Posted by Michel Marion, Macro-Fiscal Advisor, and Michele Robinson, Debt Management Consultant, CARTAC
Caribbean countries are among the most heavily-indebted, middle-income countries in the world. Indeed, more than half of the ten most heavily-indebted, middle-income countries in the world are Caribbean countries. In addition, for many of the moderately indebted countries in the region, the weaker economic performance which accompanied the global recession and financial crisis has led to a worsening of debt indicators. The trend in the region has been towards higher debt burdens and worrying levels of debt to GDP.
The IMF’s regional technical assistance center in Barbados, CARTAC, has been supporting members’ efforts to strengthen their capacity to formulate and execute sound debt management strategies for some time through two distinct paths. TA has been provided to members in the preparation of target-based Medium-Term Fiscal Frameworks and Debt Sustainability Assessments. These two outputs combined to help fiscal authorities determine if they are on a sustainable fiscal path, which is the foundation of a sound debt strategy and prudent debt management. CARTAC has also been assisting members in a second, and more indirect way: sponsoring the participation of representatives of member states at events put on by the Inter-American Development Bank for Debt Office managers operating in the Caribbean and Latin American regions, which has provided members a venue to network with their counterpart, compare experiences and learn about the capital markets environment they are operating in and about good regional practices.
A number of member countries approached CARTAC for additional help: to provide TA in support of the development of policies and strategies that will lead to stronger fiscal performance and sustainable debt levels over the medium and longer term. They are seeking assistance to strengthen their institutional framework and their capacity to carry out the front, middle and back office functions of their Debt Offices more effectively. They are also seeking training to help member states manage their debt portfolios more effectively. Sound debt management must take place within the framework of sound macro-fiscal and public finance management. Indeed it is an important component of sound fiscal management. The program presented below sets the provision of debt management TA within that context.
In response to numerous requests from members for more direct and more broadly-based assistance to strengthen their debt strategy and management, CARTAC developed a number of new TA initiatives with the support of the Fund’s Fiscal Affairs and Monetary and Capital Markets Departments. The program we have developed encompasses different types of interventions.
At its core, effective debt management policies and strategies are underpinned by a sound debt recording and reporting framework. Across CARTAC member countries, the key indicators of a strong debt recording and reporting framework include:
- An accurate, comprehensive and up-to date debt database, which covers all dimensions of a debt instrument, including projected disbursements, interest and principal payments and other debt service charges at regular time intervals (daily, monthly, annual) throughout the full loan cycle;
- A good working knowledge of the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS), the software standard for debt management in the Caribbean (and elsewhere) including the data management and analytical modules of the software;
- A well-developed ability to interpret all aspects of a loan/debt instrument correctly and record them accurately in CS-DRMS;
- The generation of regular, timely and comprehensive reports on actual and forecast data on debt stocks, debt flows, debt ratios/indicators and basic risk measures of the portfolio; and
- A good information flow from debt managers to budget planners, Treasury officers, the central bank, macroeconomic analysts and other stakeholders involved in fiscal forecasting, macroeconomic planning, cash management, and debt accounting and settlement.
In preparing this program, it is assumed that the criteria for a sound debt recording and reporting framework are largely satisfied. It is also assumed that:
- Projections of total debt stocks and flows (domestic and external (factoring in all signed loan agreements) across maturities and currencies are available; and
- All member countries have a cadre of officials who are well trained in the use of CS-DRMS for data recording and reporting, but may be less adept at using the analytical module, “Management Tools” of the software for portfolio analysis and loan evaluation”. Scope has therefore been provided in the program for incorporating refresher training in the use of the relevant tools in the CS-DRMS software to facilitate debt analysis.
Based on these assumptions, this TA program focuses on helping to support institutional reform efforts in member states; and strengthen front and middle office functions, to enable a more effective use and analysis of the data provided by the back office.
