Public Information Notice No. 07/60

Public Information Notice: IMF Executive Board Discusses Strengthening Debt Management Practices: Lessons from Country Experiences and Issues Going Forward

May 30, 2007

On May 4, 2007, the Executive Board of the International Monetary Fund (IMF) held a formal seminar to discuss issues relating to strengthening public debt management practices in developing countries. The discussion was based on a published staff paper.

Background

The staff papers review Bank-Fund staff experience with strengthening public debt management (PDM) frameworks and capacity in developing countries. This review builds on experience since the IMF and the World Bank developed guidelines for sound debt management practices in 2001. An assessment of and advice on PDM has been incorporated into surveillance work, where relevant, and included in other Bank and Fund advisory and technical assistance work. Based on these, the papers draw lessons, and propose further capacity building and advisory work in PDM to address ongoing challenges.

Although many countries have made progress in strengthening their PDM frameworks and reducing debt-related vulnerabilities, they continue to face a range of challenges. Several middle-income countries (MICs), and most low-income countries (LICs), remain at an early stage in defining comprehensive medium-term debt management strategies (MTDS). Challenges also remain in establishing effective governance frameworks, in building capacity, and in initiating public debt market reforms. The papers propose to continue supporting developing countries' efforts to strengthen PDM, and to intensify such support in the case of LICs through the MTDS capacity building missions, in cooperation with other providers of technical assistance and bilateral donors.

Executive Board Discussion

This seminar has provided an opportunity to review sovereign debt management practices in developing countries and to discuss issues going forward with a view to strengthening existing practices. Today's discussion has provided important insights into Directors' views on the key issues outlined in the staff papers.

Directors welcomed the joint Bank-Fund staff papers on strengthening public debt management (PDM) practices, which provide a comprehensive and valuable stocktaking of the Bank-Fund's experience in helping middle- and low-income countries in strengthening such practices, as well as an assessment of the challenges ahead. Several countries have made progress in strengthening their PDM frameworks and the supporting governance framework, and in deepening domestic public debt markets. The recent experience confirms that effective PDM and well-functioning domestic public debt markets can play an important role in reducing countries' financial vulnerabilities and in crisis prevention.

Notwithstanding this positive experience, Directors underlined that many developing countries continue to face a range of policy, institutional, and operational challenges in developing effective PDM frameworks. The fact that, more than a decade after the HIPC Initiative was launched, a number of HIPC countries still lack the capacity to carry out basic debt management functions is a matter of concern. Many countries remain at an early stage of developing comprehensive medium-term debt management strategies, heightening the urgency for substantial progress on this front. In the current context-marked by ample global liquidity, increased and easier access to capital markets by a broader range of countries, a shift from external to domestic financing, and growing fiscal space and scope for borrowing created by debt relief-Directors felt that the Fund will need to continue to remain engaged in supporting a strengthening of PDM frameworks in developing countries, through closer monitoring of trends and PDM practices, policy advice, technical assistance, and knowledge sharing.

Directors recognized the critical importance of a sound medium-term debt management strategy (MTDS)-a significant analytical exercise that needs to be not only effectively formalized and integrated with a country's macroeconomic policy framework, but also be fully owned by the national authorities. It is important to aim at developing an MTDS that is informed by a fully operational medium-term fiscal framework; supports effective cash management practices; minimizes potential conflicts between debt management and monetary policy; incorporates contingent liabilities; and recognizes interactions with financial markets. While fiscal policy remains, in the first instance, the principal tool for ensuring debt sustainability, effective PDM can help mitigate the likelihood of a liquidity or solvency crisis, and reduce costs and risks. Integrating the debt strategy analysis, tailored to individual country circumstances, within a debt sustainability framework is also a priority. The strategy should also address challenges arising from capital flows and developments in the private sector, in particular where such developments give rise to fiscal or financial risks. It was suggested that future work by the Fund staff should also examine the implications of the recent reserve accumulation strategies of some countries on their PDM.

Directors noted that the development of effective PDM frameworks will often require establishing governance and organizational arrangements in a holistic manner. These include supportive public debt legal frameworks, organizational arrangements that avoid fragmentation of responsibilities, strong debt recording and data dissemination systems, and adequate staff and IT systems infrastructure capacity.

