External Debt Management In Indonesia, By Tarun Das

Management of External Debt International Experiences and Best Practices

Dr. Tarun Das*, Economic Adviser, Ministry of Finance, India And Resource Person, UNITAR, Geneva.

November 2005 _______________________________________________________________________ * This report expresses personal views of the author and should not be attributed to the views of the Ministry of Finance, Government of India or the UNITAR. The author would like to express his gratitude to the UNITAR for providing an opportunity to prepare this report and the Ministry of Finance, Government of India for granting necessary permission for that.

1

Management of External Debt International Experiences and Best Practices Dr. Tarun Das, Economic Adviser, Ministry of Finance, India And Resource Person, UNITAR, Geneva.

Contents 1. Conceptual Issues 1.1 Definition of external debt 1.2 Debt Sustainability and Fiscal Deficit 1.3 Debt Sustainability and Current Account Deficit 1.4 Liquidity versus Solvency 2. Risk and Debt Sustainability Measurements 2.1 Economy wide model in ALM framework 2.2 Different Types of Risk 2.3 Risk Management 2.4 Sustainability Indicators 2.5 World Bank Classification of External debt 3. Inter Country Comparisons 3.1 Top ten debtor countries 3.2 Selected countries in Asia and Pacific 3.3 South Asia, and East Asia & Pacific 4. International Best Practices 4.1 New Zealand 4.2 Australia 4.3 Ireland 4.4 European Union 4.5 India 5. External Debt situation in Indonesia 6. Lessons from international best practices Selected References Statistical Tables

2

1. Conceptual Issues Debt sustainability basically implies the ability of a country to service all debts – internal and external on both public and private accounts- on a continuous basis without affecting adversely its prospects for growth and overall economic development. It is linked to the credit rating and the creditworthiness of a country. However, there is no simple answer to the question- what should be the sustainable or optimal level of debt for a country? Before discussing various measures for sustainable debt management, it is useful to clarify certain basic concepts regarding measurement of external debt. 1.1 Definition of external debt The Guide on external debt statistics jointly produced by the Bank for International Settlements (BIS), Commonwealth Secretariat (CS), Eurostat, International Monetary Fund (IMF), Organisation for Economic Co-operation and Development (OECD), Paris Club Secretariat, United Nations Conference on Trade and Development (UNCTAD) and the World Bank and published by the IMF (2003) defines “Gross external debt, at any time, as the amount of disbursed and outstanding contractual liabilities of residents of a country to non-residents to repay the principal with or without interest, or to pay interest with or without principal”. This definition is crucial for collection of data and analysis of external debt: 1. First, it talks of gross external debt, which is directly related to the problem of debt service, and not net debt. 2. Second, for a liability to be included in external debt it must exist and must be outstanding. It takes into account the part of the loan, which has been disbursed and remains outstanding, and does not consider the sanctioned debt, which is yet to be disbursed, or the part of the debt, which has already been repaid. 3. Third, it links debt with contractual agreements and thereby excludes equity participation by the non-residents, which does not contain any liability to make specified payments. 4. Fourth, the concept of “residence” rather than “nationality” is used to define a debt transaction hereby excluding debt transaction between foreign-owned and domestic entity within the geographical boundary of an economy. Besides, while borrowing of overseas branches of domestic entities including banks would be excluded from external debt, borrowing from such overseas branches by domestic entities would b included as part of external debt. 5. Fifth, it talks of contractual agreements, and excludes contingent liabilities. For a liability to be included in external debt, it must exist at present and must have contractual agreement.

3

6. Finally, the words “principal with or without interest” include interest free loans as these involve contractual repayment liabilities, and the words “interest with or without principal” include loans with infinite maturity such as recently popular perpetual bonds as these have contractual interest payments liabilities. Three other concepts- one relating to interest payments, another relating to currency and another relating to short-term debt need some clarification. While calculating interest, in general an accrual method rather than the actual cash-flow method is used. As regards currency, debt is made in different currencies and it is a common practice to convert all debt in a single foreign currency, say US dollar, and also in domestic currency. In some cases, debt from non-residents could be denominated in terms of domestic currency. As per definition of external debt, such debt should form a part of external debt, even though it may not be fully convertible. In general, short-term debt is defined as debt having original maturity of less than one year. However, Southeast Asian crisis highlighted the necessity to monitor debt by residual maturity. Short-term debt by residual maturity comprises all outstanding debt having residual maturity of less than one year, irrespective of the length of the original maturity. Residual maturity concept is distinctly superior to original maturity concept. 1.2 Debt Sustainability and Fiscal Deficit Debt sustainability is closely related to the fiscal deficit, particularly to the primary deficit (i.e. fiscal deficit less interest payments). Sustainability requires that there should be a surplus on primary account. It also requires that the real economic growth should be higher than the real interest rate. Countries with high primary deficit, low growth and high real interest rates are likely to fall into debt trap. 1.3 Debt Sustainability and Current Account Deficit Economic theory states that high fiscal deficit spills over current account deficit of the balance of payments. Persistent and high levels of current account deficit is an indication of the balance of payments crisis and needs to be tackled by encouraging exports and non-debt creating financial inflows. 1.4 Liquidity versus Solvency One important conceptual issue relates to the distinction between debt service problems due to liquidity crunch and those due to insolvency. These concepts are borrowed from the financial analysis of corporate bodies, but there are distinctions between firms and countries (Raj Kumar 1999). If a firm has positive net worth but faces difficulty to meet the obligations of debt service, it is considered to be solvent but to have liquidity problem. When it has negative net worth, it is insolvent. There is difficulty to apply these concepts to a country, as it is difficult to value all the assets of a country such as natural resources, wild life, antics in museum, heritage

4

buildings and monuments. Besides, firms can disappear due to insolvency problems, but a country cannot become bankrupt nor disappear nor are overtaken or merged purely on account of financial problems. So we need to consider medium and long term prospects of a country in terms of growth and balance of payments. 2

Debt Sustainability Measurements

There are broadly two approaches to determine debt sustainability of a country. One is to develop a comprehensive macroeconomic model for the medium term particularly emphasizing fiscal and balance of payments problems, and another is to assess various risks associated with debt and to monitor various debt sustainability ratios over time. 2.1 Economy wide model in ALM framework Economy wide model in general is constructed in the Asset and Liability Management (ALM) Framework and is aimed at minimizing cost of borrowing subject to specified risks or to minimize risk subject to specified cost. Benefits of such models are quite obvious in the sense that the model can be used not only for debt management but also for determination of optimal growth, fiscal profiles, medium term balance of payments etc. However, building up such models requires not only huge data but also expertise on the part of modelers for which there may be constraints in developing countries. 2.2 Different Types of Risk There should be a framework that identifies and assesses the financial and operational risks for the management of external debt. Risks can be grouped in three broad heads viz. (A)

External market based risks which include  Liquidity risk  Interest rate risk  Credit risk  Currency risk  Convertibility risk  Budget/ Fiscal risk

(B)

Operational and Management Risks which include  Operational risk  Control systems failure  Financial error risk, and

(C)

Country specific and political risks.

Box-1 provides a brief discussion the nature and implications of these risks.

