activities). - Assign responsibility (Minister of Finance explicitly mandated to ensure preparation; operationally prepared by the Debt Management Office or Department). - Require strong coordination among MoF departments and across government agencies (including the Central Bank). - Provide explicitly for approval of the MTDS by Cabinet and publication after approval. - Some jurisdictions require all public debt-related activities to conform with the MTDS. Example: - Sierra Leone’s Public Debt Management Act of 2011 requires all government borrowing and public debt management activities to be undertaken in compliance with the MTDS (see Section 6). - Where law mandates adherence to the MTDS, legal consequences of non-compliance should be clarified (e.g., reporting requirements where the Minister must submit a report to Parliament evaluating conformity with the MTDS). - Some jurisdictions mandate preparation by debt managers of annual borrowing plans to implement the MTDS over a fiscal year; legislative approval of such plans is typically not required. ### Debt Sustainability Analyses (DSAs) - DSAs have become a common feature in a number of jurisdictions; they are part of the overall fiscal risk management framework (not strictly a core PFM function). - DSAs help assess the sustainability of debt given macroeconomic and institutional variables and provide guidance for sound debt management strategies. - Providing a statutory basis for DSA can formalize the practice. Legal frameworks that provide for DSA should: - Clarify responsibility for preparation and approval and the frequency of preparation (e.g., annual basis if domestic capacity permits). - Assign the Ministry of Finance responsibility for preparation at the technical level, with results presented to Cabinet for consideration. - Require results to be laid in Parliament by the Minister of Finance for consideration along with the budget documents. - Recognize operational responsibilities possibly vested in the macro-economic/fiscal policy department/team of the Ministry of Finance, with close coordination with the debt management team. ### Legal Mandate to Borrow - Government’s authority to borrow may be provided in the Constitution and/or in primary legislation (PFM-type laws, debt management laws, and others). - The legal framework should ideally provide explicit authority to conduct debt management operations, including: - debt buy-backs, exchanges, prepayments, the reopening of existing debt issues, and hedging (derivatives such as interest rate swaps, currency swaps, and interest rate futures). - To avoid legal uncertainty, the law should clarify authority and capacity to conduct debt operations broadly (subject to availability of relevant expertise) and subject such activities to governance and transparency safeguards. - Borrowing authority is usually subject to controls to promote discipline and accountability; controls may include specification of permitted sources, borrowing purposes, debt ceilings, and other constraints. ### Sources from which Government may borrow - Legal framework should specify sources: resident and non-resident individuals, institutions, and Governments. - Borrowing authority should explicitly allow Government to borrow from all such sources, and provide authority to borrow domestically and externally. - Exchange control policies may restrict non-resident lending in some countries. - Legal definitions of domestic versus external debt matter; jurisdictions use different approaches: - By residence of the creditor (external debt = debt owed to nonresidents). - By currency of denomination (foreign-currency denominated debt = external debt). - By jurisdiction of issuance and governing law (transactions issued outside sovereign’s jurisdiction and governed by foreign law = external debt). - Many jurisdictions appear to use the third approach (jurisdiction of issuance and governing law); legal framework should clarify the preferred definition while considering international norms and practices. ### Who Exercises Borrowing Authority? - Borrowing authority may be vested in the Legislature (examples: U.S. Congress: “to borrow money on the credit of the United States”; Australia’s Parliament: borrow “money on the public credit of the Commonwealth”). - Constitutions may mandate delegation of borrowing authority to the Executive by an Act of Parliament; such delegation typically vests authority in the Minister of Finance. - Example (Canada): borrowing authority vested in the Governor in Council (Cabinet) who may authorize the Minister to borrow money on behalf of Her Majesty in right of Canada on specified terms and conditions. The Minister may delegate borrowing authority to other officials or entities within legal boundaries. - Delegation implies Executive authority to borrow subject to constraints imposed by the Legislature. ### Debt Service - Legal framework should provide authority to repay debt and related costs and expenses; debt servicing requires parliamentary approval (appropriations) in one form or another. - Many jurisdictions provide permanent appropriations for public debt service obligations instead of periodic appropriations. - Example: New Zealand’s Public Finance Act 1989 provides “permanent legislative authority for payment of certain expenses” defined as “an express authority given by or under an Act to spend public money without further authority.” (As amended in 2013, section 65ZH.) - In some jurisdictions (including Ghana and Jamaica) permanent appropriations for public debt service are provided for in the Constitution (Article 119 of Jamaica’s Constitution; Article 182 of Ghana’s Constitution). - Debt-related payments authorized by legislation should cover not only repayment of principal and debt service costs (interest/coupons), but also other expenses related to public debt. - Example (Canada’s Financial Administration Act, section 55): payment out of the Consolidated Revenue Fund for: - “(...) (a) all money required to provide a sinking fund or other means of securing repayment of securities; (b) the remuneration and compensation of registrars and fiscal agents appointed under the Act; (c) all costs, expenses and charges incurred in the negotiation or raising of loans or issue, redemption, servicing, payment and management of any loan and any securities issued in respect thereof; and (d) all money required to be paid under contracts and agreements related to public debt.” ### Borrowing Purpose(s) - Legal frameworks vary on whether Government borrowing is confined to specific purposes or allowed for broader fiscal purposes. - Policy choices include restricting borrowing to specified purposes (e.g., fund specific expenditures) or allowing borrowing for any lawful or fiscal purpose. - Where law is specific on borrowing purposes, design should ensure Government is not unduly constrained in unforeseen financing needs; consider emergency borrowing provisions for sudden economic shocks or short-term liquidity smoothing. - Examples of legal provisions on borrowing purposes (Box 3): - General fiscal purposes: - Botswana—Section 10, Finance and Audit Act 1970 (amended as of 2007): “Government may borrow locally to meet current requirements.” - Lesotho—Section 3 (1) of the Loans and Guarantee Act 1967 as amended: Minister may issue government securities and raise loans “to defray expenditures which may lawfully be defrayed.” - Tanzania—Sections 