Public Debt Governance, By Tarun Das

10 UNITAR Training and Capacity Building Programmes in Legal Aspects of Debt and Financial Management

Governance of Public Debt: International Experiences and Best Practices

BEST PRACTICES Series No. 10

United Nations Institute for Training and Research (UNITAR) Best Practices Series No. 10 _______________________________________________________________________________________________________

UNITAR Best Practices Series in External Debt Management

Document No. 1: Best Practices in the field of External Borrowing (August 2001) Document No. 2: Best Practices in External Debt Management (August 2001) Document No. 3: Best Practices in Drafting Techniques of a Loan Agreement (October 2002) Document No. 4: Best Practices and Key Issues to be addressed in a Regulatory Framework for Public Debt Management (June 2003) Document No. 5: Best Practices for Poverty Reduction and Sustainable Development: Public Participation in Africa (July 2003) Document No. 6: Best Practices and Key Analytical Functions for Public Debt Management (February 2004) Document No. 7: Best Practices in Drafting Arbitration Clauses (March 2004) Document No. 8: Best Practices in Relation to Guarantee Agreements (June 2005) Document No. 9: Management of External Debt - International Experiences and Best Practices (January 2006)

This Series is published and distributed by the United Nations Institute for Training and Research (UNITAR), Geneva. Orders or requests for information should be addressed to: UNITAR Debt and Financial Management Palais des Nations CH-1211 Geneva 10 Switzerland www.unitar.org/dfm UNITAR Best Practices Series Copyright © UNITAR 2006. All Rights Reserved Views expressed in this document are strictly those of the authors and not those of UNITAR or any other body of the United Nations.

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Contents

_____________________________________________________________________ Page Introductory Note ……………………………………………………..……… 4 Governance of Public Debt - International Experiences and Best Practices 1. Introduction ………………………………………………………….. 5 2. Risk Management Framework for Public Debt …………………. 5 3. Institutional and legal set-up for public debt management …… 8 4. Governance: Legal Framework and Accountability…………….. 16 5. World Bank Survey on Debt Management Practices …………… 17 Selected References …………………………………………………… 21 Author’s Profile ……………………………………………………………….. 23

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Introductory Note ___________________________________________________________________________________

T

his edition is the 10th. in a series of Best Practices publications compiled by UNITAR’s Training Programme in the Legal Aspects of Debt and Financial Management. It is hoped that this document entitled ‘Governance of Public Debt - International Experiences and Best Practices’ will be useful especially to policy makers, senior government officials, parliamentarians as well as debt managers, civil society and other officials from Ministries of Finance, Justice, AttorneyGeneral’s Chambers and think tanks involved in institutional and legal/regulatory issues relating to public borrowing and debt management. This document forms part of a broader effort by UNITAR’s Debt and Financial Management Training Programme to sensitize public professionals in external debt management issues. These Best Practices have been contributed by Dr. Tarun Das, Economic Adviser, Ministry of Finance (India) and UNITAR Resource Person. UNITAR thanks him for his contribution and commitment to our training programmes as well as research activities. We hope that this document will be useful as well as challenging to its readers. Marcel A. Boisard Assistant Secretary-General of the United Nations Executive Director of UNITAR Geneva, January 2006

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GOVERNANCE OF PUBLIC DEBT INTERNATIONAL EXPERIENCES AND BEST PRACTICES by Dr. Tarun Das1, UNITAR Expert

1. Introduction

P

ublic debt management practices by leading debt offices bears many valuable lessons for countries in the process of strengthening their debt management capacity. As in other spheres, there is no unique answer as to what constitute sound debt management practices at all the times and at all countries. Selective discretion should be used while ameliorating debt management practices based on international experiences. More importantly, the country specific requirements should be carefully analyzed so that the international best practices could be grafted effectively. A country should own its system and develop it over the years. 2. Risk Management Framework for Public Debt Efficient public debt management primarily aims at ensuring that government borrowing needs are met efficiently, and the incremental flows and stock of public debt from both budgetary and off-budgetary sources are managed in consistency with the government’s preferences for cost and risk. An objective of minimising debt servicing cost, irrespective of risk, should not be an explicit objective. Risky debt structures, characterised by excessive exposure to short-term or floating-rate debt or debt denominated in or indexed to a single foreign currency can 1

