Medium-Term Debt Management Strategy (MTDS): A Framework

1. Medium-Term Debt Management Strategy (MTDS): A Framework MDB Meeting on Debt Issues July 10, 2008

2. Motivation • Post MDRI perspective • New borrowing opportunities  new risks • A clear framework to fully assess the related costs and risks of new financing is absent in many cases • Shareholders of the World Bank and IMF have instructed both instituions to scale-up work program to help improve debt management in LICs • MTDS aims to provide coherent framework to fully assess relevant costs and risks of new financing

3. What is an MTDS? • A framework to fully assess relevant costs and risks associated with a government’s desired composition of debt • It is a document that describes the plan that the government intends to implement to achieve this composition • Medium-term planning horizon of the government (usually 3-5 years)

4. What is an MTDS? • The principal benefit of a MTDS: It can help a country “avoid expensive mistakes.” • Improves evaluation of cost-risk tradeoff • Improves risk measurement and management • Facilitates policy coordination • Facilitates domestic debt market development

5. What is an MTDS? MTDS Toolkit: • Guidance Note: a step-by-step “how-to” guide on the process of developing and implementing an MTDS. • Scenario Analysis Model (spreadsheet-based analytical tool) to help compare alternative strategies under different scenarios for future market rates, accompanied by a User’s Guide • A template for strategy documentation

6. Debt Management, Macroeconomic Framework and Market Constraints

7. Designing an MTDS • Objectives and scope of the MTDS • Cost and risk of existing debt • Potential sources of finance • Medium-term macro-policy and market environment • Broad structural factors and risks • Analysis of alternative debt management strategies • Review with fiscal, monetary and market authorities • Propose and approve MTDS

8. Objectives & Scope Objective • Identify main objectives for public debt management and the scope of the MTDS Outputs • Description of the overall objectives for public debt management • Definition of the types of debt to be covered by the MTDS

9. Cost & Risk of Existing Debt Objectives • Identify outstanding debt and its composition • Calculate basic cost and risk indicators Outputs • Detailed information on outstanding debt • Debt servicing profile of outstanding debt • Description of main portfolio risks

10. Potential Instruments & Characteristics Objective • Identify potential sources of finance, their financial characteristics including cost and risk parameters Output • List of existing and potential instruments, domestic and external, and description of their financial characteristics • Evaluation of the potential of annual borrowing in each instrument • Discussion/ranking of the instruments based on cost/risk characteristics

11. Macro and Market Environment Objectives • Identify the baseline projections for key fiscal and monetary policy variables, as well as market rates, the mains risks to this, and the relevant constraints and implications for MTDS formulation Output • Baseline projections for key fiscal, monetary policy and market variables • A clear and comprehensive set of country specific risk scenarios to be tested

12. Review Key Longer-term Structural Factors Objective • Review structural factors that will potentially influence the desired direction of the MTDS over the longer-term Output • Articulation of long-run structural factors that the MTDS should take into account, e.g., • Commodity price vulnerability • Macro vulnerabilities created by the debt composition

13. Analysis of Strategies Objectives • Identify and analyze possible debt management strategies, assess their performance, and chose a small number of preferred debt management strategies Outputs • Comparison of feasible debt compositions, identifying preferences relative to objectives • Comparison of cost and cost-range implications of debt management strategies • Identify the preferred, and a few alternative strategies

14. Review with Other Agencies Objectives • Ensure that relevant feedback from the strategies identified is provided by the fiscal and monetary policy authorities • Review the potential debt market implications of the strategies. Output • A clear assessment that the candidate strategies are consistent with fiscal and monetary policies, maintaining debt sustainability, and in line with plans for market development

15. Propose & Approve the MTDS Objective • Present the preferred and alternative strategies to the highest responsible authority • Propose the preferred MTDS for approval Output • A document describing the preferred strategy, as well as a few alternatives • A clear description of the key associated costs and risks, and relationship with the broad objectives

16. Disseminating the MTDS • Once determined, the agreed MTDS should be disseminated • Inform key stakeholders (e.g. Parliament, primary dealers, creditors, investors, ratings agencies) • Secures (political) commitment to the strategy • Reduces uncertainty, increases confidence • Facilitates active decision-making by the DM • Enhances transparency and accountability • Improves the quality of the debate • Strengthens analysis and (consequently) improves outcomes • Establishes a reference point to evaluate debt management performance

17. Implementing the MTDS • Separate process from strategy formulation • Operational focus • Need to identify consistent borrowing plan • More focused on precise characteristics and details of instruments • Implementation will highlight key bottlenecks that constrain the set of feasible strategies, e.g.: • Shallow local debt markets • Weaknesses in primary market operations • Potential conflict with operating framework for monetary policy • Limits on availability of (concessional) external finance • Link to market development strategy

18. Next Steps • Field test MTDS toolkit: Bangladesh, Ghana, Cameroon, Nicaragua + 2 • Conclude elements of toolkit • Present progress/experience to Boards in early 2009