Keeping it Local: A Secure and Stable Way to Access Financing

IMF Blog, March 12, 2021

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Canonical URL: Keeping it Local: A Secure and Stable Way to Access Financing

Authors: Tobias Adrian, Thor Jonasson, Ayhan Kose, Anderson Silva
Publication date: March 12, 2021
Context: Emerging and developing economies often rely on bond markets to finance public expenditures (paychecks for teachers, new hospital equipment, social assistance programs, and other public expenditures). Borrowing in foreign currencies exposes these countries to exchange-rate volatility; developing local-currency government bond markets is a strategy to reduce that exposure.

Enhance resilience to sudden movements in foreign capital flows.
Form the basis of a robust financial system to support growth and the productive use and allocation of savings.
Help finance budget deficits in a non-inflationary way.
Facilitate cutting taxes in tough economic times and support the use of other countercyclical fiscal policy measures.
Support effective monetary policy and provide an important information source for policymakers.
Provide risk-free benchmark rates as the cornerstone for domestic financial market development.
When developed, become more stable and less risky sources of funding—contributing to debt sustainability.

Establishing and developing domestic debt markets is a long and complex process requiring multiple and interdependent policy actions.
Benefits and risks for macroeconomic and financial stability need to be addressed during market development.
There is no single “recipe” for developing a local-currency bond market because country needs vary; nonetheless, common principles exist.

The Guidance Note was developed jointly by IMF and World Bank staff with support from the Financial Sector Reform and Strengthening Initiative.
The Note presents a systematic roadmap and identifies six key building blocks of development:
- (i) money market
- (ii) primary market
- (iii) investor base
- (iv) secondary market
- (v) financial market infrastructure
- (vi) the legal and regulatory framework
The Note also presents enabling conditions for market development.

An indicator-based diagnostic framework:
- Based on specific questions and a simple scoring system.
- Grades each country across dimensions of successful local currency bond market development.
- Allows identification of development gaps and priorities and comparison with peers to inform solutions.
A catalogue of common problems and solutions:
- Example problem: fragmentation of the market with a large number of instruments.
- Example remedy: issuance of benchmark securities by reopening previously issued instruments.
A guide for designing market reform plans:
- Considers political economy issues and interactions among reforms.
- Highlights points such as central bank operational autonomy and coordination arrangements with the debt management office.

The diagnostic framework provides a simple and systematic approach countries can use to:
- Assess market development levels.
- Identify problems.
- Monitor progress as policies are implemented.
Findings from the framework can shape the delivery of related capacity-development work.
Together with country authorities and other international financial institutions, a financial sector development strategy could be drawn up or updated—following on the Financial Sector Reform and Strengthening Initiative—and mapped into IMF and World Bank work aimed at sharing knowledge and building skills among officials in emerging and developing economies.
The Guidance Note can inform policy recommendations across IMF and World Bank core areas: fiscal and monetary policy, financial stability, capital market development, management of foreign flows, business cycles, and economic growth.
Many cases require a wide spectrum of reforms; careful consideration of optimal sequencing and timing is often needed.
The IMF and World Bank are ready to play a catalytic role in coordinating reforms through regular monitoring and ongoing dialogue with fiscal and monetary authorities.

Source: Keeping it Local: A Secure and Stable Way to Access Financing — IMF Blog, March 12, 2021