Dr. Tarun Das - Economic Adviser, Ministry of Finance (India), and Resource Person, UNITAR, Geneva. 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. ___________________________________________________________________________________ Governance of Public Debt - International Experiences and Best Practices Copyright © 2006 DFM/UNITAR www.unitar.org/dfm

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substantially deteriorate the fiscal position of the government, may put constraints to access to both domestic and external capital and even propagate financial market instability. This is particularly important when the government’s debt portfolio is large relative to the economy’s economic size. Prudent debt management aimed at reducing both costs and risks by establishing a low risk currency composition, interest structure and maturity profile of the government’s debt portfolio could make a country less susceptible to financial risk and contagion effects. Several OECD governments have accordingly set government debt management objectives aimed at minimising debts servicing costs over the medium and longer-term subject to a prudent level of portfolio risk. On the other hand, debt management objectives of many emerging market economies appear to cover their borrowing needs with least cost, lengthen maturities and diversify funding sources wherever possible and less attention is paid to managing market risks and refinancing risk. 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. Table-1 summarizes the strategic sovereign debt management benchmarks that have been established in various countries.

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Table 1: Structure of strategic portfolio benchmark in selected countries PORTFOLIO BENCHMARK Interest rate Refinancing Maximum Fix Modified ceiling on debt Floating Duration maturing in next (ratio) (years) year

Country

Domestic: Foreign Currency (ratio)

Belgium

95:5

Domestic

80:20

4.25 ±0.25

10-15%

Colombia

77:33

Foreign

85:15

3.5

10-15%

88:12*

Domestic

-

4 ± 0.5

10-15%

Foreign

-

2.5 ± 0.5

20-25%

Domestic/ Foreign Currency Benchmarks

Denmark

Finland

60:40

Foreign

85:15

3.6

-

Ireland

94:6

Domestic

67:33

3.7

Portugal

100:0

Domestic

60:40

3.0

Sweden

94:6

Domestic and Foreign

“50:50”

3.4 ± 0.4

Ceiling on all debt with less than 5 years to maturity of 60% 20% in 12 months, 15% in subsequent years 30% in 12 months, 15% in subsequent years

Usually, governments are risk-averse in their sovereign debt management, often because governments have strong political incentives to adopt the risk appetite reflected by the “median voter” decision-making. Evidence suggests that taxpayers or representative voters tend to be risk averse in their decision-making and expect the government to have similar risk appetite in managing its financial interests. Thus, while governments generally have preference for more stable tax rates over time they tend to be risk averse for their financial asset-liability management.

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3. Institutional and legal set-up for public debt management The institutional setting for public debt management in different countries, could be broadly classified into five categories i.e., (i) a full-fledged debt office either in the mainstream Ministry of Finance; (ii) under the Ministry of Finance as a separate entity like the Treasury or a Debt Management Agency; (iii) autonomous institution outside the Ministry; (iv) in the Central bank; and (v) the debt office is dispersed between the Ministry of Finance and the central bank. The first four categories refer to a full-fledged debt office and could be differentiated by the location and the degree of autonomy accorded to the debt office. Table-2, which lists the institutional setting for public debt offices in different countries, shows that the bulk of the debt offices are located as a separate agency under the Ministry of Finance with sufficient degree of operational independence (i.e. second category). Table 2: Institutional Location of Sovereign Debt Management Responsibility Under the Located Located Ministry of within the elsewhere as an Finance or Central Bank autonomous Treasury* entity Advanced Economies Australia Austria Belgium Canada Denmark Finland France Germany Greece Ireland Italy Japan Netherlands New Zealand Portugal Spain Sweden Switzerland United Kingdom United States ___________________________________________________________________________________ Governance of Public Debt - International Experiences and Best Practices Copyright © 2006 DFM/UNITAR www.unitar.org/dfm

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Emerging Economies Argentina1 Brazil 1 China1 Colombia Hungary India Korea 1 Mexico South Africa Thailand1 Turkey 1: Establishment of sovereign debt management offices is currently underway in these countries. *: In many countries, although debt offices are under the Ministry of Finance or Treasury, the debt office is set up as an autonomous entity with sufficient operational independence. Source: “Sound Practices in Sovereign Debt Management”, FPS Department, The World Bank, March 2000; OECD as mentioned in “Risk Management of Sovereign Assets and Liabilities”, Working Paper, WP/97/166, IMF, December 1997 and national authorities.