5

Box 1. Risks for Management of External Debt (A) External Market-Based Risks (A1) Liquidity risk. The pledging of reserves as collateral with foreign financial institutions as support for loans to either domestic entities, or foreign subsidiaries of the reserve management entity, renders reserves illiquid until the loans are repaid. Liquidity risks also arise from the direct lending of reserves to projects (particularly in real estate and share markets) with returns in domestic currency or to enterprises, which are subject to shocks in external and domestic markets and are unable to repay their liabilities in time. In fact, one of the major factors leading to East Asian financial crisis in 1997-1998 was that short-term external borrowing was invested in protected or illiquid sectors having low return and long gestation period (real estate and petrochemicals in Indonesia, Thailand, Malaysia), sectors with high or excess capacity having low or negative returns (steel, ships, semiconductors, automobiles in Korea), non-tradable (such as land, office blocks and condominiums in Thailand) that generate return in domestic currency and did not generate foreign exchange; in automobiles and electronics with inadequate attention to profitability, and speculative and unproductive lending in share markets. This created liquidity problem due to maturity mismatch between assets and liabilities of the financial intermediaries. (A2) Interest rate risks. While fixed interest rate has the advantage of having fixed obligations of interest payments over time, there may be a substantial loss in a regime of falling interest rates and global trends of soft interest rates. Solution lies to have a proper mix of variable and fixed interest rates. Losses may also arise on assets from variations in market yields that reduce the value of marketable investments below their acquisition cost. Losses may also arise from operations involving derivative financial instruments. (A3) Credit risk. Losses may arise from the investment of reserves in high-yielding assets that are made without due regard to the credit risk associated with the asset. Lending of reserves by the Central Bank to domestic banks and overseas subsidiaries of reserve management entities, may also expose reserve management entities to credit risk. (A4) Currency risk. Some element of currency risk is unavoidable with external debt. But, there are instances to denominate debt in a few currencies in anticipation of favorable exchange rates. Subsequent adverse exchange rate movements may lead to large losses. (A5) Convertibility risk: Easy convertibility of domestic currency may lead to flight of capital at the slight anticipation of crisis. (A6) Budget/ Fiscal Risk: Fiscal risk may arise from unanticipated shortfalls in revenue or expenditure overruns. Government should consider both budget and off-budget liabilities and try to minimise contingent liabilities, which may represent a significant balance sheet risk for a

government and are a potential source of future fiscal imbalances. Sound public policy requires that a government needs to carefully manage and control the risks of their contingent liabilities. The most important aspect of this is to establish clear criteria as to

6

when government guarantees will be used and to use them sparingly. Experience in the industrialised countries suggests that more complete disclosure, better risk sharing arrangements, improved governance structures for state-owned entities and sound economic policies can lead to substantial reductions in the government’s exposure to contingent liabilities. (B) Operational and Management Risks (B1) Operational Risk is the risk that arises from improper management systems resulting in financial loss. It is due to improper back office functions including inadequate book keeping and maintenance of records, lack of basic internal controls, inexperienced personnel, and computer failures. Probability of default is high with inadequate operational and management systems. (B2) Control system failure risks arise due to outright fraud and money laundering because of weak or missing control procedures, inadequate skills, and poor separation of duties. (B3) Financial error risk. Incorrect measurement and accounting may lead to large and unintended risks and losses.

(c) Country specific and political risks influence multinational companies choice between exports and investments, and act as deterrents for foreign investment, whereas scale economies, lower wages, fiscal incentives, high yields, trade openness and agglomeration effects stimulate non-debt creating financial flows. Foreign capital is attracted by countries which allow free repatriation of capital and profits, and donot insist on appropriation of private capital in public interest.

2.3 Risk Management Although there is no unique solution to tackle various types of risk, general risk management practices of the government aim at minimizing risk for government bodies and public enterprises. These include development of ideal benchmarks for public debt and monitor and manage credit risk exposures. Typical risk management policies are summarized in Table-1. Table-1 Policies for Risk Management Type of Risk 1. Liquidity risk

Risk Management Policies (a) (b) (c) (d) (e) (f) (g) (h)

Monitor debt by residual maturity Monitor exchequer cash balance and flows Maintain certain minimum level of cash balance Maintain access to short-term borrowing But, fix limits for short-term debt Pre-finance maturing debt Do not negotiate for huge bullet loans Smooth the maturity profile to avoid bunching of debt services

7

2. Interest rate risk 3. Credit risk

(i) (j) (k) (l) (m) (n) (o)

4. Currency risk

5. Convertibility risk

(p) (q) (r) (s) (t) (u) (v) (w) (x)

(y)

(z) 6. Budget Risk

(aa) (bb) (cc) (dd) (ee) (ff) (gg)

7. Operational risks

Develop liquidity benchmarks Fix benchmark for ratio of fixed versus floating rate debt Maintain ratio of short-term versus long-term debt Use interest rate swaps Have credit rating of various scrips by major credit rating organizations such as S&P’s, Moody’s, Japan Bond Research Institute etc. Identify key factors that determine credit-rating Develop a culture of co-operation and consultation among different departments and with credit rating organisations Set overall and individual counter-party credit limits Fix benchmark for the ratio of domestic and external debt Fix ratios of short-term and long-term debt Fix composition of currencies for external debt Fix single currency and currency pool debt Use currency swaps and have policies for use of market derivatives Try to have natural hedge by linking dominant currency of exports and remittances to the currency denomination of debt It is better to have gradual and cautious approach towards capital account convertibility. The liberalisation of capital accounts should be done in an orderly manner in line with the strengthening of domestic financial systems through adequate prudential and supervisory regulations. The golden rule is to encourage initially non-debt creating financial flows (such as foreign direct investment and portfolio equity investment) followed by long term capital flows. Short term or volatile capital flows may be liberalised only at the end of capital account convertibility. Enact a Fiscal Responsibility Act. Put limits on debt outstanding and annual borrowing as a percentage of GNP or GDP Use government guarantees and other contingent liabilities (such as insurance and pensions etc.) judiciously and sparingly Fix limits on contingent liabilities Fix targets on fiscal deficit and primary deficit Fix limits on short term borrowing Monitor debt service payments

(hh) Allow independence and transparency of different offices (such as front, back, middle and head offices) dealing with public debt (ii) Strengthen capability of different offices (jj) Try to achieve general political consensus in policy formulations.

8. Country specific (kk) Have stable and sound macro-economic policies and political risk (ll) Have co-ordination among monetary and fiscal authorities

8

(mm)Try to achieve general political consensus for policy formulation. 2.4 Sustainability Indicators Debt sustainability indicators are the most widely used ratios for debt management. These indicators express outstanding external debt and debt services as a percentage of gross domestic product or other variables indicating the strength of the economy. Some commonly used debt sustainability indicators are given in Table-2. Table-2: Debt Sustainability Indicators Purpose 1. Solvency ratios

2. Liquidity monitoring ratios

Indicators (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l)

3. Debt burden ratio

4. Debt structure indicators 5. Public sector indicators

(m) (n) (o) (p) (q) (r) (s) (t) (u) (v) (w) (x) (y) (z)

Interest service ratio – the ratio of interest payments to exports of goods and services (XGS). External debt to GDP ratio External debt to exports ratio External debt to revenue ratio Present value of debt services to GDP ratio Present value of debt services to exports ratio Present value of debt services to revenue ratio Basic debt service ratio- Ratio of total debt services (interest payments plus repayments of principal) to XGS Cash-flow ratio for total debt or the total debt service ratio (i.e. the ratio of total debt services to XGS) Interest payments to reserves ratio. Ratio of short-term debt to XGS Import cover ratio- Ratio of total imports to total foreign exchange reserves. International reserves to short-term debt ratio Short-term debt to total debt ratio Total external debt outstanding to GDP (or GNP) ratio Total external debt outstanding to XGS ratio Debt services to GDP (or GNP) ratio Total public debt to budget revenue ratio Ratio of concessional debt to total debt Rollover ratio- ratio of amortization (i.e. repayments of principal) to total disbursements Ratio of interest payments to total debt services Ratio of short-term debt to total debt Public sector debt to total external debt Public sector debt services to exports ratio Public sector debt to GDP ratio Public sector debt to revenue ratio

9

(aa) (bb) 6. Financial sector indicators

Average maturity of non-concessional debt Foreign currency debt over total debt

(cc)

Open foreign exchange position- Foreign currency assets minus liabilities plus long term position in foreign currency stemming from off-balance sheet transactions (dd) Foreign currency maturity mismatch (ee) Ratio of foreign currency loans for real estate to total credits given by the commercial banks (ff) External sector related contingent liabilities (gg) Trends of share market prices (hh) GDRs and Foreign currency convertible bonds issued (ii) Inflows of FDI and portfolio investment 7. Corporate sector (jj) Leverage (debt/ equity ratio)- Ratio of debt to equity indicators (kk) Interest to cash flow ratio (ll) Short-term debt to total debt (mm) Return on assets (nn) Exports to total output ratio (oo) Net foreign currency cash flow (pp) Net foreign currency debt over equity 8. Dynamic ratios (qq) Average interest rate/ growth rate of exports (rr) Average interest rate/ growth rate of GDP (ss) Average interest rate/ growth rate of revenue (tt) Change of PV of debt service/ change of exports (uu) Change of PV of debt service/ change of GDP (vv) Change of PV of debt service/ change of revenue Source: Raj Kumar (1999) and IMF (2003) 2.5 World Bank Classification of External debt On the basis of ratio of PV to GNI and PV to XGS (exports of goods and services), the World Bank in their report on Global Development Finance 2005 has classified countries into three categories viz. low indebted, moderately indebted, and severely indebted countries as indicated in Table-3. While PV takes into account all debt servicing obligations over the life span of debt, GNI indicates country’s total potentials and XGS indicates foreign exchange earnings reflecting debt-servicing ability. Countries are also classified into low and middle income depending on the level of per capita income. Table-3 Cross classification of countries by income level and indebtedness Indebtedness →

