Developing Debt Management Capacity
IMF/World Bank Debt management initiatives for Low Income Countries
Posted by Brian Olden
In May 2007, a Joint IMF/World Bank Board paper on strengthening debt management practices was approved by the Boards of the two institutions. This paper attempted to identified the key lessons learned by country authorities government in trying to develop their debt management capacity following the financial crises of the 1990’s. More importantly, the paper attempted to identify how these lessons could be leveraged to assist lower income countries (LIC’s) to develop their debt management capacity.
The Bank and the Fund, have been active in providing TA assistance in this area for many years and also collaborated to produce the Guidelines for Public Debt Management in 2001 (revised 2003), which have become an internationally accepted framework for debt management. However, much of the work to date has concentrated on developed or middle-income countries (MICs), with few resources being directed towards the LICs, partially due to the view that the reliance on concessional lending and lack of access to market based financing and financial instruments limited the role of debt management in many LIC countries. In the current environment, with the completion of the HIPC and MDRI debt relief programs, the increased access to market based financing and the opportunities presented by new sources of financing, it is evident that debt management capacity building is increasingly important in LICs.
May 2007 Board Paper
The 2007 Board paper pointed out that the reform agenda in many countries, and particularly in LICs, remains considerable, including the need for further capacity building, institutional development and governance policies. In addition, while access to concessional debt and aid may have reduced some risks such as interest rate risks, other market risks such as currency risk were significant. The traditional volatility of aid flows also highlights the need for cash management policies to be fully integrated with debt management. Increased borrowing opportunities offered by HIPC and MDRI debt relief, could, if not managed properly, result in a return to the unsustainable borrowing positions of the past.
A major input to the 2007 Board paper was a pilot study of 12 MICs and LICs, which began in 2002, and carried out mainly by the World Bank but with some input from the Fund. This pilots sought to identify the common issues affecting debt management capacity. As a consequence, a number of key issues were identified including:
- The view that a thorough diagnostic of existing capacity is required in advance of any reform program.
- That understanding the relationship between debt management and the broader macro-economic framework is an essential part of any reform program. The absence of a credible macroeconomic policy framework makes capacity building in this area much more difficult. This also has implications for the development of Medium-Term Debt Strategies (MTDS), linked to, but separate from overall government macro-economic policies.
- That coordination of reforms with other donors has improved the effectiveness of TA delivery and capacity building efforts.
The studies found that many MICs had attempted to develop a MTDS but that this was less the case in LICs where capacity constraints limited the possibilities in this area. The staff of the two institutions informed their boards of their desire to continue to assist MICs in their debt management reform efforts but also to increase their focus on debt management capacity building in LICs over the medium-term In particular, the staff requested approval for a proposal to develop of a new diagnostic tool for debt management, based on the existing PEFA assessment and to assist countries to develop debt management capacity by identifying specific areas that needed to be addressed to offer assistance to LICs to develop and implement MTDS’ going forward. The Boards concurred with the joint staff assessment and agreed to allow staff to pursue their proposed agenda (the Fund’s involvement will be financed out of the existing resource envelope, due to budgetary constraints) and to report back to the board on progress within one year.
New Initiatives -- Diagnostic Tool and MTDS Support
A new diagnostic tool, the Debt Management Performance Assessment (DeMPA) Framework has been developed. Extensive comments were sought from all of the stakeholders in this process, including the donor community, other TA providers and selected country authorities. The DeMPA has already been used to assess a number of LICs, mostly in Africa on a pilot basis. The expectation is that all LIC’s will have a DeMPA carried out within a three year period with updates to approximately one-third of these occurring on a three-yearly cycle.
A number of missions to assist in development of MTDS have also been carried out on a joint basis. It is intended to complete approximately 4-6 such missions per annum and a new MTDS toolkit incorporating guidelines for developing an MTDS and quantitative cost/risk analysis tools is currently being developed
A recent Debt Management Stakeholder conference in Oslo co-sponsored by the World Bank and the Norwegian Department of Foreign Affairs(see March 26, 2008, blog post) indicated broad support for the initiatives being launched by the fund following on from the board paper and gave encouragement that the path being pursued by the two institutions in this area were seem as extremely relevant by both donors and countries as part of the effort to build capacity in this important area.