In terms of the degree of independence accorded to the debt office, the institutional setting for the above category resembles the third category, i.e., where the debt office is located as an autonomous entity. Although, in the first three cases, the debt office may be located under the Ministry of Finance or as an autonomous agency, the central bank still retains some agency services for debt management and in some cases undertake foreign exchange operations for its foreign currency debt and cash management. Denmark is the only country, where its central bank, Nationalbanken houses the debt office for the government. In India, debt management factions are shared by the central bank and the Ministry of Finance. While the Reserve Bank of India acts as the manager on the internal debt of the government, the Ministry of Finance is responsible for the management of external debt. International experience suggests that centralised debt offices in most countries are located under the Ministry of Finance. This is because MOF in general is in charge of dealing multilateral financial institutions and bilateral donors. Within this institutional structure, in most of the advanced countries, the debt offices are set up as an autonomous or separate entity within a Treasury or as a statutory unit. This enables the debt office to assume sufficient degree of operational independence Thus, for thirty countries for which data is available, twenty-four have their debt offices under the Treasury/ Ministry of Finance. This includes all the emerging economies for which information is available. The main argument for entrusting sovereign debt management responsibility within the Ministry of Finance or Treasury is the proximity of location, which enables the senior management within the Ministry of ___________________________________________________________________________________ Governance of Public Debt - International Experiences and Best Practices Copyright © 2006 DFM/UNITAR www.unitar.org/dfm

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Finance to review and assess the performance of the entity more easily. This issue of geographical proximity is particularly important when a fullfledged centralised debt office is being set up and management competencies are unproven. Another factor, which prompted many governments to locate the debt office within the Ministry of Finance is that the public debt has budgetary implications and co-ordination between budget making and the debt office facilitates effective management of debt and fiscal deficit. This arrangement thereby minimises chances of any conflict arising from the budgetary process wherein the annual borrowing requirements are determined and the management of such liabilities. The downside risk of unsustainable borrowing has been obviated in most of the cases, by legal enactment of authorising annual borrowing with a preset limit (Tables 3 and 4) and practising policies of fiscal prudence. Table 3: Institutional Arrangement of Debt Offices and Annual Borrowing Authority or Debt Ceiling Limit Institutional Countries Limit on Annual Debt Ceiling Arrangement Borrowing Limit Authority Ministry of Finance Belgium × Canada × Finland × France × Germany × Greece × Hungary × India × Italy × Mexico × Morocco × New Zealand × United States × United Kingdom × Autonomous Agency Australia × Ireland × Portugal × Sweden × Central Bank Denmark × Source: Guidelines for Public Debt Management, SM/00/135, IMF. ___________________________________________________________________________________ Governance of Public Debt - International Experiences and Best Practices Copyright © 2006 DFM/UNITAR www.unitar.org/dfm

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Table 4: Legal Framework for Debt Offices Countries Ministry of Finance Belgium Canada Germany Greece India Japan Mexico Netherlands New Zealand Switzerland Turkey United Kingdom Autonomous Agency Australia Austria Ireland Sweden Central Bank Denmark

Limit for Domestic Borrowing Limit on the cost of borrowing Yes, Borrowing Authority Act Yes, a limit is set by federal legislative authorization (Budget Law) No, except for the limit to TBills Yes, a limit is set by Budget Law Yes, a limit is set by Budget Law Yes, a limit is set according to the Federal Budget Implicit limit (budgeted borrowing) No legal limit No legal limit Only for govt. bonds the limit is twice the budget deficit Limit by the funding remit

Decides new limits

The Parliament The Parliament The Parliament

The Parliament The Parliament The Congress MOF may alter the program For govt. bonds, the Parliament -

Yes, financial year budgetary need Yes, the limit is set by the Financial Law No Limit only for foreign exchange funding

DMO and the Treasurer The Parliament

Limit on the level of debt outstanding

The Parliament

-

Source: OECD as mentioned in “Risk Management of Sovereign Assets and Liabilities”, Working Paper, WP/97/166, IMF, December 1997.