3 and 6 of Tanzania’s Governments Loans, Guarantees and Grants Act, 1974 (amended as of 2003): Government may raise foreign and local loans “to defray expenditures which may be lawfully defrayed”. - Specific borrowing purposes: - Jamaica—Section 10 of the Public Debt Management Act 2012: “The Minister may borrow money only for the following purposes (i) to finance the fiscal deficit; (ii) to refinance any maturing or outstanding public debt; (iii) to finance investment projects approved by the House of Representatives; (iv) to finance payment of guarantees called; (v) to facilitate cash management operations; (vi) to finance activities required in the interests of national security; (vii) to reduce or eliminate the effects of a period of public disaster or a period of public emergency as defined in section 20 of the Constitution of Jamaica.” - Moldova—Art. 3(4), 12, 23(1) and 2710 of Law no.419-XVI: Government may borrow for fostering development of the economy and investment activities; promotion of exports; creation of new jobs and improvement of social and environmental conditions; disaster relief and other emergencies; prepayment, repayment, refinancing, restructuring of existing debt and guarantees; financing the state deficit and covering short term cash needs of the Treasury; and for on-lending to finance investment projects, programs or priority activities of the State. - South Africa—Section 71 of the Public Financial Management Act 1999 (amended as of 2009): “Government may borrow to (a) finance national budget deficits;(b)refinance maturing debt or a loan paid before the redemption date;(c) obtain foreign currency;(d)maintain credit balances on a bank account of the National Revenue Fund;(e) regulate internal monetary conditions should the necessity arise; or (f ) any other purpose approved by the National Assembly by special resolution.” - Where legal frameworks are restrictive, some jurisdictions provide flexibility by authorizing other grounds approved by Parliament (examples: Jamaica PDM Act Section 11 (J); Sierra Leone Public Debt Management Act 2011 –Section 3 (1)). *Source: _wp15147 - 31. Public debt management must be guided by broad parameters set out in law.* ### Box 3: Selected legal provisions on Government’s borrowing purposes (Continued) ### Box 3: Selected legal provisions on Government’s borrowing purposes (Continued) ### Capital/Long-term investments only (“Golden Rule”) - Brazil, Federal Constitution: "Credit operations may not exceed the sum of capital expenditures in the fiscal year, except those authorized by the Legislature by absolute majority, and with a precise purpose." - Japan—Article IV of the Public Finance Law (Law No. 34 of 1947): "Government may only borrow to finance public works, the scope of which is approved by the Diet." - Nigeria—Section 41 of the Fiscal Responsibility Act 2007: "Government borrowing by all tiers of Government (federal and state) may only be used for capital expenditures and human development." ### Capitalizing Central Bank or Monetary Policy Purposes - Sweden—Act on State Borrowing and Debt Management 1998, section 1: "The Government is authorized to borrow also to fulfill the Central Bank’s requirements of currency reserves." - United Kingdom—National Loans Act of 1968 section 12: Borrowing authorization is provided for fiscal purposes, as well as to raise "any money which the Treasury considers it expedient to raise for the purpose of promoting sound monetary conditions in the United Kingdom." - Lesotho—Section 3 (1) of the Loans and Guarantee Act 1967 as amended: "The Minister may issue government securities and raise loans for the purposes of conducting monetary policy in Lesotho." - Moldova—Article (4) of Organic Law # 419 on Public Debt, State Guarantees and State On-lending: "The Ministry of Finance is authorized to issue State Securities for increasing National Bank of Moldova’s statutory capital or for covering the debit balance of the general reserve fund of the National Bank of Moldova." - Sierra Leone—Section 3 (1) of the Public Debt Management Act 2011: "Government may borrow to “(...) meet requests by the Bank of Sierra Leone to issue Government securities for the sole purpose of supporting monetary policy objectives (....)”" ### E. Debt Ceilings — Overview and evidence - A number of jurisdictions impose ceilings on public debt although evidence on their effectiveness appears mixed. - Debt ceilings determine the maximum amount of debt that government or other public sector entities can carry. - Views: debt ceilings may be ineffective, and in some cases could increase fiscal costs; in several jurisdictions they are seen as useful tools to constrain fiscal policy and promote sustainable debt. - Where policy favors introduction of a debt ceiling, key legal considerations should be borne in mind in the design of the PDM legal framework. ### Should the ceiling be specified in legislation? — Modalities and examples - Debt ceilings may be established in a variety of ways: - Political Commitments: e.g., Canada and Cape Verde; coalition agreements in Finland. (Also mentions Japan and Korea have expenditure rules/ceilings by political commitment/internal rules.) - Supranational ceilings: part of regional treaties (e.g., EU member states). Examples of monetary unions with ceilings: WAEMU (debt to GDP ratio of 70 percent) and CEMAC (debt to GDP ratio of 70 percent). In the case of the ECCU, a debt to GDP ratio of 60 percent acts as a benchmark or target. - Constitutional ceilings: limited number of countries (such as Hungary and Poland) establish debt ceiling under the Constitution; example: Hungary’s Constitution/Fundamental Law of 2012 a debt ceiling of 50 per cent of the gross domestic product of the previous year; Poland has since 2004 adopted under its Constitution a public debt/GDP ratio of 60 percent. - Statutory ceiling: established under statute such as public debt law, fiscal responsibility law or budget/public finance management law. Examples: U.S. Congressional Budget Act of 1974, Jamaica’s Financial Administration and Audit Act, as amended. - Annual ceilings set by Parliament: e.g., Argentina, Brazil, Canada, Japan, Moldova, New Zealand, and Spain; historically the U.S. required House resolution pre-1974. - Ministerial action: empowering the Minister of Finance to set debt ceiling by secondary legislation (example: section 2 of the UK’s Fiscal Responsibility Act of 2010), noting risk of excessive discretion where no parliamentary affirmation is required. - Tradeoffs: choice among approaches requires consideration of treaty/legal obligations and political/pragmatic factors; legal implications of each option should be considered. ### What legal type of ceiling? - Ceilings should be clear in type: nominal or relative. - Nominal ceilings: absolute numbers (value in a specific currency). Examples: Denmark, U.S. (historical use), Australia previously had a debt ceiling which increased to $300 billion in May 2012 and repealed in December 2013. - Relative ceilings: expressed as a percentage of GDP (historical or forecasted). Example: Maastricht treaty ceiling of 60 percent of GDP. - Ceilings can be on stocks or flows: - Stock ceilings: limit amount of debt at any point in time. - Flow ceilings: limit net debt contracted within a period (e.g., annual); legal framework should ensure debt management operations for liquidity management are not unduly