World Bank

Debt
Management
Questions and Answers
PRMED September 2013

World Bank
Question
General Questions
i.
How would
1
one
characterize
the debt
portfolio for
the average
low-income
country?
ii.
What changes
would have
been witnessed
since debt
reliefon
average?

iii.

i.

What bilateral
creditors have
moved more
aggressively
into the
African field
of play? How
should this be
viewed?
What
instruments
are available
for
government
cash
management

Debt Management

Questions and Answers

September 2013

Answer

Source

The external debt portfolio for an average low income country- post HIPC/MDRI may be MTDS
composed largely of concessional credits from multilateral (IDA, AfDB, ADB, etc.) sources,
as well as funding obtained from bilateral donors to the country (e.g. Saudi Fund, European
Union). The establishment of a domestic debt market would likely be at an early phase of
development. It is likely that public pension funds and government state owned companies
(SOEs) will be holding a large part of public domestic securities.
http://go.worldbank.org/83PZB7FH80
Since debt relief in the early to mid-2000s, under the auspices of HIPC and MDRI,
government external debt fell dramatically from ranges of 50-75 percent of GDP to 25percent or less. Following this encouraging decline, however, central government debt has
begun to re-accumulate as a proportion to the economys output, while debt service
indicators have shown signs of deterioration, notably interest costs to export values.

Over the years since 2000, large bilateral developing market creditors (e.g. China, India and
others) have moved fairly aggressively into African debt markets, with loans on semiconcessional terms. Often loans are tied to natural resources, infrastructure and other public
investment, in which the creditor will (in some cases) establish an inroad to the resource
base being exposed in much of sub-Saharan Africa today. Views on semi-concessional
borrowing are mixed, with the IFIs negotiating such borrowing for IDA-only countries on a
case by case basis.
Treasury Bills are the instrument of choice for cash management in a typical low-income DeMPA
country. The central government manages its cash in-excess of target through investment in
the market or with the central bank at market ratesissuance or buyback of T-Bills on a
more regular basisor optimally transacts daily using issuance and buy-back of T-Bills or
(less likely) entering into repurchase or reverse repurchase agreements.

i.

ii.

in a typical
low-income
country?
What is the
role of the
Central Bank
in
debt
management,
and the need to
separate
monetary
policy
implementatio
n from debt
management?
What is the
content of a
Memorandum
of
Understanding
(MoU)
between
the
Ministry
of
Finance and
the
Central
Bank outlining
roles
and
responsibilities
in
debt
management?

Information sharing between debt management (DeM) entities and the Central Bank on
current and future debt transactions and the governments cash flow is critical to the
functioning of both debt management and monetary policy. The central government should
avoid borrowing directly from the central bank, except under unusual circumstances
(financial emergencies), and even then there should be a limit on the amount and period of
repayment. Monetary financing of the budget has adverse consequences in terms of
implementation of monetary policy, inflationary effects, and in a developing country also
imposes constraints on development of the domestic debt market.

Wheeler, Graeme,
2004, Sound
Practice in
Government Debt
Management,
(Washington, World
Bank)

Insofar as the central bank acts as a DeM agent for the government, the agency relationship
should be spelled out in an MOU and should be published. The expected role of the central
bank on behalf of the central government should be made clear.
It is highly recommended that such agreement be formulated, approved and published, in
order to clarify the objectives and policy interdependencies between monetary policy and
debt management. Government debt managers operational relationships with central banks
can be complex. The central bank often provides a wide range of agency services for debt
managers. Many central banks provide registry and fiscal agency services for debt managers
by maintaining a registry of owners of government securities and by acting as paying agent
for the government in the domestic market. When the government (a) collects taxes or issue
bonds/treasury bills; or (b) pays back the public debt or spends money following budget
appropriations, the government is changing the level of money supply in the economy.
Therefore, the relationship (including sharing of information) between the government and
the central bank has to be well established.

Governance and structure of DM Office

i.
Is there a There is no standard or recommended size for a debt management office that would be DeMPA
1
2

standard
or
recommended
size for a debt
management
office?

universally applicable for different countries. Attention should be paid towards designing an
effective operational structure of debt unit and the capacity of staff to maintain security

and control over government borrowing and debt-related transactions, as well as the
use of public funds. The organizational structure should support clear separation
between the debt managers with the authority to negotiate and contract on behalf of
the central government and those responsible for settlement of the transactions,
including arranging of payments, bank account management, and recording in the
government accounting system (referred to as segregation of duties). In addition,
there should be a risk monitoring and compliance function within the principal DeM
entity (or the DeM entities) to monitor whether all government DeM operations are
within the authorities and limits set by government policies and whether they comply
with statutory and contractual obligations. This function could be overseen by an
individual staff member or, more ideally, a specialized unit with this role and the
associated responsibilities.
The organizational structure and management policies should support sound human
resource management practices with a sufficient and adequately trained staff, formal
job descriptions, individual training and development plans, and performance
assessments.

i.