Few debt offices (e.g., Australia, Austria, Ireland, Portugal and Sweden) have also been set up as an autonomous debt agency or corporation outside the Ministry of Finance giving it a distinct institutional presence. This was established with legislation (e.g. Ireland and Portugal) or without ___________________________________________________________________________________ Governance of Public Debt - International Experiences and Best Practices Copyright © 2006 DFM/UNITAR www.unitar.org/dfm

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legislation (e.g. Australia and Sweden). Very recently, Germany have decided to take out the debt management functions from the Ministry of Finance to an autonomous set up as a private corporation. The overriding reason for creating an autonomous institution emanated from the concern of conflicts in objective between fiscal policy and debt management. Thus, an autonomous debt office would be less likely to engage in risky strategies designed to maximise short-term political gains. Another common concern has been the influence on interest rate. Thus, any perception of insider trading or market manipulation would undermine the credibility of the government, the debt office and the market. The risk of debt management and cash management being downplayed by a large institution like the Ministry of Finance could result in the commercial needs of the business being inadequately funded. The degree of autonomy in such debt offices, vary from country to country (Table-5). Although the debt offices are autonomous in nature, most of them either report to the Minister of Finance or to the Parliament. Thus, while the formulation of debt policy like level of the debt, limits on domestic and foreign-currency borrowing is a political decision and therefore should rest with the government, the actual management of sovereign debt can be extracted from the political domain by assigning such responsibility to an autonomous institution. Under this arrangement, the Ministry of Finance, based on its objectives, risk preferences and macroeconomic and institutional constraints of the country, defines the medium-term strategy for debt management; while the debt office implements that strategy and administers the issuance of domestic and foreign currency debt.

Table 5: Degree of Autonomy for Debt Offices Countries Ministry of Finance Belgium Canada Germany Greece Japan Mexico Netherlands New Zealand Switzerland Turkey United Kingdom

Degree of Autonomy Not independent Independent except for independent matters Dependent Independent within the broad objectives of the Development Plan Independent No specific independence Independent, except for restriction on some type of institution Independent under normal circumstances Independent within limits set by the remit

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Autonomous Agency Australia Austria Ireland Sweden Central Bank Denmark

Highly independent Highly independent Independent in some broad guidelines drawn by the MOF Independent except for foreign exchange Borrowing program is approved by the MOF

Source: OECD as mentioned in “Risk Management of Sovereign Assets and Liabilities”, Working Paper, WP/97/166, IMF, December 1997.

The issue of conflict in objectives between debt management and monetary management has led to many central banks transfer its debt management responsibility back to the government or to an autonomous agency outside the Ministry of Finance. In view of the potential conflicts in objectives between debt management, monetary policy and exchange rate management, Austria, Hungary and United Kingdom have recently shifted their debt management responsibility out of the central bank. In New Zealand, all debt management functions carried out by the central bank, as agent of the debt office, have been conducted without reference to monetary policy considerations since 1988. Moreover, in South Africa, after a thorough review of debt policy, the central bank, which until recently, has been the government’s agent for marketing its debt instruments, was made accountable to the Department of Finance on all matters related to debt management. Funding activities undertaken by the central bank on behalf of the government were ring-fenced from monetary policy operations. Denmark is the only exception, where in 1991 the Danish government decided to regroup assets and liabilities management under the central bank’s authority. The rationale behind the decision was to improve the coordination of the management of the public debt and the foreign exchange reserves, and to reduce the net exposure of the government to exchange rate risk. Some governments recognise the fact that the central bank has more staff with market transaction experience. The efficiency advantage has led to some central banks (United Kingdom and Brazil) undertake the government’s foreign currency borrowing. For countries, which have already established their debt offices, the central bank, still retains some debt management functions like book-keeping, registry services etc under an agency agreement between the Ministry of Finance and the central bank. For some countries, cash management and foreign exchange transactions related to foreign currency debt are also undertaken by the central bank. For the fifth category of debt offices, public debt management responsibilities are typically split, with the Ministry of finance in charge of the public external debt management and the central bank is responsible ___________________________________________________________________________________ Governance of Public Debt - International Experiences and Best Practices Copyright © 2006 DFM/UNITAR www.unitar.org/dfm