constrained. - Legal design should weigh merits of each type of ceiling. ### Obligations covered by the ceiling - Scope should be clarified; best practice suggests covering debt obligations of the general government. - Central government may not be legally liable for general government debt, but including broad scope promotes discipline. - Example: Nigeria — debt obligations (including judgment debts) at all levels of Government are required to be subject to a single debt ceiling determined by the President. - Some jurisdictions cover only central/federal government debt (e.g., U.S.). - Recommendation: avoid multiple debt ceilings; prefer a single integrated ceiling for all public debt to better manage fiscal risks and prevent arbitrage. - Examples of multiple or alternative ceilings in practice: - Single consolidated ceiling for all levels of general government (Nigeria). - Single ceiling on all federal debt held by the public and intra-governmental debt holdings (U.S.). - Different ceilings for external and domestic debt (Lesotho, Tanzania). - Separate ceilings for Government borrowing from the Central Bank. - Certain types of debt excluded from the debt ceiling (Moldova). - Separate ceilings for contingent liabilities (Tanzania). ### Legal effect of debt ceiling and enforcement mechanisms - Legal framework should be explicit about effect of debt ceiling. - In some jurisdictions, debt contracted in breach of the ceiling is invalid. - Potential unintended consequences of such provisions are discussed elsewhere in the source. - Enforcement through reporting, adjustment, or corrective measures when ceiling is reached — examples: - Brazil: Federal, state, and municipal audit courts required to warn constituents when debt and contingent liabilities reach over 90 percent of their respective limits under the Fiscal Responsibility Law. - Hungary: 2011 Constitution establishes public debt ceiling of 50 percent of GDP and requires Parliament to reject any budget measures which would result in public debt exceeding this ceiling. - Moldova: increase in the state’s internal debt limit must be reflected in subsequent amendments of the state budget law for the respective year. - Poland: Public Finance Law imposes restrictions on public expenditures when debt exceeds 43 percent or 48 percent of GDP, although constitutional debt limit is 60% of GDP; these thresholds were reduced in 2014 from 50 percent and 55 percent as a result of pension system changes. - Slovak Republic: 2012 Fiscal Responsibility Law imposes automatic enforcement mechanisms where the 60 percent debt to GDP ceiling is close to being breached: - Minister of Finance required to issue an open letter when the debt ratio reaches between 50 percent and 53 percent of GDP. - An expenditure freeze applies when it reaches between 55 percent and 57 percent of GDP. - A balanced budget requirement applies when the debt/GDP ratio reaches between 57 percent and 60 percent. - A confidence vote is required when the debt ratio exceeds 60 percent of GDP. - U.S.: Treasury has no authority to borrow above the statutory ceiling, although it will be able to issue additional debt in amounts equal to maturing debt. Once reached, only Congress can suspend or increase the ceiling. Until suspended or increased by Congress, the Executive must deploy "extraordinary measures" to free up borrowing space and cash for critical spending. *Source: IMF staff compilation from the cited legal provisions and excerpts in the provided content unit.* ### 56. In addition to providing for borrowing by the central government, the legal ### _wp15147 - 56. In addition to providing for borrowing by the central government, the legal ### Borrowing mandates for public sector bodies - The legal framework should clarify borrowing mandates for public sector bodies, reflecting political and institutional arrangements and devolution of borrowing authority across federal, state, and local governments. - The framework should clarify distribution of borrowing authority among: - central government; - entities that form part of the broader general government (including local government authorities, autonomous agencies, and statutory funds); - the wider public sector, which would include state-owned enterprises (SOEs). - Jurisdictions differ in the level of borrowing authority provided: - Local government authorities: - In some jurisdictions, local government authorities (municipalities, councils, etc) have legal authority to borrow independently from central Government. - Such legal authority may be provided in the Constitution, the PFM/public debt legislation, and/or legislation establishing or governing local government authorities. - Example: under section 88 of Ghana’s Local Government Act 1993 (Act 462) a local government authority has authority to raise local loans and overdrafts as approved “in the amounts, from the sources, in the manner, for the purposes and on the conditions approved by the Minister in consultation with the Minister responsible for Finance”, except where it does not exceed a threshold specified in the Act, or does not require a Government guarantee. - Parastatals/statutory bodies: - Autonomous public sector bodies (independent regulatory agencies, statutory funds such as social security, deposit insurance, infrastructure funds) may have borrowing authority; the legal framework should clarify the extent and any controls. - Example: In Lesotho, such entities have independent borrowing authority subject to the prior written approval of the Minister of Finance. In respect of loans or bank overdraft of more than Rands 10,000. See Loans (Statutory Bodies) Act 1975 (Act No. 22) Section 3. - Example: Jamaica’s Public Bodies Management and Accountability Act 2010 as amended prohibits public bodies from taking steps to enter into negotiations to borrow money, by way of an issue of bonds, without prior approval of the Minister. - State-owned enterprises (SOEs): - SOEs—entities created either by special statute or under ordinary company law, with commercial objectives, and in which governments own shares either wholly or partly—tend to have borrowing authority by virtue of their legal existence as corporate bodies. - Some jurisdictions confer broad borrowing authority in consolidated legislation (example: New Zealand’s State-owned Enterprises (SOE) Act of 1986). - Example: Tanzania’s Public Corporations Act (Cap 257) confers borrowing authority on every public corporation in which the Government is the sole shareholder. - Example: In Lesotho, SOEs may borrow domestically or externally subject to prior written approval of such borrowing by the MoF. Public Financial Management and Accountability Act 2011, s. 41, section 32. ### Liability for public sector borrowing and government assumption of debt - General legal principle: - Public sector entities should be primarily liable to their creditors for their debt obligations, consistent with their separate legal persona. - As a general legal matter, the central government should not be liable for the debt of a public sector entity; conversely, the debt of the central government should not be held against other State agencies with separate legal personality. - Governments may, however, consciously assume such liabilities under explicit guarantees or indemnities for economic, political or social reasons, sometimes through transfers from the central government budget or