Hidden Debt Hurts Economies. Better Disclosure Laws Can Help Ease the Pain.

IMF Blog, April 2, 2024

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Hidden Debt Hurts Economies. Better Disclosure Laws Can Help Ease the Pain.

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Bibliographic details

• Authors: Alissa Ashcroft, Karla Vasquez, Rhoda Weeks-Brown
• Published: April 2, 2024

Scope and urgency

• Hidden debt is borrowing for which a government is liable but is not disclosed to its citizens or to other creditors.
• Hidden debt is estimated to reach $1 trillion globally by some estimates.
• Global public debt is described as topping $91 trillion.
• Hidden debt poses a growing threat to low-income countries, which are already highly in debt with annual refinancing needs that have tripled in recent years.
• The problem is more pressing amid higher interest rates and weaker economic growth.
• Hidden and opaque debt heightens the risk of corruption and undermines accountability.

Main findings from the IMF paper and survey

• The Legal Foundations of Public Debt Transparency: Aligning the Law with Good Practices presents findings from a survey of 60 countries that examined vulnerabilities and loopholes in national laws that hinder transparency.
• Building on a July 2023 paper, the research finds:
  • Fewer than half the countries surveyed have laws that require debt management and fiscal reports.
  • Less than a quarter require disclosure of loan-level information.
• The research identifies four noteworthy legal vulnerabilities that enable debt to be hidden:
  • A narrow definition of public debt.
  • Inadequate legal requirements for disclosure.
  • Confidentiality clauses in public debt contracts.
  • Ineffective oversight.

Definition (scope of public debt)

• Problem: Narrow legal definitions of public debt in one or multiple laws permit some forms of sovereign debt to escape oversight.
• Recommendation: The definition of public debt should be broad and comprehensive, capturing:
  • arrears, derivatives and swaps, suppliers’ credit, assumptions of guarantees, loans and securities;
  • extra budgetary funds, public trust funds (pension funds, for example), and special purpose vehicles.
• Country examples of legal reform or broad definitions:
  • Ecuador pursued legal reform in 2020 to ensure that short-term financing instruments—such as securities or treasury paper with terms of less than one year—were included in debt calculations and statistics.
  • Ghana, Jamaica, Rwanda, Thailand and Vietnam have legal definitions that encompass multiple types of debt instruments.

Disclosure requirements

• Finding: Across the globe, legal requirements for debt disclosure are inadequate.
• Importance: A strong legal basis signals a clear requirement to report debt data in a manner that is timely and relevant for policy analysis, transparency and accountability.
• Positive examples: Benin, Kenya and Rwanda have strong reporting laws that define both public debt reporting requirements and the timeframes for these reports.
• Recommendation: Strengthen legal bases to require timely, relevant debt reporting and loan-level disclosure where appropriate.

Confidentiality in public debt contracts

• Problem: Confidentiality clauses in public debt contracts directly hinder transparency; few laws regulate or limit confidentiality, giving policymakers wide discretion to label contracts confidential for national security or other reasons.
• Complication: Current debt-related international standards and guidelines provide limited guidance on tackling confidentiality issues.
• Recommendation: Laws should tightly define exceptions to disclosure and the scope of confidentiality agreements; legislative oversight and safeguard mechanisms such as administrative or judicial remedies should be specified in legal provisions.
• Country examples: Laws in Japan, Moldova and Poland authorize legislative or parliamentary oversight of confidential information.

Oversight and governance

• Problem: Ineffective oversight by legislatures and supreme audit institutions can inhibit disclosure of public debt.
• Requirements:
  • Legislative bodies must be able to monitor and scrutinize public debt and have staff able to read and grasp highly technical reports.
  • Laws should provide supreme audit institutions with the authority and necessary powers to monitor and audit government debt and debt operations.
• Institutional arrangements: Several legislatures use committee systems (for example, committees on the budget and public accounts) to allow specialization among legislators.
  • Example: In the United States, the Treasury Secretary is required by law to send the annual public debt report to two specific committees—House Ways and Means and Senate Finance—rather than to Congress as a whole.

IMF role and implications

• Hidden and opaque debt complicates the IMF’s ability to fulfill its core mandate, including:
  • Accurately assessing a country’s debt when collateralized loans, novel and complex forms of financing, and confidentiality agreements obscure liabilities.
  • Designing and implementing programs to help bring an economy back on track.
• The Fund addresses debt transparency through technical assistance and by incorporating transparency issues in program engagements.

Policy recommendations (summary)

• Revise and broaden legal definitions of public debt to capture a comprehensive set of instruments and obligations.
• Strengthen legal requirements for debt reporting, including loan-level disclosure and clear reporting timeframes.
• Limit and tightly define confidentiality exceptions in public debt contracts; include legislative oversight and administrative or judicial remedies in law.
• Enhance legislative and supreme audit institution capacity and legal authority to monitor, scrutinize, and audit public debt.
• International partners and borrowers should push for domestic legal reforms to improve public debt transparency, benefiting borrowers, legitimate creditors, and the broader system.

Source: IMF blog post "Hidden Debt Hurts Economies. Better Disclosure Laws Can Help Ease the Pain."

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• HMNS_Hidden_debt_revelations
  • HMNS_Hidden_debt_revelations (Markdown version)
  • HMNS_Hidden_debt_revelations (PDF)

References

• [$91

trillion](https://www.imf.org/en/Blogs/Articles/2023/09/13/global-debt-is-returning-to-its-rising-trend)

• tripled
• [The Legal Foundations of Public Debt Transparency: Aligning the Law with

Good Practices](https://www.imf.org/en/Publications/WP/Issues/2024/02/09/The-Legal-Foundations-of-Public-Debt-Transparency-Aligning-the-Law-with-Good-Practices-544450)

• paper