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for domestic debt management. Table-2 shows the split nature of debt management responsibilities for some emerging market economies till recently. Among the emerging market economies, some countries like Colombia, Hungary, Mexico and South Africa have already established a full-fledged debt office under the Ministry of Finance. Further more, some countries like Argentina, Brazil, China and Thailand have started initiatives to set up a debt office under the Ministry of Finance. To establish a public debt office, the starting point for all these countries has been to strengthen the capacity building of the debt office by establishing a middle office. Management of External Debt As regards external debt, most of the countries donot allow Subnational or provincial governments to borrow directly from the external sources (Table-6). Only the Central government borrows from multilateral and bilateral sources and then on lends money to the states and local governments. Table 6: Institutional Framework for Foreign Currency Debt Management in Emerging Economies Countries Central Govt. State & Local State Owned Govt. Enterprises China MOF Not allowed SOEs India MOF Not allowed SOEs Indonesia MOF Not allowed Korea MOF Own SOEs responsibility Singapore None Thailand DMO under MOF None MOF Argentina MOF Own responsibility Chile MOF Not allowed MOF Colombia MOF State Govts./MOF SOEs/MOF Mexico MOF State Owned MOF banks Peru DMO under MOF DMO under MOF MOF Venezuela MOF Not allowed Not allowed Czech Republic None MOF SOEs Hungary DMO under MOF None Poland MOF Own responsibility Russia MOF Regional agencies Israel MOF Own SOEs responsibility South Africa DMO under MOF Not allowed MOF Source: “Managing foreign debt and liquidity risks in emerging economies: an overview”, John Hawkins and Philip Turner, as excerpted in “Managing Foreign Debt and Liquidity Risks”, BIS Policy Papers, No. 8, September 2000. ___________________________________________________________________________________ Governance of Public Debt - International Experiences and Best Practices Copyright © 2006 DFM/UNITAR www.unitar.org/dfm

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Nearly all of the autonomous debt management offices have adopted an organizational structure similar to that in leading corporate treasury and investment banks. They divide functional responsibilities for managing transactions into different offices within the debt management organization and established procedures to ensure internal control and accountability. Sound governance considerations suggest that debt management functions should be organized as separate units given their different objectives, responsibilities and staffing needs. Usual practice is to establish a separate front, middle, back and head offices. (i) The Front office The front office is responsible for the efficient execution of all portfolio transactions and negotiations with lenders consistent with the portfolio management policy of the agency. These transactions may include short- and medium-term borrowing in domestic and foreign currencies, management of trading positions and hedging transactions, the investment of foreign currency liquidity and any excess cash balances associated with the government's daily departmental cash management. Within the front office, individual portfolio managers are assigned different functional responsibilities (e.g., foreign currency borrowing, liquidity management, domestic currency funding) on an instrument, market, or currency basis. (ii) The Middle office The middle office (or risk management office) is responsible for establishing a risk management framework for the debt office and for monitoring compliance against the portfolio and risk management policies, which form part of asset-liability management. It is also responsible for identification, measurement and monitoring of debt and risk, establishment of benchmarks, dissemination of data and policy formulation for both short and medium term and public and private debt. (iii) Back Office It is responsible for accounting, auditing, data consolidation and the dealing office functions for debt servicing. (iv) Head Office It is the final authority to approve all public debt- both domestic and external.