through direct assumption of debt obligations. - Example: in the 2013 “Chapter 9” bankruptcy filing of Detroit, the U.S. federal government offered U.S. $300 million in combined federal and private aid. - Speculation exists whether the Austrian government will assume guarantees issued by the province of Carinthia in respect of bonds issued by Heta Asset Resolution AG; Austrian government has publicly stated it will not assume liability for Carinthia’s guarantees (citation included in source). - Eurostat rulings and EU implications: - Eurostat has ruled that EU member states may be liable for the debt of SOEs under certain circumstances, with implications for compliance under the Stability and Growth Pact and possible treaty-based implications. - Example: Eurostat’s letter of February 2011 on Austrian Railway Company ÖBB noted that the Federal Government provided regular subsidies to ÖBB to cover debt service payments for 70 percent of its debt, suggesting indirect responsibility. - Judicial interpretation and “alter ego” doctrine: - Courts may hold statutory corporations to be the “alter ego” of central government in particular facts, making parliamentary approval requirements applicable to such entities. - Example: Klomega v. Attorney General and others (Supreme Court of Ghana, 2013) — the Court held statutory corporations’ agreements were generally outside constitutional parliamentary approval requirements, but left open an exception where a statutory corporation could be deemed an alter ego of the Government. ### Consistency and controls across central government and public sector borrowing - Macroeconomic stability depends on overall aggregate exposure to risk, including overall public sector debt; effective controls over borrowing of public sector entities (particularly local government) are required. - The legal framework should subject borrowing by public sector entities to a framework broadly consistent with that applicable to the central government, subject to fiscal powers in the constitution. - Illustrative legal provisions and controls: - Public Debt Management Objectives: The legal framework could require borrowing by public sector entities to be guided, to the extent possible, by the debt management objectives enshrined in the PDM law. - Reporting requirements: Reporting on debt obligations of all public sector entities is sometimes required by law. - Example: In Belgium, all foreign currency denominated borrowing by the federal and state governments are to be reported to the Central Bank (the National Bank of Belgium), which may request discussion of any negative implications on exchange rate policy with the Minister of Finance. See Article 11 of Belgium’s organic law of the National Bank of Belgium. - Constraints on Borrowing: - Example: South Africa prohibits provincial governments or provincial public entities from borrowing or binding themselves to any future financial commitment denominated in a foreign currency or concluded on a foreign financial market. Public Finance Management Act 1999 as amended, Section 67. - The Minister of Finance in South Africa is authorized to approve annual borrowing plans of such entities, and impose conditions on borrowing by authorized public entities, including limits on borrowing. Public Finance Management Act 1999 as amended, Section 66. - In some jurisdictions, constraints such as debt limits on sub-national debt are imposed through negotiations between federal and sub-national governments (examples: Austria, Belgium, and Denmark). - Legal clarity is important to avoid ambiguities about whether PDM requirements applicable to government automatically apply to SOEs and other public sector bodies. - Example: Ghana’s Supreme Court held constitutional requirement for parliamentary approval of international economic agreements entered into by “Government” did not extend to statutory corporations, but allowed for exceptions where a statutory corporation is effectively the Government’s alter ego. ### Contingent liabilities: scope, creation, and mitigation - Definition and types: - Contingent liabilities include guarantees, indemnities, and other potential liabilities incurred depending on future events. - They may be explicit (contractual or statutory) or implicit (arising after an event, based on political or moral obligations). - Legal frameworks commonly provide government authority to create contingent liabilities; provisions may also appear in PFM, fiscal responsibility, and public investment management legislation. - Examples: Australia’s 2003 Guidelines for Issuing and Managing Indemnities, Guarantees, Warranties and Letters of Comfort; South Africa’s Treasury Regulation 16 under the Public Finance Management Act. - Legal design features to mitigate fiscal risks from contingent liabilities: - Scope: - The legal framework should clarify the types of instruments/claims recognized as Government’s contingent liabilities. - Many frameworks cover only explicit contingent liabilities and often only guarantees; indemnities and other instruments require explicit specification of which losses Government may indemnify. - The legal framework should explicitly provide that letters of comfort and “no objection” letters are not binding and do not create contingent liabilities, depending on framing. - Implicit contingent liabilities: - The legal framework should specify circumstances under which implicit contingent liabilities may become actual liabilities of Government and provide for how such potential liabilities will be created or assumed and reported to Parliament, while avoiding moral hazard. - Reporting: - Explicit reporting requirements are critical because contingent liabilities are often off-balance sheet; reporting promotes transparency of the total quantum of contingent liabilities and fiscal risks. - The legal framework should require reporting and disclosure to enable monitoring and oversight. *Source: IMF content unit _wp15147 - 56. In addition to providing for borrowing by the central government, the legal* ### 65. The question of eligibility for Government guarantees and indemnities is a key ### _wp15147 - 65. The question of eligibility for Government guarantees and indemnities is a key ### Eligibility for Government guarantees and indemnities (Section 65–66) - Jurisdictions differ in approach to who is eligible for Government guarantees and indemnities. - Examples of eligibility approaches: - Public sector entities: some jurisdictions restrict eligibility exclusively to public sector bodies (local authorities, statutory bodies and state-owned enterprises including public private partnerships). Example: Mauritius — eligibility for Government guarantees is limited to regional or local governments, and public enterprises.111 - Open-ended beneficiaries: other jurisdictions allow guarantees to almost anyone. Examples: - Lesotho: under the Loans and Guarantees Act, the government may guarantee local or foreign loans contracted by a local authority, a body corporate or individual.112 - Kenya: Government may guarantee a loan of a county government or any other borrower.113 - Tradeoffs and policy implications: - Broad eligibility requires a clear policy framework to determine circumstances for use of public funds to guarantee liabilities, to reduce fiscal risks. - Narrow eligibility (e.g., only public sector debt) requires policy decisions on handling unforeseen occurrences that may require guarantees (e.g., guaranteeing deposit liabilities of banks or trade finance obligations during a financial crisis or severe economic contraction). - Legal framework safeguards should ensure extraordinary guarantees are well considered and do not become indirect government grants benefiting shareholders and creditors at the expense of taxpayers. *Source: IMF document excerpt (sections 65–66).