In terms of
staffing, what
type of profile
does a debt
management
office require?

i.

What should
be the content
of
communicatio
n between the
debt office and
investors?

DeMPA
Debt office staff must have degrees in Finance, economics and/or management. They should
be proficient in the use of computers, and especially worksheet packages e.g., Excel. Front
office staff must have trainings in loans negotiation skills, domestic debt, etc. While middle
office must be trained in MTDS, cost-risk analysis, forecasting, etc. and any other model
used to prepare a debt management strategy. The back office staff must be able to work on
the debt recording system.
The content of such communication should cover forthcoming issuance of domestic DeMPA
securities; and plans, if any, regarding introduction of new series of T-bills, bonds etc. the
full information on these should be transmitted with transparency. The DMU for its part
should enquire of market participants concerning the confidence in which government
financial policy is held and what impediments to investment are seen in the domestic
market. Regular meetings between debt managers (usually together with central bank
officials) and investors should be organized and used to clarify government public debt
3

i.

policies and instruments.

ReportingThe Unit responsible for debt management policies and implementation should make sure DeMPA/ MTDS
what reports that there is sufficient- and quality- information to discharge this responsibility effectively.
should a debt Typically this is done through periodic reporting by the debt manager on progress on the
office
implementation of the medium-term debt management strategy and the associated annual
produce?
borrowing plan. This reporting should provide information on the evolution of the portfolio
and the key cost and risk indicators, so that those accountable for decisions are able to
adequately monitor developments vis--vis the expected evolution of these indicators.
The government should report both central government and total nonfinancial public sector
debt and loan guarantees outstanding to meet statutory- or contractual- reporting obligations
or both. Externally, this will include reporting to international financial institutions, stock
exchanges, and foreign regulatory authorities, where applicable.
A debt statistical bulletin (or its equivalent) covering domestic and external central
government debt and loan guarantees should be prepared. This bulletin could be in the form
of regular central bank publications, statistical tables produced by the bureau of statistics, or
tables published in the government financial accounts. The bulletin should be published at
least annually (preferably semiannually or quarterly) and provide information on central
government debt stocks (by creditor, residency classification, instrument, currency, interest
rate basis, and residual maturity); debt flows (principal and interest payments); debt ratios
and indicators; and basic risk measures of the debt portfolio.

i.

What is a good A good debt recording system would readily provide the following:
DeMPA
debt recording
An accurate break-out of outstanding debt by various characteristics, including
system? What
currency composition, creditor composition, concessionality and instrument
are minimum
composition (including by interest rate type).
requirements
Aggregate debt servicing schedules across various categories of debt.
for a good
Some basic portfolio indicators, such as average maturity, proportion of foreign
system?
currency debt, etc.
Payment schedules for interest and amortization of individual loans and securities,
along with the associated payment notices. This can be decentralized if management
is spread across different contracting entities.
The potential to handle domestic debt, on-lending, and to a degree, contingent
liabilities.
Ideally, the debt recording system would also interface with other key systems including (i)
4

the payments system used to make debt servicing payments; (ii) the transaction management
system (where relevant for example, if the debt management unit engages directly in
financial market transactions); (iii) the auction system (if separate from the transaction
management system), and (iv) the governments financial management information and
accounting system(s). In addition, it should be important to ensure the integrity of the
system by imposing appropriate security controls.
Sound practice requires comprehensive debt management systems that record, monitor,
settle, and account effectively for all central government debt and debt-related transactions,
including past debt relief and debt restructuring (Paris Club rescheduling). These systems
should provide for an accurate, consistent, and complete database of the domestic, external,
and guaranteed debt. Ideally, the debt recording or management system should interface
with the governments financial management information and accounting systems.

ii.

i.

ii.