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4. Governance: Legal Framework and Accountability Sound governance practices are an integral part of sovereign debt management. In order to establish appropriate accountability for managing the sovereign debt portfolio, most governments have in place legislation pertaining to powers to borrow, invest, issue guarantees and undertake transactions on behalf of the government (Tables 3 and 4). This overcomes the need to request specific authorisations from the Parliament or the constitutional authority for individual transactions, which can introduce and a range of political factors into the decision-making and considerable delay the execution of transactions. For e.g., a study by IBRD suggests that more than three-fourth of the member countries surveyed, on an average, took more than a week to obtain approval to execute a foreign borrowing transaction. This implies that such countries, in their endeavour to manage the debt portfolio, can only operate with a lag to achieve a transaction in case there are any desirable market movements in the international financial market. Such impediments, in a volatile international financial market, could ultimately prove to be imprudent decision finally when the transaction is entered into or entail a loss in terms of opportunity cost for not being able to execute a transaction at the opportune moment. The authority to issue new debt is normally stipulated in the form of either borrowing authority legislation with a pre-set limit or a debt ceiling. Legal arrangements are supported by delegation of appropriate authority to debt managers. A common feature of this type of legislation is that the authority for borrowing or financial transaction decision rests with the Minister of Finance or Treasury and requires the Ministry to be accountable for these decisions to the Parliament. The Minister, in turn, delegates the decision-making authority to the head of the debt office. All delegations pass through the head of the debt agency to portfolio managers and any other staff with responsibility. For example, in Portugal, a statue specifies responsibilities, administrative and supervision framework, delegation of powers, distribution of tasks and the overall financial structure. Objectives for government debt management are clearly specified, publicly disclosed and included in legislation, wherever possible in order to reduce uncertainty as to the government’s willingness to trade-off cost and risk. Unclear objectives can often lead to poor decisions on how to manage the existing debt resulting in a potentially risky and expensive portfolio. Lack of clarity might also create uncertainty within the financial community leading to a higher risk premia. The above arrangements are supplemented with establishment of a risk management framework. The strategic benchmarks for portfolio management of the sovereign debt, in terms of the currency, interest and maturity mix, produced by the debt office needs to be approved by the ___________________________________________________________________________________ Governance of Public Debt - International Experiences and Best Practices Copyright © 2006 DFM/UNITAR www.unitar.org/dfm

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Minister of Finance on an annual basis. For countries where the debt agency is outside the Ministry of Finance or Treasury, the recommendations made to the Minister of Finance are made by the Ministry of Finance in conjunction with the debt office. This requires a counterpart unit in the Ministry of Finance, which is usually compact, to supplement the recommendations of the debt office while approving the strategic benchmarks. Once the benchmarks are approved, the debt office would be independent to operate for achieving such strategic benchmarks. For few debt offices pursuing active portfolio management, tactical trading limits are imposed on the portfolio manager. The legislation also ensures that there is appropriate auditing of the financial transactions undertaken by the debt office to ensure that they comply with generally accepted accounting practices and the portfolio management policies of the debt office. There is in general comprehensive reporting of financial performance to the Finance Minister and/or Parliament. Irrespective of the institutional structure of the debt office, legal arrangements clearly specify the organisational set-up for debt management. Authorizing an outside body of advisors (constituting of a board of directors etc.) is used frequently to provide quality advice on debt management on a regular basis to the head of the debt office and the Finance Minister. Thus, autonomous debt agencies in countries like Sweden and Portugal, are managed by boards, appointed by the government and chaired by the head of the debt office. Advisory boards with mainly non-governmental members work with the autonomous debt agency in Ireland. In countries like Belgium, Colombia, Hungary and South Africa where the debt office is located within the Ministry of Finance, committees staffed mainly from the Finance Ministry, other government agencies and the central bank, meet regularly with the government debt managers to discuss broader government debt and asset management issues. On the other hand, for the debt office in New Zealand, which is located in the Treasury, the Advisory Board comprises mainly of nongovernmental members to establish greater transparency in the decisionmaking and supervision process. 5. World Bank Survey on Sovereign Debt Management While organizing the Second Forum on Sovereign Debt Management in November 1999, World Bank conducted a survey on sovereign debt management practices in the countries participating in the Forum. The results of the survey summarized in Table-7 are revealing and selfexplanatory. Some of the survey results are at variance with that analyzed in the preceding sections. This is because the survey results are based on the replies given by the respondents, and majority of the participants did ___________________________________________________________________________________ Governance of Public Debt - International Experiences and Best Practices Copyright © 2006 DFM/UNITAR www.unitar.org/dfm

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not send any reply. Therefore, the analysis is only indicative and may not be true for the universe.