* ### Permitted purposes for guarantees (Section 67) - The legal framework should specify purposes for which contingent liabilities can be assumed. Examples: - Moldova: government guarantees may be issued only in “exceptional cases” to guarantee loans for financing investment projects that are of major importance for the national economy, among others.114 - Kenya: the 2012 Public Finance Management Act requires guarantees be issued only in respect of loans for capital projects (section 58 (2) (a)). - Mauritius: allows guarantees to be issued for any purpose except for loans to finance current expenditure. - Tanzania: Government may guarantee loans the proceeds of which are to be utilized in furtherance of priority areas set out in regulations made by the Minister of Finance.115 *Source: IMF document excerpt (section 67).* ### Authority to issue guarantees (Sections 68–72) - Legal authority to create contingent liabilities should be clarified in law. - Typical arrangement: - The Minister of Finance should be the sole authority to enter into transactions and execute documentation on behalf of Government; law may permit delegation (e.g., specialist agencies issuing export credit guarantees). - Example: Austria's Export Credit Agency (OeKB) acts on behalf of the Austrian government (Federal Ministry of Finance) to examine applications and issue guarantees.116 - Central Bank involvement: - Some countries allow the Central Bank to issue guarantees on its own behalf or on behalf of Government. - Ghana: Loans Act (section 13) empowers Government to request the Bank of Ghana to issue loan guarantees on its behalf. - Malawi: Reserve Bank of Malawi Act allows the Reserve Bank, upon Government request, to guarantee repayments of principal, interest, and charges under external borrowing of a statutory body.117 - Where Central Banks retain such roles, the legal framework should provide safeguards to mitigate risks to the Central Bank’s balance sheet and fiscal risks, and clarify whether guarantees are subject to the same governance framework as Government-created contingent liabilities. - Example safeguard: Reserve Bank of Malawi Act entitles the Reserve Bank to demand a “counter guarantee” from Government for any guarantee it issues for statutory bodies on the request of Government.118 - Oversight and restrictions: - The legal framework should clarify whether public sector entities (local governments, statutory bodies, SOEs) may themselves issue guarantees. Some laws prohibit this (e.g., Serbia prohibits local governments from issuing guarantees). - The framework should clarify whether Cabinet and/or Parliamentary approvals are required for transactions creating contingent liabilities. Parliamentary approval of contingent debts is required in many OECD and non-OECD countries under budget laws, debt management laws, or constitutions (examples: Finland and Germany).119 Moldova requires Parliamentary approval for government guarantees.120 *Source: IMF document excerpt (sections 68–72).* ### Risk management for contingent liabilities and debt portfolio (Sections 73–75) - Importance: - Risk management for contingent liabilities and the debt portfolio is increasingly important; clear legal underpinnings are essential.121 - Operational framework needed to enable debt managers to identify and mitigate risks associated with contingent liabilities (including PPPs).122 123 - Legal framework responsibilities: - Clarify Minister’s responsibility to ensure appropriate skills, processes, and systems (including internal and external controls) are in place to manage risks related to contingent liabilities. - Required assessments and reporting: - Some jurisdictions explicitly require risk assessments by the Executive before guarantees or contingent liabilities are provided; objective is to assess government exposure including market and credit risks. - Legal framework should mandate initial and ongoing risk assessments, with primary legislation setting broad requirements and secondary legislation providing detailed methodology and reporting triggers (e.g., for reporting to Minister, Cabinet, Parliament). - Example: Sections 58 and 59 of Kenya’s Public Finance Management Act, 2012 provide comprehensive provisions on guarantee risk assessments and reporting. - Fees and reserves: - Legal framework should require payment of guarantee fees or authorize the Minister to charge such fees: - Initial fee to reflect credit risk (likelihood of guarantee being called) plus administrative costs. - Additional fees over the life of the guarantee to reflect changes in credit risk profile. - Fees could be based on a Minister-specified methodology in Regulations for flexibility. - Legal framework may clarify handling of fees by the Treasury (e.g., holding in a reserve fund for paying Government’s liability if called), consistent with budget execution and cash management provisions under the PFM legal framework. *Source: IMF document excerpt (sections 73–75).* ### Government lending and on-lending (Sections 76–78 and Box 4) - Legal authority: - Governments require explicit legal authority to lend money and to on-lend funds obtained by Government borrowing; this framework may be set out in debt or public finance/budget laws.124 - Mitigating credit risks: - Legal framework should require due diligence and prudence in Government lending: detailed credit risk analysis, market-based interest charges reflecting borrower risk, ongoing monitoring and collections, and oversight by Cabinet and Parliament where necessary. - On-lending safeguards: - On-lending entails fiscal risks related to the primary loan; legal framework should require on-lending terms to enable Government to meet debt service obligations under the primary loan without recourse to further borrowing. - Box 4: Selected statutory provisions on Government lending (redacted sample) - Purpose of Government lending: - Requirement for the Minister of Finance to explain the public policy objective of intended Government lending. - Risk Assessment: - Requirement for risk assessment of any proposed lending by Government including the borrower’s ability to repay the loan, based on a methodology to be specified by the Minister in Regulations. - Terms and conditions of the loan to include market-based interest rates that reflect the borrower’s risk profile as well as Government’s funding costs. - Transactional Approval: - Cabinet approval is required by the Minister before a loan or advances over a threshold amount (to be specified by Regulations), and in some cases, approval from Parliament. - Record of Transactions: - Requirement for the Minister to record details of Government loans and advances, with reporting to Parliament as part of documents presented with the budget. *Source: IMF document excerpt (sections 76–78, Box 4).