Severely Indebted Either PV/XGS > 220% Or PV/GNP > 80%

Moderately Indebted Either 132%
Less Indebted Both PV/XGS<132% and PV/GNP<48%

Low income: GNI per capita less than US$765

Severely Indebted Low income (SILI)

Moderately Indebted Low income (MILI)

Less Indebted Low income (LILI)

Middle income: GNI per

Severely Indebted

Moderately Indebted

Less Indebted

Income Level ↓

10

capita between US$766 and US$9,385

Middle income (SIMI)

Middle income (MIMI)

11

Middle income (LIMI)

3

Inter Country Comparisons 3.1 Top ten debtor countries

Annex-2-A and Annex-2-B provide key debt indicators for top ten debtor countries in the world. It is observed that Brazil tops the list in terms of total external debt followed by China, Russian Federation, Argentina, Turkey, Mexico, Indonesia, India, Poland and Philippines in the order mentioned. It may be noted that out of ten top debtor countries in the world, the majority of the countries (viz. Russian Federation, China, Turkey, Indonesia, India and Philippines) are from the continent of Asia, and three countries (viz. Brazil, Argentina and Mexico) belong to Latin America, and only one country (i.e. Poland) belongs to Europe. Brazil, Argentina, Turkey and Indonesia are classified as severely indebted countries, whereas Russian Federation, Poland and Philippines are moderately indebted and China, Mexico and India are less indebted. India’s position has improved over the years. India ranked first in terms of total external debt in 1980, but it position improved to third in 1990 and further to eighth in 2002-2003. 3.2 Selected countries in Asia and Pacific Table-4 classifies the selected countries by the levels of per capita income and external indebtedness. Bhutan, Kyrgyz Republic, Lao PDR, Myanmar and Tajikistan are classified as severely indebted low income (SILI) countries, while Indonesia, Kazakhstan, Maldives, Samoa and Turkey fall under the category of severely indebted middle income (SIMI) countries. External debt in Indonesia is discussed in details in section-5. Table-4: Classification of selected countries in Asia and Pacific by levels of external indebtedness and per capita income in 2003 Severely indebted Low income SILI Bhutan Kyrgyz Rep Lao PDR Myanmar Tajikistan

Moderately indebted

Middle income SIMI Indonesia Kazakhstan Maldives Samoa Turkey

Low income MILI Cambodia Mongolia Pakistan PN Guinea Solomon Island Uzbekistan

Middle income MIMI Malaysia Philippines Russian Fed Sri Lanka Turkmenistan

Less indebted Low income LILI Bangladesh India Nepal Vietnam

Middle income LIMI Armenia Azerbaijan China Fiji Iran Ism Rep Thailand Tonga Vanuatu

3.3 South Asia, and East Asia & Pacific Table-5 indicates that despite severe foreign exchange and financial crisis at the end of 1990s, East Asia and Pacific countries as a group achieved significant improvement in the external debt burden in 1990-2004. South Asian countries as a group also improved their debt situation. South Asia has higher shares of multilateral and concessional debt than 12

those in East Asia and Pacific. On the other hand, the ratio of reserves as a percentage of external debt is much higher in East Asia and Pacific than in South Asia despite significant improvement in the ratio in South Asia over the period. Table-5 : Trends of Key Debt Indicators Key external debt indicators

EDT/XGS (%) EDT/GNI (%) TDS/XGS (%) INT/XGS (%) INT/GNI (%) RES/EDT (%) RES/MGS (months)

Short-term/ EDT (%) Concessional/ EDT (%) Multilateral/ EDT (%)

East Asia and Pacific 1980 1990 2000 2004 179 17 27 14 1 51 9 23 19 9

132 36 18 7 2 31 5 16 29 15

78 32 11 4 2 57 6 13 21 13

49 24 8 2 1 141 8 27 21 12

1980

South Asia 1990 2000

2004

154 16 12 5 1 40 6 7 73 25

303 31 28 15 2 7 2 10 55 31

113 23 10 4 1 78 10 4 52 36

155 27 15 6 1 30 5 4 50 38

Notes: EDT = External debt outstanding, GNI = Gross national income TDS = Total debt services, INT = Interest payments XGS = Exports of goods and services, MGS = Imports of goods and services RES = Foreign exchange reserves, Short term = Short term debt Concessional = Concessonal debt, Multilateral = Multilateral debt

3.3.1.1.1.1.1.1 International Best Practices 3.4 New Zealand The New Zealand Debt Management Office (NZDMO) is responsible for the management of public debt since the separation of debt management policy from monetary policy in 1988. Although NZDMO is placed in a division in Treasury, it maintains some degree of autonomy from the rest of the government and has its own advisory board. The board meets at least four times a year and consists of a senior member of the Treasury and experts in risk management. The board provides advice and oversight on wide range of issues relating to operational risk management and promotes transparency in debt management policies and supervision. The treasurer or the head of the NZDMO recommends benchmarks for sovereign debt in terms of currency mix and interest rate sensitivity, and trading limits imposed on the portfolio manager. The basic objective of the NZDMO is to identify a low risk portfolio of net liabilities consistent with the government’s aversion to risk and expected costs for risk reduction. In order to minimize the net risk exposure, the NZDMO has set the duration and currency profile of the liabilities to match its assets. As most of the government assets are denominated in New Zealand dollars, the strategy has entailed gradual elimination of net foreign currency debt (which was achieved in September 1996)

13

and lengthening maturity of domestic debt. Assets and liabilities are monitored on daily basis and the model also incorporates private sector debt management practices. The actual performance of portfolio managers is evaluated against the benchmark portfolio on daily basis. Over these years NZDMO has undertaken considerable amount of works relating to analysis and management of the government liabilities within an Asset and Liability Management (ALM) framework (Anderson 1999). It has developed both economy wide models and specific models for the management of public debt. In the wider model, basic objective is to construct a debt portfolio, which aims at hedging the economy as a whole against shocks to national income or net worth. It requires information on the nature and degree of private hedging mechanisms, which are highly dispersed and very expensive to collect. Therefore, NZDMO concentrates on the management of the government assets and liabilities. It has improved accounting principals and has adopted generally accepted accounting and auditing practices. In recent times, focus has been on maximizing returns and minimizing costs of assets and liabilities using the modern portfolio theory. In contrast to earlier works, it does not include physical assets that do not directly produce returns. The model estimates the relationship between the values of various asserts classes (e.g. equities, real estate etc,) and various government liabilities (e.g. debt and the undefended pension liabilities). To reflect the Crown’s total portfolio, the model also includes the measures of the Crown’s future tax revenues and future social expenditure liability. ALM relates essentially to the management of market risk and derivatives are used to achieve desired outcomes. On the basis of ALM modeling, NZDMO specifies benchmarks for various sustainability indicators such as ratio of domestic and external debt, ratio between debts with floating and fixed interest rates, currency mix, maturity mix, limits on short term debt, interest rates etc. Like many sovereign debt management agencies the NZDMO is committed to the principles of transparency, neutrality and even-handedness in its activities. The experience of NZDMO (Anderson 2000) leads to the following conclusions: (a) ALM framework is conceptually appealing but requires huge data. (b) It is relatively easy to include all financial assets and liabilities. (c) The extension of ALM to physical assets and non-traded sovereign instruments raises a number of issues and practical difficulties. (d) ALM framework is only one component of prudent debt management. Measures to manage other risks, particularly refinancing, liquidity, and operational risks need to be established. However, gains in risk management and cost reduction are considerable.