Government securities issued in the domestic market require an accurate recording of the
holders of each security. This requires having in place an efficient and secure central
What is a depository (registry) system. The registry system should provide accurate and timely
registry
for information on all holders of government securities. A registry agreement between the issuer
government
and registrar is a normal practice.
securities, and
why is it not a Most registry systems allow nominee accounts (that is, accounts in the name of a local
replacement
custodian bank holding the securities on behalf of its clients). For these nominee-registered
for a debt securities, beneficial ownership can be determined only from the books of the custodian. For
recording
reporting and statistical purposes, someone (normally the central bank) must possess the
system?
power to require the domestic custodians to share information on the amounts held by
foreign investors. In the following indicator, holders of government securities do not
include the end investors in the case of nominee accounts.
What are the There needs to be a clear separation between debt managers with the authority to negotiate
roles
and and transact on the behalf of the central government (front office staff), and those
functions of a responsible for settlement of the transactions, managing bank accounts and recording the
back office? transactions in the government accounting system (segregation of duties). The Back
How should Office is usually charged with loan entry into secure databases, compilation of data which
the office be feed into reports generated by middle-Office staff, and other like duties. Back-office
organized?
(treasury operations) responsibilities usually include confirming trades, issuing payment
instructions for transactions, accounting for trades, arranging collateral transfers,
administering loan documentation, and managing relationships with fiscal agents (which, for

Wheeler, Graeme,
2004,
Sound
Practice
in
Government Debt
Management,
(Washington, World
Bank)

domestic debt, may be the central bank) and with registrars and paying agents.
Responsibility for managing the systems needs of the debt office, including systems
planning, implementation of new systems, and maintenance and updating of existing
applications is also usually assigned to this office. Compilation of debt statistics and
reporting on operational risk or vulnerabilitiesoften, with the help of the middle officeis
frequently a back-office responsibility.
7

i.

ii.

What are the

roles
and
functions of a
middle
office?
How should
the office be
organized?

The middle office is often changed with analytic work grounded in the figures produced by
back-office staff. Research work related to debt management, and production of a series of
comprehensive reports on the countrys debt situation falls within the mandate of this office.
The middle office--often called the risk management team-- is normally responsible for
establishing a cost and risk management strategy or framework for the governments debt
portfolio, researching and analyzing policy alternatives, and monitoring compliance with the
portfolio and risk management policies. In some countries these responsibilities cover broad
obligations on the governments balance sheet, including guarantees and other contingent
liabilities and the monitoring of private sector foreign currency debt (which can represent a
possible contingent liability). A key output from the middle office is the formulation of the
debt management strategy.

Wheeler, Graeme,
2004,
Sound
Practice
in
Government Debt
Management,
(Washington, World
Bank)

MTDS, Reform Plan, DeMPA, DSA

i.
What is a An MTDS is a plan that the government intends to implement over the medium-term 1 in MTDS
1
medium term order to achieve a desired composition of the government debt portfolio, which captures the
debt
governments preferences with regard to the cost-risk tradeoff. It operationalizes country
management
authorities debt management objectivese.g., ensuring the governments financing needs
strategy
and payment obligations are met at the lowest possible cost, consistent with a prudent degree
(MTDS) and of risk.
how should it
be expressed? An MTDS has a strong focus on managing the risk exposure embedded in the debt
portfoliospecifically, potential variations in the cost of debt servicing and its impact on
the budget. In particular, an MTDS identifies how cost and risk vary with the composition of
1

The medium-term is typically defined as 35 years. If the time horizon is too short, e.g., the budget cycle, there is a risk that short-term expediency will
dominate, turning the focus on short-term costs and away from risks that could materialize later. The evaluation of the cost and risks underlying the strategy
should aim to capture the full economic cycle, allowing potentially higher short-term interest rates and substantive movements in the exchange rate to emerge
elements of shocks to the system- both of which may significantly increase the cost of debt.

the debt. While a sound MTDS can be developed without the use of a quantitative tool,
especially where countries are constrained in their choices, the use of scenario analysis
provides useful information, enabling the DM to quantify the potential risks to the budget of
alternative debt management strategies.

ii.

The strategy document should preferably include the following:

Description of the market risks being managed (currency, interest rate, and
refinancing or rollover risks) and historical context for the debt portfolio
Description of the future environment for DeM, including fiscal and debt
projections; assumptions about interest and exchange rates; and constraints on
portfolio choice, including those relating to market development and the
And how is it
implementation of monetary policy
different from
Description of the analysis undertaken to support the recommended DeM strategy,
an
MTDS
clarifying the assumptions used and limitations of the analysis
report?
Recommended strategy and its rationale

It is important to
maintain
coherence
between a reform plan
and a strategy. For
example, if an MTDS
points to an increase in
domestic borrowing, it
may be that a reform
plan needs to remove
institutional obstacles
or provide a legal
framework.
When
during
the