* ### Institutional arrangements for effective public debt management and the role of the Legislature (Sections 79–82) - Institutional design: - Institutional arrangements for public debt management (PDM) should be clear, promote effective oversight over Executive actions, and allow flexibility for debt managers to perform functions. - Legislature’s roles: - The legislature should establish the broad framework for PDM and generally avoid transactional approval; it should set objectives, purposes, and safeguards to promote debt sustainability, and exercise oversight through reporting and accountability requirements in the legal framework. - Delegation of borrowing authority to the Executive does not necessarily remove Parliament’s ultimate borrowing authority; Parliament often retains important roles, including approvals for borrowing transactions and terms. - Examples of legislative approval regimes: - Approvals for every transaction: Austria, Czech Republic, Ghana, Moldova — legal frameworks require legislature to specifically approve all borrowing transactions.125 126 127 128 - Specific approvals for certain transactions only: e.g., Belize requires legislative approval for Government borrowing above a threshold (equivalent of BZD 10 million); some jurisdictions require approval for external borrowing only.129 - Approval of standard terms/annual approvals: e.g., Ghana’s Loans Act allows legislature to approve standard terms and conditions of Government loans while requiring ex post approval of specific agreements; Grenada passed annual Budget Loan Authorization Acts (2012 and 2013) authorizing borrowing under standard terms up to limits; Japan’s Public Finance Law requires annual Diet approval of scope of public works to be financed by Government debt.130 131 - Best practice: - Parliament’s role in approving debt transactions should be minimized to avoid cumbersome, costly transaction-by-transaction approvals; focus on delegating authority and establishing broad legal framework. - The budget process can provide oversight mechanisms (e.g., setting annual borrowing ceilings or targets) to constrain Executive borrowing authority. *Source: IMF document excerpt (sections 79–82).* *Source: Excerpt from IMF working paper (section numbers and cited statutory provisions preserved).* ### 83. Yet for some jurisdictions, transactional approval by Parliament may continue ### _wp15147 - 83. Yet for some jurisdictions, transactional approval by Parliament may continue ### The Role of the Executive - Transactional approval by Parliament may continue to be regarded as a necessary component of governance and accountability in some jurisdictions; tradeoffs are required to balance accountability and good governance against flexibility and autonomy for debt managers. - Important considerations: the level of institutional development in the jurisdiction, and the extent to which the Executive can be relied on to police itself without transactional approvals by the legislature. - Legal framework recommendations: - Provide explicitly for debt management powers to be exercised solely by the Minister of Finance on behalf of Government and subject to the established framework. - Other Ministers may play supporting roles; example: in Albania, the Minister of Foreign Affairs is required to counter-sign borrowing under international agreement.132 - Legal requirements may exist for the Minister of Finance to consult with other Ministers responsible for Economic Development or Planning, local government, or SOEs. - Cabinet oversight: - The legal framework should provide for Cabinet oversight of public debt management (e.g., approving the MTDS, reviewing debt-related reports before submission to Parliament). - Cabinet may approve annual debt and guarantee ceilings, and in some cases, borrowing and guarantee transactions. - Jurisdictions that require transactional approval for Government borrowing include Bosnia133 and Ghana.134 ### Institutional Support and Delegation - Given the enormity of the Minister’s responsibilities, institutional arrangements to support the Minister are critical: - Establishment of debt management departments or offices, and inter-departmental/agency committees. - Delegation of authority to officials or entities to borrow and/or manage debt on behalf of the Minister, including approval and management of individual transactions within defined borrowing programs (e.g., annual program of issuance of government securities, medium-term note program, self-registration in foreign markets). - Legal framework should: - Provide clear statutory backing for delegation. - Provide broad powers for the Minister to appoint agents and advisors to support debt management functions. ### Debt Management Department/Office (DMO) - Centralization benefits: - Centralization of all debt functions in a single unit or agency reduces fragmentation and enhances coordination in debt management.135 - Consolidation (preferably under a single office called the Debt Management Office) promotes a holistic view of debt obligations, effective risk management, debt servicing, audit, evaluation, and reporting. - Legal underpinnings: - Primary legislation in a number of jurisdictions136 provides explicitly for the establishment of the DMO and clarifies its legal status and functions. - Legal framework should require DMO involvement in all technical analyses leading to borrowing and lending decisions and in creation of contingent liabilities. - Mandate the DMO to prepare the MTDS and annual borrowing plans, and to maintain records of all debt liabilities and exposures under contingent liabilities to facilitate reporting by the Minister. - In some jurisdictions, functions related to Government securities have been outsourced to the Central Bank. - Operational autonomy: - Legal framework should support operational autonomy of the DMO to protect technical decision making from political interference. - Options: empower the DMO to make technical recommendations the Minister must consider, or provide the DMO with technical decision-making authority within boundaries established in the MTDS and annual borrowing plans. - Coordination: - Where consolidation is not feasible, the legal framework should promote coordination among departments/entities responsible for day-to-day debt management. - Mandate coordination of debt management with broader fiscal policy management, including coordination between the DMO and other units of the Ministry of Finance and other relevant Agencies. ### Committees for Public Debt Management - Many jurisdictions establish committees for public debt management operations, typically comprising relevant officials of the MoF, Planning Ministries, and central banks. - Functions: coordinating, advising on, or monitoring debt. - Statutory backing may be useful for clarity on composition, roles, and responsibilities; in some countries committees are set up pursuant to agreements between the Ministry of Finance and the Central Bank (example: Iceland). - Box 5 examples (selected jurisdictions and committee features): - Austria: Advisory Council under the Export Guarantee Act to examine applications for Government guarantees above certain thresholds; membership includes multiple ministries, economic and labour chambers, and the Oesterreichische Nationalbank. - Iceland: Consultative committee on Treasury Debt Management established pursuant to an agreement between the Ministry of Finance and Central Bank of Iceland; committee proposes issuing calendar, bond issue arrangements, market making and auction arrangements, and benchmark issuances. - Jamaica: 2012 Public Debt