Table 7: World Bank Survey on Second Sovereign Debt Management Forum Items

Percentage in total respondents

1. Public Debt management objectives and priorities (a) To minimize financial costs and risks (b) To raise funds for financing government budget (c) Management of debt (d) Development of financial markets (e) Others 2. Establishment of benchmarks for risk management (a) Countries establishing guidelines for risk management (b) Countries establishing benchmarks for foreign currency debt (c) Countries establishing benchmarks for portfolio performance (d) Countries establishing benchmarks for domestic debt 3. Risk management guidelines (a) Limits on currency risk (b) To avoid excessive short-term debt /smooth maturity profile (c) Incur debt in least volatile currency (d) Limits on debt with floating interest rate (e) To maintain debt matching reserves (f) Others 4. Analytical techniques for undertaking risk analysis (a) Not using any analytical techniques (b) Value-at-Risk (VAR)/ Cost-at-Risk (CAR) (c) Debt sustainability indicators (d) Others 5. Constraints for establishing benchmarks (a) Lack of debt management policy (b) Lack of debt management expertise (c) No access to financial markets (d) Lack of debt monitoring (e) Difficult economic environment (f) Others

38 26 15 9 13 45 24 21 13 35 29 24 18 12 18 32 23 16 29 23 23 13 10 10 21

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6. Use of derivatives to hedge currency and interest rate risks (a) Currency swaps (b) Interest rate swaps (c) Use of exchange commodity futures and options 7. Constraints for using derivatives (a) Lack of technical knowledge (b) Undeveloped financial markets (c) Legal constraints 8. Institutions managing the foreign currency debt (a) Ministry of Finance (b) Jointly by the Ministry of Finance and the Central Bank (c) Central Bank (d) Independent Debt Office 9. Coordination of both public and private debt (a) Ministry of Finance (b) Jointly by the Ministry of Finance (MOF) and the Central Bank (CB) (c) Partly by MOF and partly and independently by the Central Bank (d) Debt Management Committee 10. Highest authority for approval of foreign Dom. currency debt debt (a) Finance minister/ Governor of the Central 72 Bank (b) Parliament 6 (c) Interministerial board 8 (d) President/ Prime Minister 6 (e) DG of independent authority 8 11. Average time taken for approval of external debt (a) One day or less (b) Less than a week (c) More than a week, but less than three months (d) More than three months 12. Management of Contingent liabilities (a) Sub-national entities are allowed to raise their own funding abroad (b) Central govt provides explicit guarantees for IBRD loans (c) Central govt bears fully the exchange rate risk for IBRD loans (d) Central govt shares partially the exchange rate risk 13. Efficiency of Middle Office (a) Use of Market Information system (MIS) (b) Access to internet

31 24 7 71 17 12 51 30 11 9 35 24 24 18 Ext.Debt 49 21 12 9 9 10 13 65 13 69 68 41 11 76 91

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(c) No Middle Office Unit (d) Distinct Middle Office Unit (e) Middle Office placed under the direction of the Front Office 14. Main constraints for external debt management (a) Lack of proper organizational structure (b) Macroeconomic risk (c) Lack of technical staff in the middle office (d) Lack of technical staff in the back office (e) Lack of legal framework (f) Limited local debt market

43 43 3 31 14 12 6 6 6

Source: Fred Jensen (2000) as given in World Bank (2000)

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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. 194-207, 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. _______ 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 Region- Achieving Coherence and Consistency, United Nations, New York, 2005. 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.

___________________________________________________________________________________ Governance of Public Debt - International Experiences and Best Practices Copyright © 2006 DFM/UNITAR www.unitar.org/dfm

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United Nations Institute for Training and Research (UNITAR) Best Practices Series No. 10 _______________________________________________________________________________________________________

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.297- 310, 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. 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.

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United Nations Institute for Training and Research (UNITAR) Best Practices Series No. 10 _______________________________________________________________________________________________________

Profile of the Author: •

Dr. Tarun Das has 35 years experience as Development Economist with specialization in public finance, budgetary, fiscal and monetary policies, economics of poverty and inequality, policy planning, project appraisal, management of external debt, balance of payments, India's relations with the World Bank, IMF, ADB, UNCTAD, WTO, Commonwealth secretariat and ESCAP. " Dr. Das is a Gold Medallist in Economics from Calcutta University and holds a Ph.D. Degree in Economics as Commonwealth Scholar from the University of East Anglia, England.

