Guidelines for Public Debt Management : Examples of Sound Practice for Low Income Countries ( HIPCs) Pierre Yourougou B

1. Developing Government Bond Markets in Sub-Saharan Africa month 2003 Guidelines for Public Debt Management : Examples of Sound Practice for Low Income Countries ( HIPCs) Pierre Yourougou Banking and Debt Management Group Treasury, The World Bank Johannesburg, South Africa June 17 -19, 2003

2. June 2003 Outline of the Presentation • Background and Purpose of Guidelines • Guidelines • Examples of Sound Practice for Low Income Countries, including HIPCs • Are the Guidelines relevant for these countries? • Capacity Needs in Public Debt Management • Useful country examples of sound practice

3. June 2003 Are the Guidelines Relevant for LICs and HIPCs ? • It is widely thought that the lack of sound debt management practices along with a failure of fiscal policy contributed to the accumulation of unsustainable levels of debt of the HIPCs • IMF and World Bank survey indicates weakness in key aspects of debt management: • Legal and institutional framework • Coordination of debt management with macroeconomic policies • Policy framework for new borrowing • Human and technical capacity Prudent debt management, together with sound overall macroeconomic policy, is critical to ensure a durable exit from the unsustainable debt burden

4. June 2003 The Guidelines are Relevant particularly for LICs (HIPCs) given their … • High degree of vulnerability to shocks due to export concentration in few commodities, import dependence and low reserves coverage • Considerable capacity constraints in public debt management • Lack of developed domestic debt market and limited access to financial market The sound practice promoted by the guidelines and the lessons drawn from other countries would benefit LICs, including HIPCs

5. June 2003 The Guidelines are Relevant particularly for LICs (HIPCs) (2) • The guidelines could serve as useful framework • To guide countries to build their capacity and implement policy reforms in public debt management • To guide technical assistance in public debt management capacity provided by IFIs and other donors • To assess debt management practices in the context of IMF-World Country Assessments and FSAPs

6. June 2003 Capacity Needs by LICs (HIPCs) • Sound Practice Examples for LICs and HIPCs • Are the Guidelines relevant for the LICs and HIPCs ? • Capacity Needs in Public Debt Management by LICs, including HIPCs • Useful country examples of sound practice for LICs, including HIPCs

7. June 2003 Need to Have Clear and Independent Policy Objectives for Debt Management • Many HIPCs lack clear and explicit policy objectives for debt management • Strategy is often solely based on cost minimization without consideration to risk • Scope of the strategy often limited to external debt, i. e. insufficient attention to domestic debt and often no consideration for contingent liabilities • The lack of Central Bank independence and the absence of developed domestic market create a potential for conflict between monetary policy and debt management objectives • E.g., in many LICs, both monetary policy and debt management are implemented in the primary market, and often using the same instruments • In some countries, effort to develop the domestic market has been hampered by conditioning the issuance of the debt to monetary conditions (price stability objectives), or by “controlling” the tenders to target given levels for interest rates

8. June 2003 Institutional and Legal Framework Need to be strengthened and adequately implemented … • To ensure better definition of responsibilities • In many LICs, the debt management functions are scattered between the Central Bank and the MoF, and within MoF, resulting in most cases a lack of comprehensive strategy for managing debt, duplication of responsibilities, lack of coordination and, loss of transparency, accountability and operational efficiency • The role of parliament, cabinet and debt management committees if any, need to be clarified in many LICs • To provide formal coordination mechanisms between debt management and monetary and fiscal policies • In some LICs, too many committees tend to coordinate policies and activities at various levels of responsibility. However, because responsibility is spread over a number of committees and units, accountability tends to be diffused.

9. June 2003 Institutional and Legal Framework Need to be strengthened and adequately implemented (2) • To promote transparency and accountability • While almost all LICs have some legal instruments governing debt management, they are not adequately implemented • E.g. In some countries, even though the MoF has the sole authority to borrow , the lack of oversight has led some technical ministers and sub-nationals to contract external debt on behalf of the government • In general, countries disclose some information on government debt • However, for many LICs, accountability is diffused because of the spread of responsibility and transparency is often compromised by lack of complete and reliable data on debt obligations

10. June 2003 Institutional and Legal Framework Need to be strengthened and adequately implemented (3) • To improve technical capacity of debt management staff by providing proper incentives to attract and retain highly skilled debt management staff • E.g. The lack technical capacity in the MoF is an important factor explaining the fragmentation of debt management functions between several institutions and in particular the duplication of some essential functions by the Central Banks in some LICs • To ensure full political support from the highest levels for the success of the efforts to strengthen debt management capacity • The lack of success in capacity building in public debt management in some countries has been attributed to a lack of high level commitment and country ownership of the project that led to an inadequate allocation of resources

11. June 2003 Need to Develop a Comprehensive Debt Management Strategy to ensure long-term sustainability • To integrate cost and risk of domestic and external debt strategy into fiscal sustainability analysis to assess the level and the composition of sustainable borrowing program • Unsustainable debt burdens in HIPCs have resulted from unsound policies regarding new borrowing even after benefiting from concessions, including rescheduling • IMF and World Bank survey indicates that 2/3 of the HIPCs do not have in place a sound policy framework for new borrowing • Guarantees and other contingent liabilities represent huge potential claims against the government. The potential loss of guarantees should be assessed and potential debt issuance to cover these losses should be factored into government’s policy for managing debt

12. June 2003 Need to Develop a Risk Management Framework … • To identify and manage the trade-off between expected cost and risk in the government portfolio • Because of insufficient development of domestic debt market, many HIPCs often have limited choice between longer maturity foreign currency debt (currency risk exposure) and short-term or floating rate domestic debt (interest rate risk) • Excessive focus on reducing cost by issuing short-term, floating rate or low nominal interest rate foreign currency debt have been important factors in inducing financial crises in many LICs.