14

3.5 Australia The Australian Office of Financial Management (AOFM) established on July 1, 1999 is an independent agency within Treasury and a specialised office to manage Australian government’s debt position (McCray 2000). However, it has important practical linkages with the parent departments. Its major task is to identify, measure, monitor and analyze all kinds of risk, particularly market risk, funding/ liquidity risk, credit risk, operational risk etc. AOFM recognizes that capital account convertibility and liberalisation of trade and financial flows present both opportunities and challenges for debt management. Opportunities lie in accessing a truly global and expanded market for debt with potentially low cost. However, risks arise due to increased financial market volatility and internationally mobile creditors and investors leading to vulnerability of debt service costs, market exposures of debt portfolio and balance sheet net worth. Australian government introduced accrual budgeting and accounting systems to tackle risks and contingent liabilities. There is an increasing emphasis on outcomes-oriented approach to performance reporting, public sector transparency and accountability, and focus on net worth and risks to net worth. A comprehensive risk management framework encompassing funding, market, credit, liquidity and operational risks provide the basis for a coherent and objective planning for debt. A unique feature of the Australian debt management is that the basic organisational structure, staffing numbers, skill net, financial resourcing, delegation powers and accountability arrangements within AOFM had practically remained unchanged since its inception. 3.6 Ireland The National Treasury Management Agency (NTMA) in Ireland is an independent public debt office and is in charge of management of all public debt- either internal or external and also all contingent liabilities (such as savings schemes of the government, pension, provident and insurance funds). The benchmarks are designed in consistent with the annual debt-service budget within which the NTMA has to operate. As such the review of the benchmark is annual and matches the budget cycle. At the beginning of the year, NTMA signs a Memorandum of Understanding (MOU) with the Finance Minister and specifies benchmarks for various parameters such as extent of internal and external loan, currency mix, maturity mix, interest rare mix etc. These benchmarks are developed after careful examination and measurement of various risks such as liquidity, debt refinancing, maturity of debt etc. MOF does not interfere with the day-to-day working of the NTMA, which has distinct front, back, middle and head offices and dealing rooms.

15

The NTMA attempts to beat the benchmark both by funding at different dates than the benchmark stipulations in order to take advantage of favourable market conditions, and by issuing at different maturities within the broad guidelines regarding proportions of foreign currency and floating rate debt. The performance of the NTMA is evaluated at the end of the year in terms of actual and benchmark portfolios and costs. If NTMA performs better than the benchmarks agreed in the MOU, it retains the profits of debt management. Over the years, NTMA has emerged as a highly technical, efficient and profitable organisation in debt management. 3.7 European Union The Maastricht Treaty of the European Union set up the framework for the European Monetary Union, which includes introduction of common currency – the Euro. The Treaty also sets out four convergence criteria to achieve price stability, fiscal prudence and debt sustainability. These include the following: (1) Average consumer price inflation should be sustainable and, in the year prior to examination, should not be more than 1.5 percentage points over that of, at most, the three best performing countries. (2) The country should not have an excessive deficit. Prima facie a government’s budget deficit should not exceed 3% of GDP, and (3) Its debt should not be more than 60% of GDP. (4) Average nominal long-term interest rates should not exceed, by more than two percentage points the long-term interest rates of, at most, the three best performing member states in terms of price stability. Individual countries within European Union have developed independent debt management systems and procedures within these broad principles. Several countries have developed benchmarks for currency composition and maturity mix of external debt. Institutional constraints that limit influence the benchmarks include limiting currency composition of foreign debt to that of reserves portfolio (e.g. United Kingdom) and maintaining a fixed percentage of foreign exchange in a specific currency such as the ECU to develop debt market of that currency (e.g. France and Italy). In Sweden, the benchmark serves as the limit within which the foreign currency debt may be exposed to currency and interest rate risks. The Sweden debt Office (SNDO) lays down the risk limits and takes position in the foreign exchange and bond markets to bring the long-term cost of the debt below that of benchmark portfolio. The currency composition of the benchmark primarily matches the weights of the currencies in the ECU basket while US dollar and Japanese Yen are included in the portfolio for diversification. The SNDO may deviate from the currency mix benchmark by 3 percentage points, and that for duration benchmark by 0.5 percentage points. The interest rate structure of the benchmark is based on diversified borrowing along the yield curve to reduce shocks to specific parts of the yield curve and to reduce bunching of debt payments over time. In Denmark, benchmarks for various indicators and the maximum level of deviations from the benchmarks are specified.

16

In Hungary, the debt management office located in the Ministry of Finance is responsible for servicing the cost of the net sovereign external debt. The authorities align the currency composition of the external debt through hedging operations with that of the currency basket to which the national currency is pegged. Emphasis is placed on lengthening the maturing of the debt, maintaining more than three quarters of the debt in fixed rate instruments, and evenly spreading debt redemptions to avoid rollover risks. 3.8 India External debt indicators of India showed steady improvement over time. Despite severe balance of payments difficulties due to the impact of the gulf crisis in early 1990s and hardening of international oil prices in recent years, India never defaulted on its obligations of external payments. On the contrary, India pre-paid $7 billion worth of external debt to multilateral and bilateral lenders during 2003-2004. In terms of total external debt stock, India’s position improved from the first rant in 1980 to third rank after Brazil and Mexico in 1990 and further to the eighth rank after Brazil, China, Argentina, Russian Federation, Mexico, Turkey and Indonesia in 2003 (Annex-2-A). The debt-to-GDP ratio declined continuously from 38 % in 1991 to 20 % in 2003 and further to 18 % in 2004. The debt-service ratio (i.e. the ratio of total debt services to gross receipts on the current account of the external sector) also declined continuously from 35 % in 1990 to 16 % in 2003-2004 and further to 6 % in 2005. The World Bank now classifies India as a “low indebted country”. External debt is predominantly long-term. The share of short-term debt in total debt declined from 10.2 per cent in 1990-91 to 5.7 per cent in 2004-05. Eighty per cent of government debt comes from multilateral and bilateral sources. Table-6-A: Trends of external debt of India Year End

Total Ext Debt As % of GDP (US$ Bln)

1990-91 1995-96 2000-01 2001-02 2002-03 2003-04 2004-05

83.8 93.7 101.3 98.4 105.0 111.7 123.3

Short term

Per cent

Per cent

Official Creditors Per cent

28.7 27.0 22.6 21.2 20.3 17.8 16.7

10.2 5.4 3.6 2.8 4.4 4.0 5.7

64 64 51 52 48 45 43

Official Debtors Per cent

Concessional Per cent

60 57 43 44 42 40 39

46 45 35 36 37 36 34

Table-6-B Debt sustainability indicators for India during 1990-2005 (per cent) Year 1990-91 1991-92 1995-96 2000-01 2003-04 2004-05

Debt service ratio 35.3 30.2 26.2 16.2 16.2 6.1

Debt/ Current Receipts ratio 329 312 189 110 99 95

Short Term debt to Forex reserves 382 126 30 9 4 5

17

Short term debt to GDP ratio 3.0 3.2 1.4 0.8 0.7 0.6

Int. to current receipts ratio 16 13 9 6 4 2

18

Contingent Liabilities Government of India raises external loans on its own account under external assistance program and also provides guarantees to external borrowings by the public sector enterprises, developmental financial institutions and a few private sector companies under the BOT schemes for infrastructure development. All loans taken by the nongovernment sectors from multilateral and bilateral creditors involve guarantees by the government. Such guarantees given by the government form part of sovereign liability as the guarantees could be invoked in the case of default by the borrower. Thus, guarantees tantamount to contingent liability of the government. However, share of guaranteed loans in total external debt has declined continuously over the years and now accounts for only 5.5% of total external debt. External Debt Management- Policies and Organisational Set-up India has been able to manage its external debt situation despite serious balance of payments problems at the beginning of 1990s on account of gulf war leading to disruptions of Indian exports and remittances by non-resident Indians living in the gulf. Policy emphasis has been on resorting to concessional and less expensive fund sources, preference for longer maturity profiles, monitoring short-term debt, pre-payment of high cost debt and encouraging exports and non-debt creating financial flows. Careful management of external debt allowed India to retain policy-making sovereignty and not to be wholly influenced by the conditionalities imposed by the multilateral funding agencies. In fact, in recent years India prepaid a part of more expensive debt from the World Bank, the Asian Development Bank and some bilateral countries. They insisted for substantial reduction of food and fertilizer subsidies and overall fiscal deficit, which were not politically feasible for a coalition government. Effective public debt management also helped government to adopt a step-by-step approach to liberalization and to adopt effective safety nets for the weaker and vulnerable sections of the society by expanding and strengthening various anti-poverty and poverty alleviation programs. India adopted a cautious, gradual and step-by-step approach towards capital account convertibility. Initially non-debt creating financial flows (such as FDI and portfolio equity) were liberalized followed by liberalization of long-term debt flows and partial liberalization of medium term external commercial borrowing. There was tight control on short-term external debt and close watch on the size of the current account deficit. Capital account restrictions for residents and short-term debt helped India to insulate from the East Asian economic crisis during 1997-2000. There was high share (80% at the end of March 2000) of concessional debt in government accounting and there was no government borrowing from external commercial sources and no short-term external debt on government account. Maturity of government debt concentrated towards long-end for the debt portfolio (GOI-MOF 2005). The organisational structure for sovereign external debt management consists of the following offices:

19

(a)

(b) (c)

(d)

Front offices, which are responsible for negotiating new loans. Various divisions in the Ministry of Finance (MOF) such as Fund-Bank, ADB, EEC, Japan, America, ECB divisions, and the Reserve Bank of India (for IMF loans) act as front offices. Office of Controller of Aid, Accounts and Audit in the MOF acts as the Back Office, which is responsible for auditing, accounting, data consolidation and the dealing office functions for debt servicing. External Debt Management Unit (EDMU) in the MOF acts as the Middle Office, which is responsible for identification, measurement and monitoring of debt and risk, dissemination of data and policy formulation for both short and medium term. The Finance Minister acts as the Head Office and accords final approval for both internal and external debt.

Under the Indian constitutional provisions, States cannot borrow directly from external sources and the Central government has to intermediate external borrowings and bear exchange rate risk for the states. Currently, external assistance is passed on to the states on the same terms and conditions as for normal central assistance for state plans i.e. in 90:10 mix of grant and loan to the hilly and backward states (the so-called special category states) and 30:70 mix of grant and loan to other states. Loans carry an interest rate of 11.5% with maturity of 20 years including moratorium of 5 years. The system involves certain amount of concession provided to the states. Recently, on considering the high transactions cost of large number of low value projects, tied assistance, and strict conditionalities, government has taken a policy decision to prune the number of bilateral creditors from over 18 to only six namely Japan, United Kingdom, Germany, USA, European Commission and Russian Federation. Government has also decided to pre-pay outstanding bilateral debt except to Japan, Germany, USA and France. The decision was also partly influenced by the substantial build up of foreign exchange reserves and low interest rates in the domestic countries. Those bilateral countries, from which it has been decided not to receive development assistance on government account, have been advised to provide their development assistance to non-governmental organisations and the Universities etc. Accordingly, countries like Australia, Belgium, Canada, Denmark, France, Italy, Netherlands, Norway, Sweden, Switzerland and others are now providing assistance directly to the NGOs for primary education, urban water supply and sanitation, HIV/AIDS prevention and care, strengthening environment institutions and poverty alleviation program. India provides technical assistance under the Technical and Economic Cooperation (ITEC) Program and the Special Commonwealth African Assistance plan (SCAAP) to 141 developing countries in Asia, Africa, Latin America, Eastern Europe and the Pacific. India is also participating actively in the international initiative for economic development of HIPC (Heavily Indebted Poor Countries) and other developing countries. Under the HIPC, India is providing credit lines to seven eligible HIPC countries viz.

20

Mozambique, Tanzania, Zambia, Ghana, Guyana, Nicaragua and Uganda. The government has waived the outstanding dues from these countries. In addition, India provides credit lines to a number of developing countries. An effective system is in place to measure and monitor the level and indicators of debt. Some of the important sustainability and liquidity indicators include external debt to GDP ratio, debt service ratio, maturity and present value of debt, short-term debt by original and residual maturity, ratios of debt to other indicators such as exports of goods and services, and foreign exchange reserves. Statistical improvement and technological upgradation have been done to monitor these parameters on real time basis. Fiscal Responsibility and Budget Management (FRBM) Act 2003 Indian government enacted a Fiscal Responsibility and Budget Management Act in 2003. The Act came into force in April 2004. The Act mandates the Central government to eliminate revenue deficit by March 2009 and to reduce fiscal deficit to 3% of GDP by March 2008. Under section 7 of the Act, the central government is required to lay before both houses of Parliament Medium Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Macro Economic Framework Statement along with the Annual Financial Statement. Four fiscal indicators to be projected for the medium term. These include revenue deficit, fiscal deficit, tax revenue and total debt as % of GDP. The Act stipulates the following targets for the Central government: • Reduction of revenue deficit by 0.5% of GDP or more every year. • Reduction of gross fiscal deficit by 0.3% of GDP or more every year. • No assumption of additional debt exceeding 9% of GDP for 2004-05 and reduction of this limit by at least one percentage point of GDP in each year. • No government guarantee in excess of 0.5% of GDP in any financial year. • Greater transparency in the budgetary process, rules, accounting standards and policies having bearing on fiscal indicators. • Quarterly review of the fiscal situation. Monitoring, Dissemination and Capacity Building 100% government debt data and 78% of total external debt data are computerized on the basis of Commonwealth Secretariat DRMS. The Ministry of Finance has undertaken projects to computerise fully NRI deposits and short-term debt, which account for the residual 22% of total external debt. Historical trends and future projections of debt stock and debt services are available for analysis, scenario building and as MIS inputs. Debt Data are updated quarterly for March, June, September, December. June 2005 debt data are now under compilation. Data by both Creditors and Debtors classification and by currency, maturity and interest mix are available. Data cross-classified by institutions and instruments are also available.

21

Time lag for data update is 8 weeks, which is well below the IMF benchmark set under the Special Data Dissemination Standard (SDDS). A Status Report on External Debt is presented by the Finance Minister to the Parliament every year. The report is also posted on the MOF homepage. World Bank provided a Grant under the Institutional Development Fund (IDF) for strengthening capacity building and policymaking process for management of Indian external debt. The Grant yielded rich dividends and involved all stakeholders in the policy of policymaking and helped in bridging research and policy. The IDF Grant helped to computerise the database and disbursements and payments system for external public debt on real time basis and reduced transactions cost significantly. Under the IDF grant the Ministry of Finance organized three international seminars and one workshop with active participation by the World Bank, RBI, academicians and all stakeholders concerned with external debt and non-debt creating financial flows. The executive agencies published three Books on papers and proceedings (CRISIL 1999 and 2001 and RBI 1999). These seminars recommended various reforms for external sectors. Most of the policy recommendations were accepted by the government. Ministry of Finance also set up various working groups comprising members from the government, RBI, financial institutions, private and public corporate bodies and professionals having expertise and the experience on the selected subjects. Members visited foreign countries to understand international best practices for management of external debt. These countries included Australia, Ireland, New Zealand, UK and USA. 5. External debt situation in Indonesia Along with other countries, World Bank publishes external debt statistics for Indonesia in the Global Development Finance (GDF). In the latest issue of GDF (2005), the World Bank has classified Indonesia as a severely indebted middle-income country. As per the World Bank statistics summarised in Table-7, in recent years, external indebtedness of Indonesia has improved to some extent. The external debt to GNI ratio decreased from 117 per cent in the crisis year 1999 to 189 per cent in 2003, external debt service ratio also declined from 30 per cent in 1999 to 26 per cent in 2003 and the share of concessional loan in total external debt improved from 21 to 27 per cent over the same period. The share of multilateral debt in total debt remained around 14 per cent and that of short-term best remained around 6 per cent during 1999-2003. However, external debt to export ratio decreased from 257 per cent to 333 per cent over the same period and the country has foreign exchange reserves, equivalent to only 6 months imports cover.