Management Act provides for a Public Debt Management Committee (PDMC) and a Public Debt Financing Committee (PDFC); PDMC monitors MTDS implementation and legal compliance; PDFC advises the Financial Secretary on debt transactions and lending applications. - Tanzania: Government Loans, Guarantees, and Grants Act provides for a National Debt Management Committee (NDMC) and a Technical Debt Management Committee (TDMC); NDMC advises the Minister on public debt matters including MTDS formulation, coordinates government departments involved in debt management, and advises on measures for non-compliance; TDMC provides technical advice to the NDMC. - Legal citations and institutional specifics (as provided): Sections 5 (2); paragraph 6 of the Agreement between the Ministry of Finance and Central Bank of Iceland on Treasury debt management dated September 207; Sections 16, 17, 18, and 19 Government Loans, Guarantees, and Grants Act 1974 as amended (Cap 134). ### Agents, Advisors, and Dealers - Outsourcing: Debt managers commonly outsource issuance, registration, clearing, and settlement services to agents and advisors. - Central Bank often acts as fiscal agent, which may include issuing and registration agent roles. - Central securities depository (CSD) may handle registration and clearing; if the CSD is separate from the Central Bank, formal legal arrangements among the MoF, Central Bank, and CSD are required. - For international debt markets, issuing agents may include foreign investment banks. - Legal framework should clarify authority to appoint primary dealers and other Government securities dealers; in some jurisdictions this function is handled by the Central Bank as fiscal agent under terms approved by the Minister. ### Central Bank as Fiscal Agent - Legal alignment: - Where the Central Bank is authorized under its enabling law to act as fiscal agent, the PDM law and the Central Bank law should reflect this mandate. - The legal framework should clarify the scope of the agency relationship (e.g., managing auctions, registry services, cash management transactions), and whether it covers borrowing by public sector entities (example: Lesotho; Botswana). - Consistency with central banking mandate: - The scope of the Central Bank’s fiscal agency role should be consistent with its core central banking mandate (typically price stability); this should be carefully crafted in law. - Example: Central Bank of Lesotho Act of 2000 provides that the role of the Central Bank as fiscal agent should be consistent with its duties and functions as a central bank.139 - Operational arrangements: - Operational details are often set out in fiscal agency agreements or memoranda of understanding (MOU) between the Ministry of Finance and the Central Bank.140 - Such agreements typically set out roles and responsibilities, coordination arrangements, and may also cover terms under which the Central Bank will act as banker and lender to Government. - Agreements should provide terms and conditions including remuneration and reimbursement for expenses related to fiscal agency duties. - Legal protection and indemnity: - The legal framework should clarify Government’s role as issuer and provide legal protection for the Central Bank as agent; issuance is a contractual obligation of the Government, not the Central Bank. - Legislative or contractual protections may shield Central Bank assets from attachment by State creditors (example cited: Banque de la Republique du Burundi vs. Goetz et al, where the Tribunal rejected arguments that Central Bank assets could be garnished because the Central Bank was a separate legal entity). - Fiscal agency agreements/MOUs could include indemnities by Government to the Central Bank for losses arising out of good faith performance of fiscal agent duties. ### Key Features of a Fiscal Agency Agreement (Box 6) - Minimum provisions recommended: - The scope of the Central Bank’s role (clarify whether it applies only to central government or also to all public entities).1 - Clear definition of responsibilities of the Minister and Debt Management Office (Minister retains responsibility for overall PDM and oversight of key activities, including issuing calendar, volumes, maturities, yields, and ensuring agent functions conform to debt management objectives, strategy, and borrowing plan). - Clear definition of the Central Bank’s responsibilities as agent (act within delegated authority; seek prior Ministerial approval before accepting bids at auctions, exceeding offering amounts, and making Government payments). - Reporting: timely and comprehensive reporting by the Central Bank to the Ministry on action results, future debt service requirements, and other relevant information. - Remuneration and expenses: market-based remuneration for Central Bank services and reimbursement for direct expenses (e.g., publication costs for issuing calendar, auction announcements). - Cooperation and coordination: arrangements for cooperation between MoF and Central Bank, including establishment of working committees such as auction committees. - Legal protection and indemnity: MoF should indemnify the Central Bank for third-party claims within the scope of its agency authority, in the absence of negligence or bad faith. - Examples referenced: Lesotho and Botswana noted in paragraph 96.142 ### Transition to Transparency, Accountability, and Reporting - The text proceeds to Part VI on TRANSPARENCY, ACCOUNTABILITY AND REPORTING with subsection A. Transparency beginning immediately after the material summarized above. *Source: _wp15147 - 83. Yet for some jurisdictions, transactional approval by Parliament may continue* ### 99. Transparency in public debt operations is a key tool for promoting fiscal ### Transparency in public debt operations is a key tool for promoting fiscal ### Transparency framework: key requirements (paragraph 100) - Publication of the MTDS on the Government or Ministry of Finance’s website, and local newspapers of wide coverage, among others. - Publication of the annual borrowing plan together with the budget. - Periodic public disclosure of the stock and composition of public debt (including loans guaranteed by government) disclosing details such as their currency, maturity profiles and interest rate structure financial, as well as financial assets of the state in the form of loans made by government. - Maintenance of public debt records including details of all government securities and a schedule of repayment obligations. - Periodic publication of records and accounts of borrowing by other public sector entities (including local government authorities). - Annual report to Parliament evaluating whether public debt management operations conformed to the MTDS, and the reasons for any variance. ### Enforcement and sanctions: types, examples, and mechanisms (paragraphs 101–108) - Violations described: - An official other than the Minister of Finance may have committed the Government to a debt transaction. - The Minister may have entered into a debt transaction without the necessary approvals from Cabinet or Parliament where required, or in breach of the debt limit imposed under the law. - Guarantees may have been issued in violation of the procedures set out under the law. - Public entities such as statutory bodies, SOEs, or local government authorities may have borrowed above ceilings set by the Minister of Finance. - Regional monetary union