The recommendations should specify targets and ranges for key risk indicators of the
portfolio and the financing program over the projected horizon. As an interim step, it would
be sufficient to express the strategy as guidelines to indicate the direction in which certain
key indicators are expected to evolve (for example, a statement that the amount of local
currency debt maturing within 12 months shall be reduced). In addition, if one of the DeM
objectives is to promote the development of the domestic debt market, the strategy should
include measures to support such development.
The consistency between a Reform Plan, MTDS and DeMPA should be strongly Reform-Plan Primer
emphasized. After identification of strengths and weakness in DeM activities through
application of the DeMPA, (and prospectively an MTDS), a follow-on activity moving into
reform plan territory would be an evaluation of why the organization is not performing as
well as it should--consideration of recently completed reforms are these helpful or a
headwind to further progress-- and discussion of the possible sequencing of reforms.
In the question posed to the left, it is clear that if MTDS and the countrys formal Debt
Management Strategy point to an objective of encouraging an increase in domestic
borrowing, the reform plan will need to address obstacles in the way of this hoped for
achievementstarting with the legal framework and other issues related to domestic debt
management.
Given the goal and time coverage of MTDS (building a desired debt composition within the MTDS
7

annual fiscal cycle is

the best time to
formulate an MTDS?
Is it during budget
negotiations, after, or
before? If a large
portion
of
fiscal
expenditure is on
investment
projects
with financing tied to
these projects, then a
strategy is perhaps
needed during the
negotiations of the
public investment plan
(otherwise a strategy
cannot
have
influence). In other
cases,
if
most
financing is untied,
perhaps
once
the
Medium-term
fiscal
framework (MTFF) is
in place?
What is the optimal
horizon for a strategy?
If a country has a 5year MTFF, does this
imply that we should
formulate a 5-year
strategy? In the case of
Cote dIvoire, the main
risk
(domestic
refinancing)
was
surfacing over the
coming three years, so

medium term) one would suggest having an MTDS approved at the time when the fiscal
authority proceeds to budget negotiations. If so, an MTDS can be developed within the
MTFF framework.
Moreover it is worth formulating MTDS before the budget negotiations commence since it
may offer a degree of protection from the dominance of short-term policy expediency.
The MTDS should be also the basis for preparing the annual borrowing plan which would be
finalized together with budget formulation.

The medium-term for MTDS is typically defined as 35 years. If the time horizon is too MTDS
short, e.g., the budget cycle, there is a risk that short-term expediency will dominate, turning
the focus on short-term costs and away from risks that could materialize later. The
evaluation of the cost and risks underlying the strategy should aim to capture the full
economic cycle, allowing potentially higher short-term interest rates and substantive
movements in the exchange rate to emerge, both of which may significantly increase the
cost of debt in the outer years of the projections.
The choice of time horizon over which costs and risks are evaluated should take account of
the stability of the economy. For example, if the economy is quite stable, evaluating these
factors over a shorter time horizon may be fully representative; however, if the economy is
not stable, it may be necessary to consider a longer time horizon. For example, if commodity
8

we decided to limit the

strategy to the shorter
period to highlight this
risk.
i.
Do we include
IMF loans in
the MTDS?
ii.
How do we
find out if an
IMF loan is
formally
meant
as
budget
support?
i.
What is a
DeMPA?

ii.

iii.

i.

ii.

export prices are in a downward trend, a longer time period may need to be chosen so that an
eventual upward turn in prices is also captured in the analysis.

We include IMF loans in the MTDS if the lending is part of budget support, and the central MTDS
government is paying the interest bill on the loannot the central bank. Otherwise the IMF
loans may be viewed as constituting foreign exchange reserves, on which the central bank is
paying the interest bill, and should not be included as government debt in the MTDS.
Article IV reports, readings of other recent IMF documents, and talking to counterparts at
the IMF and authorities at the Ministry of Finance of the country concerned.