22

Annex-7: External Debt in Indonesia (in US$ billion)

Total Debt stock (EDT) Long term debt Public & guaranteed Private non-guaranteed Use of IMF credit Short-term debt Total debt service Interest payments (INT) Interest on long term debt Interest on short term debt Interest on IMF loan Gross national income (GNI) Exp.of goods and services (XGS) Workers remittances Imp.of goods & services (MGS) International reserves (RES) Current account balance

1970

1980

1990

1999

2000

2001

2002

2003

4.5 4.0 3.6 0.5 0.1 0.3 0.2 0.05 0.05 0 0 9.7 … 0

20.9 18.2 15.0 3.1 0 2.8 3.1 1.5 1.2 0.3 0 74,8 … 0 … 6.8

69.9 58.2 48.0 10.3 0.5 11.1 9.9 4.0 3.4 0.5 0.1 109.2 29.9 0.2 33.1 8.7

151.2 120.9 73.7 47.3 10.2 20.0 17.7 6.0 4.6 0.9 0.4 129.3 58.8 1.1 53.9 27.3

144.4 110.9 69.8 41.2 10.8 22.6 16.7 7.4 5.7

134.0 103.1 68.7 34.4 9.1 21.8 15.5 5.9 4.6

131.8 100.1 70.1 30.0 8.9 22.8 17.0 4.0 3.2

1.2 0.5 139.2 74.3 1.2

0.9 0.5 137.1 65.9 1.0

0.6 0.3 167.1 68.4 1.3

134.4 101.3 73.4 27.8 10.3 23.0 18.4 4.3 3.4 0.6 0.2 198.0 71.0

66.9

59.5

60.8

63.9

29.4

28.1

32.0

36.3

194 104 23 10 5 20 5 16 21 14

203 98 24 9 4 21 6 16 21 15

193 79 25 6 2 24 6 17 24 15

189 67 27 6

… 0.2

1.4

Sustainability Debt indicators (in per cent) EDT/ XGS EDT/ GNI TDS/ XGS INT/ XGS INT/ GNI RES/ EDT RES/ MGS (months) Short-term/ Total debt Concessional/ EDT Multilateral/ Total debt

… 47 … … 0.5 3.5 … 7.7 62 0.1

… 28 … … 1.9 33 … 13 34 9

234 64 33 13 4 12 3 16 26 20

257 117 30 10 5 18 6 13 21 13

3 28 7 18 28 15

Source: (1) World Bank, Global Development Finance 2005

6. Lessons from international best practices International best practices for management of external debt lead to the following broad conclusions: (a) Management of external debt is closely related to the management of domestic debt, which in turn depends on the management of overall fiscal deficit. (b) Debt management strategy is an integral part of the wider macro economic policies that act as the first line of defense against any external financial shocks. (c) For an emerging economy, it is better to adopt a policy of cautious and gradual movement towards capital account convertibility.

23

(d) At the initial stage, it may encourage non-debt creating financial flows followed by liberalization of long-term and medium-term external debt. (e) Big bullets are bad for small economies, as these can create refinancing risk that many countries would be well advised to avoid. (f) It is not enough to manage the government balance sheet well, it is also necessary to monitor and make an integrated assessment of national balance sheet and to put more attention on surveillance of overall debt- internal and external, private and public. In each of the major Asian crisis economies- Indonesia, Korea and Thailand- weakness in the government balance sheet was not the source of vulnerability, rather vulnerability stemmed from the un-hedged sort-term foreign currency debt of banks, finance companies and corporate sector. (g) It is not sufficient to manage the balance sheet exposures, it is equally important manage off balance sheet and contingent liabilities. Emerging as well as advanced economies have experienced how bad banks and poorly designed bank safety nets can lead to large costs to he public sector and an unexpected weakening of the government’s balance sheet. Government guarantees of private debt can also have similar adverse impact. (h) It is necessary to adopt suitable policies for enhancing exports and other current account receipts that provide the means for financing imports and debt services. (i) Detailed data recording and dissemination are pre-requisites for an effective management and monitoring of external debt and formulation of appropriate debt management policies. (j) There is a need for setting up an integrated Public Debt Office for the following functions:

• • • •

To deal with both domestic & external debt To set bench marks on interest rate, maturity mix, currency mix, sources of debt Identification and measurement of contingent liabilities  Policy formulation for debt management  Monitoring risk exposures Building Models in ALM framework

(k) It is vital that external forward liabilities and short-term debt are kept within prudential limits.

24

(l)

It is important to strengthen public and corporate governance and enhance transparency and accountability.

(m)It is also necessary to strengthen the legal, regulatory and institutional set up for management of both internal and external debt. (n) (o) A sound financial system with well developed debt and capital market is an integral part of a country’s debt management strategy.

25

External Debt Management Strategy In all the East Asian crisis economies, weaknesses in financial systems as a result of weak regulation and supervision and a long tradition of a heavy government role in credit allocation led to misallocation of credits and inflated asset prices. Another vital weakness of all countries was associated with large unhedged private short-term foreign currency debt in a setting where the private corporate sector was highly leveraged. Short-term foreign currency denominated debt created two kinds of vulnerabilities in these economies. First, if some creditors pulled out their money, each individual creditor had an incentive to join the queue. As a result, even a debtor that had been fully solvent before the crisis could be plunged into insolvency. Second, such debts also created vulnerabilities associated with the exchange rate depreciation. Exchange risk was either borne directly by the financial institutions or passed on to the corporations as the funds was on lent (thereby converting exchange risk into credit risk). These factors were further complicated by the interaction of exchange rate and credit risks. Currency depreciation led to wide spread insolvency and created additional counter-party risk, which in turn added momentum to the exit of foreign capital. The management of debt crisis faced by the East Asian countries was not without precedence. Following the inception of the Latin American debt crisis in 1982, and on the presumption that the debt problem was one of liquidity and not solvency, the initial debt management strategy aimed at normalising the relationship between the debtors and creditors through a combination of economic adjustment by debtor countries and negotiations on financial relief. The financing modalities provided debtor countries with some financial relief through interest rate spreads, reduced fees, and extension of maturities and provision of some new finances. The negotiations conducted on a case-bycase approach for debtor countries were co-ordinated by the private bank steering committees in consultation with the IMF, World Bank and governments of the creditor banks’ home countries (Islam 1998). In the case of Asian crisis, countries succeeded in striking a reasonably comprehensive debt-rescheduling strategy with creditor banks. The implementation of the deal was voluntary and all creditors did not join the scheme. So long as free movement of international capital is allowed, there is no guarantee that the debt crisis will not recur in future. Whenever such a financial crisis occurs in future, it is necessary to formulate an international debt management strategy on the basis of negotiations among international private lenders, investors and borrowers for sharing the responsibility for debt relief, for rescheduling or for delaying claims on repayment. More effective structures for orderly debt workouts, including better bankruptcy laws at the national level and better ways at the international level of associating private sector creditors and investors with official efforts are needed to help resolve sovereign and private debt problems.

26

In the case of East Asian crisis, considerable thought was given to mechanisms that involve private sector to forestall and resolve crisis in a more timely and systematic way. A range of options are available in this respect, viz. (a) to contract credit and swap facilities with groups of foreign banks, to be activised in the event of liquidity pressures, such as those contracted by Argentina and Mexico; (b) embedding call options in certain short-term credit instruments to provide for an automatic extension of maturities in times of crises; (c) feasible modifications of terms of sovereign bond contracts to include sharing clauses; and (d) a possible role for creditor councils for discussion between debtors and creditors. However, these are complex issues and need to be designed carefully so that there are no perverse incentives, which may encourage private creditors to bail themselves out at the first sight of difficulty, rather than providing net new financing in the event of a crisis. Developing countries need to strengthen their debt management strategy by developing comprehensive debt sustainability models, which will integrate external sector, particularly the flows of external debt, with broad macro-economic variables and provide early warning regarding any possible debt trap. In this respect, separate debt models may be developed with respect to sovereign external debt and private debt. All countries need to monitor very carefully short-term debt, long-term debt by residual maturity, all guarantees and all contractual contingent liabilities arising out of both debt and non-debt creating financial flows. A more comprehensive approach is needed when trying to deal with excessive private borrowing and risk taking in the presence of large capital inflows and weak financial systems. This often means applying more flexible exchange rates, tighter fiscal policy and improved financial system. Domestic financial sector liberalisation should also proceed carefully and in step with tighter financial regulation and supervision, and internationally recognised prudential norms for capital adequacy and provisioning for non-performing assets by commercial banks and financial institutions.