enforcement: - Violations of a convergence criterion on debt may lead to mandatory corrective measures or in extreme cases expulsion from the union. - Example: the EU’s two and six pack regulations provide for an automatic sanctioning mechanism. - Other unions: the CFA zone in Africa and the ECCU have no regional surveillance and enforcement mechanisms in place. The ECCU has no enforcement mechanisms in place currently for non-compliance with its Debt/GDP ratio of 60 percent by 2020. - Forms of sanctions: - Personal or institutional; civil or criminal. - Administrative law, PFM legal regime, or general legal framework for public servants may provide minimum sanctions for malfeasance. - Example: Jamaica’s PDM Act (section 25) empowers the Minister to issue a code of conduct (including conflict of interest guidelines) for persons employed in the management of the public debt. - Civil sanctions: - Court action to recover payments received under any non-compliant debt transaction. - Example: Suriname’s legal framework makes the Minister of Finance and any other responsible party personally liable for debt obligations or guarantee commitments in violation of the debt ceiling during his term of office. - Criminal sanctions: - May involve fines and prison terms. - Example: Brazil’s Fiscal Responsibility Law and Fiscal Crimes Law provide for criminal sanctions for officials involved in violations of the public debt legal framework, including penalties for President of Brazil, state governors and mayors who authorize or conduct prohibited credit operations. - Suriname: prison term of up to ten years and a fine for “intentional breach” of key provisions; “accidental breach” results in a prison term of up to five years and a lower fine. - Kenya: the PFM Act of 2012 imposes a maximum prison term of two years and a fine on a public officer who borrows money, issues a guarantee, indemnity or security or enters into any other transaction binding the national or a county government in violation of law. - Reporting requirements and remedies: - End-of-year debt management report explanations when activities deviated from the MTDS or annual borrowing plan. - Possible requirement for immediate reporting with proposals for correction/adjustment during the fiscal year. - Legal frameworks may specify consequences for debt contracted in violation of the law, including that such transactions are void, voidable, or unlawful. - Brazil: non-compliant transactions are void and of no legal effect as though they were never contracted. - Suriname: National Debt Act of 2002 empowers the State to declare unauthorized debt obligations or guarantee commitments voidable. - Nigeria: under the Fiscal Responsibility Act of 2007, loans by banks and financial institutions to Government in contravention are unlawful. ### National legal positions on creditor protection and due diligence (paragraphs 109–112) - Jurisdictions that guarantee Government liability even if borrowing procedures were breached: - Sweden: section 4 of the Act on State Borrowing and Debt Management provides that the State shall be liable for any and all loans entered into by the National Debt Office; internal sanctions may apply but lender claims are enforceable. - Moldova: Law No. 419 of 2006 provides that “The State Debt is a sovereign Debt and represents an absolute obligation of the Republic of Moldova to its commitments in accordance with signed agreements." - Jurisdictions placing due diligence obligations on lenders: - Tanzania: legal framework guarantees validity of Government debt even if contracted in contravention; quoted provision: “No person lending any sum of money to the Government shall be bound to enquire whether all the conditions for raising a loan provided for in section 4 and section 7 have been complied with and for the avoidance of doubts it is hereby declared that where a loan whether a foreign loan, or local loan has been raised by the Minister for and on behalf of the Government, the Government shall be bound by the transaction and section 16 shall apply in relation to the loan notwithstanding that any provision of the proviso to section 4 of the proviso to section 7 has been contravened.” - Brazil and Nigeria: differ from Tanzania by imposing due diligence duties on sophisticated lenders. - Brazil: Fiscal Responsibility Law requires financial institutions to request proof that proposed lending complies with law (except for securities and external debt). - Nigeria: banks and financial institutions are required by law to request and obtain proof of compliance before lending to any Government in the Federation. - Note: due diligence duties in Brazil and Nigeria apply to banks and other financial institutions, not necessarily to all potential creditors. - Policy trade-off: - Provisions invalidating non-compliant debt can deter unlawful behavior but may create uncertainties for creditors and raise borrowing costs for Government. - Alternatives include reporting requirements and mandatory revisions to borrowing plans; where invalidation is retained, design should mitigate unintended consequences. ### Box 7 — Statutory examples of provisions invalidating public debt (summarized) - Brazil: - Fiscal Responsibility Law 9 (Article 33, section 1 and 2): public debt contracted in violation of the law are null and void, must be cancelled through refund of principal without payment of interests and other financial charges; if refund not effected during same fiscal year, a specific reserve must be set aside in the Annual Budgetary Law for the subsequent year. - South Africa: - Public Finance Management Act 1999 (section 68) amended as of 2009: any borrowing, guarantee, indemnity or security entered into in breach of the Act is null and void and of no effect. - Nigeria: - Fiscal Responsibility Act of 2007 (section 45 (2)): loans by banks and financial institutions to Government in contravention of the Act are unlawful. - Suriname: - National Debt Act of 2002 (Article 4 (11)): any agreement entered into in breach of the debt ceiling or applicable rules of law, in particular regarding financial reporting and accounting, is null and void. - Sierra Leone: - PDM Act of 2011 (section 27): “The Government shall not be bound by the terms of any loan contracted or purported to be contracted for or on its behalf by any person other than the Minister or a public officer, authorized in writing in that behalf, by the Minister." ### Design considerations and concluding guidance (paragraphs 110–113) - Sanctions regime design should avoid unintended consequences such as creating creditor uncertainty and higher borrowing costs. - Options to manage risk include: - Providing comfort for potential lenders, or - Imposing due diligence obligations on creditors (noting variation in approach across jurisdictions). - Overall approach to designing PDM legal frameworks: - Be pragmatic and carefully calibrated to meet reform objectives. - Conduct a thorough assessment of the existing legal framework against good practices appropriate to the jurisdiction’s political, legal, institutional and economic arrangements. - Seek an optimal balance between flexibility and appropriate constraints. - Aim to promote clarity, transparency, and discipline to support debt sustainability objectives. *IMF working paper content (paragraphs 99–113 of the provided source).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp15147.pdf_