Institutional Reviews and Support for Reforms
The first activity under this proposed TA program entails providing broad-based institutional support to member countries. This usually involves in-country missions to identify gaps which may exist in the current institutional framework; recommend a set of actions to address the immediate problem; and help develop a sustainable strategy for strengthening the institutional framework. Delivery of institutional support interventions usually takes place through meetings/discussions and, where appropriate, hands-on work with senior-level counterparts to identify and address the needs and issues. Typically, institutional support is focused on the following areas:
- Review of the organisational framework for debt management (across and within institutions involved in debt management). This will seek to determine whether debt management functions are fragmented, assess the impact it has on debt management operations and on executing a debt strategy, and recommend steps for institutional reform;
- Review of business processes to determine whether there are effective controls and well documented procedures so as to minimise operational risk in the debt management office. Support will be provided by assisting in the preparation of procedures manuals or business continuity plans as appropriate;
- Review of staff capacity and organisation within the debt management office and assistance in addressing any gaps through the development of job descriptions, training and development plans, mentoring programmes and attachments; and,
- Review of debt records and reporting with a view to determining the quality of the database and the effectiveness of information flows. TA support will involve facilitating and assisting in data validation exercises and preparing data validation guidelines as well guidelines for information flow.
The outputs emanating from these institutional support activities likely take the form of work or implementation plans, procedures manuals, job descriptions, and documented recommendations. Building on IADB and ECCB efforts to strengthen the network of debt managers in this region, special one-day seminars or conferences targeted to senior officials from member nations are also envisaged.
Workshops to Strengthen Middle and Front Office Capacity
The core of the TA strategy consists of the delivery of four workshops to help strengthen front and middle office operations. They are focused on helping participants to:
- Analyze and assess various external financing instruments;
- Hone the skills to negotiate more effectively with potential creditors;
- Analyze and assess the debt portfolio in the country in question, and formulate change recommendations as required; and
- Consider options, plans and make the necessary preparations in the event of a decision to pursue debt re-negotiations.
The first workshop focuses on assessing external financing options and analyzing loan proposals in order to best meet government’s debt management objectives. The workshop’s starting point will be the loan agreement and a review of the terms (implicit and explicit) that may impact debt service costs. In this regard, it is proposed to include back-office participants, many of whom are responsible for correctly interpreting the loan agreement so that all loan activities over the life cycle are captured. This will also familiarise back-office staff with the analytical tools of the debt management software, enabling them to simulate the new borrowing profiles to be used by front/middle office officials who are required to undertake detailed analysis and assessment of each borrowing proposal. Front office participants will be able to examine the impact of the new loan on the existing portfolio and also to compare competing loan offers so as to determine the offer that best satisfies the government’s debt strategy mandate. Through this process the workshop will go some way to providing participants with a loan analysis framework and process allowing for better technical evaluations of new loan offers.
The second workshop, a natural extension of the first, focuses on the requirements for a successful negotiation. Aimed at front and middle office staff, as well as legal officers involved in the negotiating process, the workshop examines all the phases involved in the negotiation process, from the preparation stage (including information gathering, building a negotiation team, planning a negotiation strategy) to the tactics and strategies involved in an actual negotiation. The intention is to introduce and to increase participants’ awareness of negotiation concepts and practices so as to better inform them of the requirements involved in a successful negotiation. Through this process, the workshop will go some way in assisting officers involved in the negotiation process to develop an effective framework for preparing and conducting loan negotiations or for establishing criteria for and assessing the performance of officials negotiating contracts on the government’s behalf.
The third workshop also complements the first workshop, as it picks up on the analytical framework presented therein, although here the scope of the analysis is broader, as the government’s entire debt portfolio, rather than individual instruments, is analysed, at a point in time and dynamically. Trend analysis of the debt portfolio over a 5 or 10 year historical period will be undertaken by participants. Participants will review the data and analyse the trend in the debt composition (domestic versus external, maturity structure, currency composition, interest structure, use of funds) as well as the trend in debt arrears, and debt flows (disbursements and debt service). Forecast projections of debt service based on existing commitments will also be assessed. Through this process and during the preparation of a portfolio analysis report, it is intended that middle office staff and senior management will better understand the issues and challenges presented by the current structure of their debt. It will also provide a critical input in the preparation of a debt strategy.
The fourth workshop is intended to assist member states who are contemplating embarking on a debt re-negotiation process to carry out some preliminary planning and preparation work, before a decision is made and well before financial advisors are hired. Indeed, one objective is for the terms of reference for and scope of work to be assigned to these advisors and the selection process are well specified and ensure that the authorities remain in control and well prepared to do so. It also sets out some alternative strategies and options for debt renegotiations, and the respective implications of each.
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