27

Selected References Das, Tarun (1999a) East Asian Economic Crisis and Lessons for External Debt Management, pp.77-95, in External Debt Management, ed. by A. Vasudevan, April 1999, RBI, Mumbai, India. _______ (1999b) Fiscal Policies for Management of External Capital Flows, pp. 194207, in Corporate External Debt Management, edited by Jawahar Mulraj, December 1999, CRISIL, Bombay. _______ (2000) Sovereign Debt Management in India, pp.561-579, in Sovereign Debt Management Forum: Compilation of Presentations, November 2000, World Bank, Washington D.C. _______ (2002a) Implications of Globalisation on Industrial Diversification in Asia, pp.ix+1-86, UN Publications Sales No.E.02.II.F.52, March 2002, ESCAP, Bangkok. _______ (2002b) Management of Contingent Liabilities in Philippines- Policies, Processes, Legal Framework and Institutions, pp.1-60, March 2002, World Bank, Washington D.C. ______ with Raj Kumar, Anil. Bisen and M.R. Nair (2002) Contingent Liability Management- A Study on India, pp.1-84, Commonwealth Secretariat, London _______ (2003) Management of Public Debt in India, pp.85-110, in Guidelines for Public Debt Management: Accompanying Document and Selected Case Studies, 2003, IMF and the World Bank, Washington D.C. _______ (2004) Financing International Cooperation- A Case Study for India, pp.1-46, Office of Development Studies., March 2004, UNDP, UN Plaza, New York. ________ (2005a) Sustainable external debt management- International Best Practices, pp.1-46, paper prepared for UN-ESCAP, Bangkok, September 2005. ESCAP (2005) Implementing the Monterrey Consensus in the Asian and Pacific RegionAchieving Coherence and Consistency, United Nations, New York, 2005. Government of India, Ministry of Finance (2005) India’s External Debt- A Status Report, June 2005, New Delhi. International Monetary Fund (2003) External Debt Statistics- Guide for Compilers and Users, 2003, IMF, Washington D.C. _______ and the World Bank (2003) Guidelines for Public Debt Management: Accompanying Document and Selected Case Studies, 2003, Washington D.C.

28

Jensen, Fred (2000) Trends in sovereign debt management in IBRD countries over the past two years, pp.14-25, in Sovereign Debt Management Forum: Compilation of Presentations, November 2000, World Bank, Washington D.C. McCray, Peter (2000) Organisational models for sovereign debt management, pp.297310, in Sovereign Debt Management Forum: Compilation of Presentations, November 2000, World Bank, Washington D.C. Raj Kumar (1999) Debt Sustainability Issues- New Challenges for Liberalising Economies, pp.53-76, in External Debt Management, ed. by A. Vasudevan, April 1999, RBI, Mumbai, India. Reserve Bank of India (RBI) (1999) External Debt Management- Issues, Lessons and Preventive Measures, pp.1-372, edited by A. Vasudevan, RBI, Mumbai, April 1999. Sullivan, Paul (2000) The design and use of strategic benchmarks in managing risk, pp.175-191, in Sovereign Debt Management Forum: Compilation of Presentations, November 2000, World Bank, Washington D.C. World Bank (2000) Sovereign Debt Management Forum: Compilation of Presentations, November 2000, World Bank, Washington D.C. _______ (2005a) World Development Indicators 2005, World Bank, Washington. DC. _______ (2005b) Global Development Finance 2005, World Bank, Washington. DC.

29

Annex-1 Economic Size of Selected Economies in 2003 Population

Country 1. Brazil 2. China 3. Russian Federation 4. Argentina 5. Turkey 6. Mexico 7. Indonesia 8. India 9. Poland 10.Philippines 11.Pakistan 12.Bangladesh 13.Sri Lanka 14.Nepal 15.Bhutan 16.Maldives 17.Fiji 18.Papua New Guinea 19.Samoa 20.Solomon Islands 21.Tonga 22.Vanuatu 23.Armenia 24.Azerbaijan 25.Cambodia 26.Iran Islamic Rep 27.Kazakhstan 28.Kyrgyz Rep 29.Lao PDR 30.Malaysia 31.Mongolia 32.Myanmar 33.Tajikistan 34.Thailand 35.Turkmenistan 36.Uzbekistan 37.Vietnam

Area GNP PC PC Density '000 US$ GNP GNP GNP Population per Million sq. km. sq. km. billion Rank US$ Rank Top 10 Debtor Countries 172 8547 20 480 13 2720 95 1272 9598 138 1417 6 1100 134 145 17075 9 375 16 2610 97 37 2780 14 140 30 3810 84 66 775 86 198 24 2800 93 99 1958 52 637 10 6230 68 209 1905 115 174 27 810 146 1032 3287 347 571 12 540 159 39 323 127 202 22 5280 72 78 300 263 88 41 1080 135 SAARC Countries other than India 141 796 183 78 44 520 161 133 144 1024 55 51 400 173 19 66 290 18 14 930 140 24 147 165 6 113 240 192 0.8 47 18 0.6 … 630 … 0.3 0.3 934 0.7 … 2350 … Pacific Islands 0.8 18 45 2 … 2240 … 5 463 12 3 144 508 163 0.2 2.8 61 0.3 … 1440 … 0.4 29 15 0.3 … 560 … 0.1 0.8 140 0.15 … 1490 … 0.2 12 17 0.22 … 1180 … Other Developing Countries in Asia 3 30 108 3 143 950 139 8 87 100 7 104 820 145 13 181 76 4 126 300 183 65 1648 39 133 32 2010 110 15 2725 6 27 62 1780 119 5 200 26 2 156 340 179 5 237 23 2 152 340 179 24 330 72 96 37 3880 82 2 1567 2 1 164 480 165 48 677 73 … … … … 6 143 44 1 162 210 195 61 513 120 136 31 2190 105 5 488 10 5 116 1120 131 25 447 61 11 88 420 172 80 332 244 39 58 480 165 Source: World Bank, World Development Indicators 2005

30

Life Expec- Literacy tancy Rate Years Percent

68 70 66 74 70 73 66 63 74 70

87 87 99 97 86 91 88 58 100 95

63 62 73 59 63 69

43 40 92 43 … 97

69 57 69 69 71 68

93 65 99 … … …

74 65 54 69 63 66 54 73 65 57 67 69 65 67 69

99 … 70 67 99 … 65 88 99 85 99 95 … 99 93

Annex-2A: Top ten debtor countries in 2003 Country ranked in Total external Share of terms of stock of debt concessional external debt (US$ billion) debt (per cent)

1. Brazil 2. China 3. Russian Fed. 4. Argentina 5. Turkey 6. Mexico 7. Indonesia 8. India 9. Poland 10.Philippines

235 194 176 166 146 140 134 114 95 63

Debt /GNP Ratio of short ratio term debt (per cent) to Total debt (per cent)

1 17 1 1 4 1 27 38 7 23

30 15 50 104 77 23 80 22 40 77

8.3 32.7 17.6 13.8 15.8 6.6 17.0 4.2 20.5 9.9

Ratio of short term debt to Foreign exch. (per cent) 39.8 17.5 39.3 162.4 64.7 15.5 63.2 4.6 57.4 39.0

Annex-2B: Top ten debtor countries in 2003 Country ranked in Debt service Present Value terms of stock of ratio of external debt external debt (per cent) (US$ billion) 1. Brazil 2. China 3. Russian Fed. 4. Argentina 5. Turkey 6. Mexico 7. Indonesia 8. India 9. Poland 10.Philippines

63.8 7.3 11.8 37.9 38.5 20.9 26.0 18.1 25.1 22.1

254.1 188.5 186.5 184.2 157.1 153.0 136.9 100.3 93.5 65.4

PV/ GNP ratio (per cent)

PV to exports ratio (%)

Indebtedness and income Classification

54 15 117 52 25 81 82 19 48 80

323 48 531 135 83 243 200 106 147 147

Severe/ Middle Less/ Middle Severe/ Middle Moderate/ Middle Less / Middle Severe/ Middle Severe/ Middle Less/ Low Moderate/ Middle Moderate/ Middle

