Credit IMF Photo/Valerie Plesch
Credit IMF Photo/Valerie Plesch
Public debt is projected to reach nearly 100 percent of global gross domestic product by the end of this decade, surpassing even pandemic-level highs. Governments, particularly those in emerging market and developing economies, face both mounting debt service costs and shrinking room to maneuver in government budgets. The result is fewer resources for social programs or investments, reduced capacity to respond to shocks, and higher borrowing costs.
In addition to issuing more debt, countries are increasingly using complex and opaque forms of financing. New debt instruments such as guaranteed, securitized, and collateralized debt contracts linked to public-private partnerships, state-owned enterprises, or SOEs, and pension funds have appeared on the scene. Because of the novelty and complexity of these instruments, more debt now remains hidden from policymakers and the public. And often it comes to light too late, during the debt restructuring process.
When revealed, hidden debt can erode confidence in the government, in its data, and its administrative capacity to provide an accurate representation of the country’s finances. This may lead to higher borrowing costs, and, if the size of the hidden debt is substantial, put debt sustainability at risk and potentially trigger a debt crisis.
Simply put, you can’t manage what you can’t see, and this is why we need light to cut through the fog surrounding the mountain of debt. We need the right laws in both borrower and creditor countries and strong institutions to do the reporting and debt management the laws require. Debt transparency is clearly a public good.
Law’s essential role
Law is the cornerstone of debt transparency. Public debt is so important that the question of whether the executive or legislature has ultimate authority to borrow on behalf of a country is spelled out in many national constitutions. Laws tell us who can sign a valid loan contract on behalf of a country and whether and under what conditions state resources can be used as collateral. At the same time, we have found that, in many cases, laws on public debt remain inadequate, murky, or poorly implemented.
Recently, the IMF hosted a conference on legal reform and debt transparency which brought together policymakers, representatives from borrower and creditor countries, civil society organizations, the private sector, and academia. The goal was to sharpen our collective understanding of the links between legal frameworks and debt transparency.
The gathering followed a recent review by the IMF Legal Department on debt-related legislation that found major gaps in 85 countries. For example, fewer than half of the countries surveyed require debt management and fiscal reporting by law, meaning that no one government agency or office is responsible for managing debt. Whether a country can handle certain types and amounts of borrowing or bond issuances is never fully known by policy makers and parliamentarians. In many cases, the legal definition of public debt is too narrow and excludes SOEs or types of borrowing, such as sub-national lending. As a result, some forms of debt fall outside the sovereign’s awareness. This debt accumulates off the balance sheet, without oversight.
Authorities should be held accountable for their decisions about public debt. This means that the state audit institution should have the authority to conduct audits on public debt and report them.
What else must countries do to overcome the challenge of hidden debt?
The IMF has been doing extensive work on debt transparency over the years:
Ultimately, transparency isn’t just about data collection; it’s about legal clarity, institutional accountability, and public trust. It’s important for countries to put their house in order, but to get there, we must have a strong foundation—that is, the right laws followed by strong institutions that implement them.