13. June 2003 Examples of sound practice for LICs and HIPCs • Sound Practice Examples for LICs and HIPCs • Are the Guidelines relevant for the LICs and HIPCs ? • Capacity Needs in Public Debt Management by LICs and HIPCs • Useful country examples of sound practice for LICs, including HIPCs

14. June 2003 Examples of Sound Practice:Debt Management objectives Develop explicit objectives for debt management with primary consideration to both cost and risk, in addition to meeting funding needs • Important progress has made by many countries in recent years • Example of Debt management objectives as stated in New National Debt Strategy Document of one MEFMI member state: “manage public debt in a way that meets the government’s gross funding needs at the lowest possible long-term cost, with due regards to the underlying risks. The development of the secondary market is a secondary objective of debt management” • The country adopted a policy to lengthen the maturities of government securities and to launch tradeable bonds in key maturities (5, 7 and 10 years) to reduce the rollover risk and establish benchmarks in key maturities

15. June 2003 Examples of Sound Practice:Coordination between macro and debt policy • Centralize and consolidate debt management functions in MoF to the extent possible • In Jamaica, the transfer of shared debt management functions from Central Bank to MoF has resulted in greater coordination of fiscal policy and debt management objectives that are now independently determined from monetary policy • Reforms introduced in one MEFMI state to transfer the functions of debt management from Central Bank and consolidate these functions in a centralized unit within MoF are intended to facilitate effective coordination of fiscal and debt management policies and to strengthen the capacity for DSA and cost/risk analysis

16. June 2003 Examples of Sound Practice:Coordination between macro and debt policy (2) • To the extent possible, use separate instruments for monetary policy and debt management • Until the secondary market permits OMO for monetary policy, one MEFMI state decided • to launch long-term debt securities to avoid issuances in the same market segment for both monetary policy and debt management; and • To transfer the accountability for managing government yield curve from Central Bank to MoF

17. June 2003 Examples of Sound Practice:Transparency and Accountability • Improve staff and information system capacity to obtain complete and reliable debt data and provide public access to debt information • For example, Tanzania publicly discloses primary debt auctions and auction results. All material aspects of debt management operations are disclosed through regular annual, monthly or weekly publications accessible to general public • Clearly delineate and publicly disclose responsibilities for debt management; and streamline the decision making process • Tanzania also shows good example of sound practice by publicly disclosing information on responsibility, debt management objectives, strategies, contingent liabilities. The recent decision to consolidate the debt management in centralized unit should enhance the accountability

18. June 2003 Examples of Sound Practice:Institutional and legal framework • The legal authority to borrow rests with the Parliament or Congress but is delegated to the MoF • In some countries, Parliament imposes restriction on borrowing e.g. limiting external borrowing only to certain purposes or establishing limits in terms of debt volume and structure. • Provide for greater accountability of MoF to the Parliament, with periodic reports covering significant aspects of debt management strategy and operations • In some countries, Government’s debt strategy is presented to Parliament every year. • Establish a code-of conduct, conflict-of –interest guidelines and seek better enforcement of the legal framework for public debt management, and apply strong sanctions for violations • The proposed reform in one MEFMI state requires that violators be reported by the Controller and Auditor General to Parliament

19. June 2003 Examples of Good Practice:Institutional and legal framework • The ability to attract and retain highly skilled debt management staff is absolutely crucial for mitigating both policy and operational risk • One MEFMI state decided to address the capacity weakness at the MoF by paying the technical staff at market rates or using central bank staff on secondment • To promote accountability and control, debt management functions are usually divided into Front, Middle, and Back Offices with clearly segregated functions and responsibilities • Experience of advanced countries show that segregation of functions and responsibilities contributes to reduce operational risk

20. June 2003 Examples of Sound Practice:Strategic Framework and Risk Management • Develop borrowing strategies based on financial analysis of cost and risk of total debt • Because of high debt burden, the emphasis of the HIPCs when choosing a debt strategy should be on minimizing risk rather than cost, and, with a risky debt structure, the level of debt should be kept at lower levels to ensure sustainability • To assess cost/risk trade-off, start with simple deterministic cash flow model and move to more complex models as capacity is developed • Most HIPCs need to build capacity in this area • However, most HIPCs have already in place Debt Recording and DSA systems which could be expanded to do simple cash flow analysis and assess cost, risk and sustainability of alternative borrowing strategies

21. June 2003 Examples of Good Practice:Strategic Framework and Risk Management (2) • Promote the development of a deep and liquid domestic market ,and lengthen the maturity of the domestic debt market • Development of domestic market is the way to reduce debt servicing risk over medium- to long-term horizon • One MEFMI state decided recently to expand the range of instruments available to manage government debt in order to • extend the yield curve of government securities that could serve as a pricing benchmark for other issuers • lower the debt servicing risk in the medium and long run owing to better function domestic debt market • better manage the costs and risks of the debt portfolio • have available separate instruments for monetary policy and debt management • reduce vulnerability to external shocks

22. June 2003 In Lieu of Conclusion, … “ The currency crisis in East Asia was not caused by unsustainable macro-policies, but instead by a failure of sovereign risk management. Governments need to do a better job of managing the risk on their balance sheets.” • Rudiger Dornbusch, World Bank Conference on Financial Integration, June 24, 1998