Source: World Bank, Global Development Finance 2005

31

Annex-3: Key Indebtedness Indicators in 2001-2003 Total Present Ratio of Ratio of Ratio of External Value of EDT to PV to EDT to Debt Stock Ext.Debt Exports Exports GNI (EDT) (PV) EDT/XGS PV/XGS EDT/GNI Country ($ Billion) ($ Billion) (per cent) (per cent) (per cent) 1. Brazil 235 254 299 323 50 2. China 194 189 49 48 15 3. Russian Fed 175 184 128 135 50 4. Argentina 166 187 473 531 104 5. Turkey 146 153 232 243 77 6. Mexico 140 157 74 83 23 7. Indonesia 134 137 196 200 80 8. India 114 100 120 106 22 9. Poland 95 94 150 147 49 10.Philippines 63 65 141 147 77 11.Pakistan 36 30 232 189 50 12.Bangladesh 19 13 188 128 37 13.Sri Lanka 10 8 134 110 62 14.Nepal 3.3 2.1 200 131 57 15.Bhutan 0.4 0.4 270 252 79 16.Maldives 0.3 0.2 54 41 45 17.Fiji 0.3 0.3 25 24 15 2.5 2.3 113 104 87 18.Papua N Guinea 19.Samoa 0.4 0.3 253 209 148 0.2 0.1 224 176 76 20.Solomon Islands 21.Tonga 0.084 0.059 106 74 57 22.Vanuatu 0.095 0.068 64 46 39 23.Armenia 1.1 0.7 131 85 45 24.Azerbaijan 1.7 1.4 58 47 28 25.Cambodia 3.1 2.7 125 107 82 26.Iran Ism Rep 12 10 33 30 9 27.Kazakhstan 23 23 181 183 94 28.Kyrgyz Rep 2 1.6 282 221 125 29.Lao PDR 3 2 611 356 155 30.Malaysia 49 50 44 45 55 31.Mongolia 2 1 188 149 127 32.Myanmar 7 6 247 187 … 33.Tajikistan 1 1 139 112 96 34.Thailand 52 51 59 59 41 2.3 … 231 … 86 35.Turkmenistan* 36.Uzbekistan 5 5 149 142 49 37.Vietnam 16 14 77 67 45 * in 1998.

32

Ratio of PV to GNI PV/GNI (per cent) 54 15 52 117 81 25 82 19 48 80 41 25 51 38 74 35 15 80 122 60 40 28 29 23 70 8 95 98 91 56 95 … 77 41 … 47 39

Annex-4: Key External Debt Sustainability Indicators in 2003 (per cent) EDT/XGS (per cent)

Country

1. Brazil 2. China 3. Russian Fed 4. Argentina 5. Turkey 6. Mexico 7. Indonesia 8. India 9. Poland 10.Philippine

265 38 107 449 199 73 190 101 125 135

11.Pakistan 12.Bangladesh 13.Sri Lanka 14.Nepal 15.Bhutan 16.Maldives

192 169 126 174 273 47

17.Fiji 18.PN Guinea 19.Samoa 20.Solomon Islnd 21.Tonga 22.Vanuatu

21 100 152 73 67 65

23.Armenia 24.Azerbaijan 25.Cambodia 26.Iran Is Rep 27.Kazakhstan 28.Kyrgyz Rep 29.Lao PDR 30.Malaysia 31.Mongolia 32.Myanmar 33.Tajikistan 34.Thailand 35.Turkmenistan*

36.Uzbekistan 37.Vietnam All developing East Asia & Pacif South Asia

Country

105 52 115 27 149 238 592 48 165 253 120 54 231 131 67 105 60 119

EDT/GNI (per cent)

TDS/XGS (per cent)

INT/XGS (per cent)

Top 10 Debtor Countries 50 64 17 14 7 1 42 12 5 136 38 6 611 39 9 22 26 6 68 26 6 19 18 5 46 25 3 72 22 6 SAARC Countries other than India 45 16 5 34 6 2 57 8 2 56 6 2 72 5 1 42 4 1 Pacific Islands 14 3 1 90 12 3 138 5 3 75 5 2 52 3 1 34 2 1 Other Developing Countries in Asia 39 9 1.2 27 8 0.8 77 1 0.3 8 4 1 82 35 5 109 17 3 137 10 2 50 7 2 118 32 2 … 4 1 80 9 2 37 16 2 86 32 9 51 21 4 40 3 1 39 17 4 26 11 2 24 16 5

INT/GNI (per cent)

Indebted classification*

3 1 2 2 3 1 3 2 1 3

SIMI LIMI MIMI SIMI SIMI LIMI SIMI LILI MIMI MIMI

1.1 0.3 1.0 0.5 0.4 0.8

MILI LILI MIMI LILI SILI SIMI

0.5 2.6 3.3 1.6 0.5 0.4

LIMI MILI SIMI MILI LIMI LIMI

0.4 0.4 0.2 0.3 3 0.9 0.6 2.2 1.3 … 1.1 1.5 4 1.5 0.8 2 1 1

LIMI LIMI MILI LIMI SIMI SILI SILI MIMI MILI MILI SILI LIMI MIMI MILI LILI

Annex-5: Key External Debt Sustainability Indicators in 2003 (per cent) Indebted RES/EDT RES/MGS Short Term/ Concess/ Multilateral (per cent) (months) EDT (%) EDT (%) / EDT (%) classification*

33

1. Brazil 2. China 3. Russian Fed 4. Argentina 5. Turkey 6. Mexico 7. Indonesia 8. India 9. Poland 10.Philippines

21 215 45 9 24 41 28 91 36 27

11.Pakistan 12.Bangladesh 13.Sri Lanka 14.Nepal 15.Bhutan 16.Maldives

33 14 22 40 87 57

17.Fiji 19.Samoa 20.Solomon Island 21.Tonga 22.Vanuatu

160 21 23 20 51 46

23.Armenia 24.Azerbaijan 25.Cambodia 26.Iran Ism Rep 27.Kazakhstan 28.Kyrgyz Rep 29.Lao PDR 30.Malaysia 31.Mongolia 32.Myanmar 33.Tajikistan 34.Thailand 35.Turkmenistan* 36.Uzbekistan 37.Vietnam All developing

45 49 31 … 22 19 9 91 16 8 10 81 61 25 39 50

18.Papua N Guinea

Top 10 Debtor Countries 7 8 1 11 38 17 7 18 1 6 14 1 5 16 4 3 7 1 6 18 27 11 4 37 5 21 7 5 10 23 SAARC Countries other than India 8 3 3 8 16 3

3 67 3 93 5 80 2 97 2 50 9 64 Pacific Islands 5 33 12 3 5 36 6 54 46 3 6 79 3 1 91 3 16 77 Other Developing Countries in Asia 4 1.2 70 2 13 53 4 7 89 … 28 0 4 12 4 5 2 68 6 0 96 5 18 3 3 20 76 2 20 67 1 7 74 6 21 19 9 23 0 5 4 27 3 8 74 7 16 18

8 14 4 10 5 13 14 26 3 12

SIMI LIMI MIMI SIMI SIMI LIMI SIMI LILI MIMI MIMI

45 73 41 84 35 56

MILI LILI MIMI LILI SILI SIMI

71 36 43 58 82 74

LIMI MILI SIMI MILI LIMI LIMI

66 33 26 3 8 50 49 2 46 18 31 6 2 13 25 15

LIMI LIMI MILI LIMI SIMI SILI SILI MIMI MILI MILI SILI LIMI MIMI MILI LILI

Annex-6: Classification of selected countries in ESCAP by levels of external indebtedness And per capita income in 2003 Severely indebted

Moderately indebted

Less indebted

Low income

Middle income

Low income

Middle income

Low income

Middle income

SILI

SIMI

MILI

MIMI

LILI

LIMI

34

(1) Bhutan Kyrgyz Rep Lao PDR Myanmar Tajikistan

(2) Indonesia Kazakhstan Maldives Samoa Turkey

(3)

(4)

Cambodia Mongolia Pakistan PN Guinea Solomon Island Uzbekistan

Malaysia Philippines Russian Fed Sri Lanka Turkmenistan

(5) Bangladesh India Nepal Vietnam

Acronyms LILI MILI SILI LIMI MIMI SIMI Low Income Middle Income

Less Indebted Moderately Indebted Severely Indebted

Less Indebted Low Income Moderately Indebted Low Income Severely Indebted Low Income Less Indebted Middle Income Moderately Indebted Middle Income Severely Indebted Middle Income Classification as per income Per capita GNP less than US$765 Per capita GNP between US$766 and US$9385 Classification as per indebtedness: PV/XGS less than 132% and PV/GNI less than 48%. PV/XGS less than 220% but higher than 132%, and PV/GNI less than 80% but greater than 48%. PV/XGS higher than 220% or PV/GNI higher than 80%.

35

(6) Armenia Azerbaijan China Fiji Iran Ism Rep Thailand Tonga Vanuatu