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Dr. Das was the Country Co-coordinator for the IMF Government Finance Statistics (GFS) and the Special Data Dissemination Standards (SDDS), Country Coordinator for the World Bank's Global Development Finance GDF), in charge of the Commonwealth Secretariat Debt Recording and Management System for India and the World Bank IDF Project on Public Debt Management. Dr. Das is empanelled as an Expert for the Government Finance Statistics (GFS) for the Technical Assistance Assignment under IMF (see Annex).

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Since 1989, Dr. Das has been working as Economic Adviser in the Ministry of Finance, Government of India. He also worked as Adviser in the Planning Commission (1987-1988), Chief Economist, Ministry of Steel and Mines (1984-1986), and the Chief (Economic Division) in the Bureau of Industrial Costs and Prices (1982-1984).

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Dr. Das was a part of High Level government delegations to the World Bank, IMF, ADB, WTO, UNCTAD, ESCAP and UN Commission for Sustainable Development (UN-CSD).

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Dr. Das worked as Government Director in the Board of the Industrial Investment Bank of India (1993-1995), Allahabad Bank (1996-1998), Corporation Bank (1999-2001) and Bank of Maharashtra (2002-2004), and Member in various government committees on Public Finance, Fiscal Policies, Balance of Payments, External Debt and Environment.

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Dr. Das has worked as Consultant to the World Bank (Washington), Asian Development Bank (Manila), Economic Commission for Africa (Addis Ababa), ESCAP (United Nations, Bangkok), UNDP (New York), and International Labour Office (Geneva).

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Dr. Das possesses diversity in skills in teaching, training, research, policy planning and modeling. He has published various papers in international journals on fiscal policies, external finance, management of public debt and contingent liabilities, poverty and inequality, transport economics, foreign investment, technology transfer and privatisation policies.

___________________________________________________________________________________ Governance of Public Debt - International Experiences and Best Practices Copyright © 2006 DFM/UNITAR www.unitar.org/dfm

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UNITAR UNITAR is an autonomous body within the United Nations which was established in 1965 to enhance the effectiveness of the UN through appropriate training and research. UNITAR’s programmes in the legal aspects of debt, financial management and negotiation are among a wide range of training activities in the field of social and economic development and international affairs carried out, generally, at the request of governments, multilateral organizations, and development cooperation agencies. UNITAR also carries out resultsoriented research, in particular research on and for training, and develops pedagogical materials including distance learning training packages. UNITAR’s Training and Capacity Building Programmes in the Legal Aspects of Debt, Financial Management and Negotiation are conducted for the benefit of over 35 partner countries mainly from sub-Saharan Africa and Vietnam. These programmes aim at meeting the priority training needs of senior and middle-level government officials through a wide range of seminars, workshops, and training of trainers workshops. In parallel to training activities, the programme also assists in strengthening local capacities of governmental and academic institutions through distance learning training packages, up-to-date publications as well as networking activities. During 2006, the programme will focus on : • • • • •

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Training government officials through short-duration regional seminars and workshops on various aspects of debt, financial management and negotiation ; Developing On-line Training Courses (in parallel with its traditional regional training) with a view to tapping a wider audience and reducing cost of training per participant ; Strengthening existing ties with regional training centres and offering joint courses with partners in the field ; Creating awareness among senior government officials of the importance of the legal aspects in the borrowing process and of putting together a multidisciplinary team for loan management and public administration; Providing in-depth training and skills development for accountants, economists, financial experts and lawyers coming from government ministries and departments involved in negotiation, financial management and public administration ; and Developing and disseminating training packages and ‘best practice’ materials directly related to the practicalities of legal aspects of debt and financial management, with a view to strengthening existing human resources and institutional capacities at the national level.

A description of UNITAR’s latest activities and training programmes in the area of debt and financial management is available on its website at : www.unitar.org/dfm.

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