Directors welcomed the inclusion of domestic public debt market development as an explicit element in some middle-income countries' debt management strategies. Debt managers can facilitate market development through supply-side measures, and predictable and standardized issuance of government bonds-with clear and publicly disseminated financing plans-can play a helpful role in this regard.

The effective functioning of public debt markets and the achievement of debt management objectives also requires efforts aimed at strengthening and diversifying the investor base.. Directors underscored the important role of money markets, and of proper incentives to trade government debt, in helping to develop debt markets, and called for further progress in these areas, particularly in low-income countries.

Directors noted that, despite improved fiscal performance, many middle-income countries still experience significant debt-related vulnerabilities, and have yet to develop explicit debt management strategies. Recent improvements in debt structures could reflect the relatively benign global liquidity conditions, and debt managers should stand ready to adapt to changes in these liquidity conditions. Directors agreed that countries embarking on programs to enhance their debt management capacity or restructure their debt portfolios could therefore benefit from the availability of customized cutting-edge debt policy and financial and risk management advisory services.

Directors noted the special challenges of debt management in low-income countries, including weak institutional capacity and vulnerability to exogenous shocks and aid volatility. In the past, these countries have relied principally on concessional debt. However, the new borrowing space created by HIPC and MDRI debt relief has provided opportunities to access non-concessional sources of financing from new creditors through innovative instruments. These opportunities present significant new challenges for debt and sovereign balance sheet risk management in low-income countries. Directors underscored the importance of mitigating the risk of a reaccumulation of unsustainable debt in low-income countries. This will require intensified efforts to help them build capacity to manage borrowing opportunities prudently, taking into account their macroeconomic vulnerabilities, human resource constraints, and underdeveloped domestic financial systems.

Directors considered that the development of clear operational frameworks to identify, monitor, and manage balance sheet and market risks would be helpful for middle- and low-income countries. In this regard, Directors supported a four-year pilot project for providing technical assistance to low-income countries with a view to help build the capacity to develop and implement an effective MTDS, with preference given to requests by post-MDRI countries. A number of Directors called for more extensive country coverage than the planned coverage of 4-6 countries a year, given the urgency of establishing public debt management frameworks. Directors broadly supported the staff's outline for the program, which includes diagnostic and follow-up missions.

To complement the targeted technical assistance efforts, Directors broadly supported the Fund's participation in the Bank's initiative of developing a set of debt management performance indicators to help provide a basis to assess country progress in strengthening debt management capacity over time. These indicators have the advantage of providing a common platform for donor support for PDM capacity building programs. However, Directors emphasized that they should be used flexibly and not mechanically, taking account of country-specific circumstances. It was suggested that, while such tools can be used effectively for self-assessment, they should not lead to any additional conditionality. Directors also emphasized that debt statistics are fundamental to the work of the Bank and the Fund in this field, and called for harmonized reporting.

Most Directors also saw scope for incorporating public debt management issues to a greater extent in Fund surveillance where relevant, in order to enrich the assessment of macroeconomic and financial sector risks. A few Directors saw some scope for also taking account of the PDM performance indicators in this analysis.

Directors emphasized that capacity building and reform initiatives in PDM necessitate a strong commitment on the part of the authorities, and coordination between the Fund and the Bank and other providers of technical assistance and the international donor community, to generate synergies, avoid duplication while preventing gaps, and ensure effective utilization of limited resources. Given that many agencies with varying expertise and responsibility are involved in providing technical assistance in PDM, coordination of their support would help avoid straining the limited administrative capacities of low-income countries.

Most Directors supported the intensification of resources allocated to capacity building work on MTDS, and agreed that these costs should be absorbed within the current medium-term expenditure envelope. Some Directors considered that the significant and urgent challenges of strengthening debt management capacity in low-income countries would require the allocation of additional resources. Given the prospect of continuing resource constraints, however, Directors stressed the importance of greater prioritization of support for public debt management. A number of Directors stressed the need for sustained managerial attention to Bank-Fund coordination issues in order to help rationalize expenditure and to effectively delineate responsibilities and accountabilities at the country and strategic levels.

It was noted, in this context, that fully exploiting opportunities for closer Bank-Fund collaboration at the working level will itself contribute significantly to arriving at a more effective delineation of responsibilities and accountabilities, thereby helping to rationalize expenditure.

Finally, Directors considered that the work on capacity building and debt management related reforms in low- and middle-income countries will be of crucial importance in the period ahead, and looked forward to reviewing progress in these areas in about 18 months.