The DeMPA highlights strengths and weaknesses in government DeM practices. DeMPA
Performance assessment facilitates the design of plans to build and augment capacity and
institutions tailored to the specific needs of a country. The DeMPA also facilitates the
monitoring of progress over time in achieving the objectives of government DeM in a
manner consistent with international sound practice. The DeMPA tool is a methodology for
assessing Debt Management performance through a comprehensive set of indicators
Should
a spanning the full range of government debt management functions. The indicator set is
government
intended to be an internationally recognized standard in the government debt management
pursue
A field and may be applied in all developing countries.
scores for all
DeMPA
A government should not set its sights on obtaining all A scores in its DeMPA review, but
indicators?
rather assist the DEMPA team to understand the state of play in the debt management unit,
For
which its strength and weaknesses, thereby targeting areas for reforms and an eventual
purposes is the improvement of performance in the Unit.
DeMPA used?
What is debt
sustainability
analysis?
How
is
sustainability
analyzed,

The DSA provides a framework for assessing the state of a country in terms of its risk of DSA
longer-term debt distress. Under the World Bank-IMF Debt Sustainability Framework
(DSF) a debt sustainability analysis (DSA) should be prepared annually for all IDA-only,
PRGF eligible countries jointly with the IMF. Sustainability is analyzed by a comparison of
debt burden indicators to indicative debt-burden thresholds. The indicative debt burden
thresholds are in turn grounded in a countrys quality of policies and institutions, as
9

iii.

under which
time horizon,
and what are
the
main
drivers of the
results?
How
is
sustainability
analysis
different from
an
MTDS
analysis?

measured by the World Banks CPIA exercise. (This classification is often used to
determine the share of grants and loans in IDA assistance).

MTDS
MTDS and the DSF are both frameworks that address debt issues, but, given their different
focus, they are complements rather than substitutes. The DSF provides the analytical tool to
undertake debt sustainability analysis. It focuses on the long-term sustainability of debt,
which is influenced by both its level and composition. To assess debt sustainability, the DSF
considers a baseline macroeconomic framework that outlines a countrys fiscal and balance
of payments stance under certain assumptions and conditions, and then considers the
robustness of key debt burden indicators - usually the ratio of the NPV of debt to GDP,
exports or tax revenueto various macroeconomic shocks, such as to GDP, the exchange
rate, revenues, etc.
Overall, its primary objective is to gauge if the level and terms of current and expected
future borrowing may lead to future debt servicing difficulties over the longer-term.
However, certain simplifying assumptions are generally made, e.g., the term structure for
market debt is not explicitly modeled, which limits its ability to provide some of the detailed
analysis that would be of interest to the debt manager.
The MTDS is a more targeted debt management framework, focusing on the specifics of
how the composition of debt should be managed over the medium-term. Determining an
effective MTDS requires the performance of various financing strategies to be evaluated
under a given path for key macroeconomic variables, which should be consistent with that
used in the DSF. Similarly, it requires the robustness of each alternative strategy to be
evaluated under various shocks. Again, the DSF should inform the stress tests to be applied.
Here, variables that capture market risk, such as the interest rate sensitivity of cash flows,
other determinants of the term structure, and the exchange rate, may be explicitly modeled.
This means that more detailed information on the specifics of the debt portfolio can be
assessed more readily. The DM needs to recognize that MTDS may have important
consequences for the DSA. Where testing of the alternative debt strategies under the various
stress tests suggests that key debt sustainability indicators may be at risk, this should be
discussed with the fiscal authorities. At this point, the preferred strategy, and its associated
cost and risk implications, could be fed into an updated DSA.
10

Technical questions
1 How to deal with SDR
debt? Do we convert it
to USD, or break it
down into USD, EUR,
JPY and sterling?
2 How to deal with
expected
large
disbursements, which
constrain strategy? For
example, if a bilateral
donor is financing the
construction of an
airport,
then
any
strategy can only be
applied
to
the
remaining free funds.
Do we ask the country
to provide information
on all still-disbursing
loans or just the major
projects?
3 How to calculate T-bill
interest rate profiles?
We usually assume
that the T-bill is rolled
over sufficient times to
make up a full year (a
weekly
T-bill
is
assumed to rolled over
52 times), but is the
face
value
kept
constant or does it
snowball? This does
not make much of a
difference, practically,

It is important to decompose the SDR into its constituent currencies, e.g. USD, Euro, GBP MTDS
and the JPY.

DM should be clear about the expected path of the primary balance, and the key drivers MTDS
underlying this projection, including anticipated government revenues and expenditures, and
economic growth. An issue that may be particularly pertinent for LICs is the appropriate
treatment of project loans and associated spending. The planned spending, as reflected in the
fiscal framework, is typically dependent on the receipt of specific project loans. Thus the
DM may wish to take the path of expected disbursements as a given, as they will be offset
by changes in spending. Nevertheless, it will be important to assess from time to time
strategic choices in a more unconstrained manner, which will enable the authorities to
determine the relative costs and benefits of project-based versus general budget financing.

The compilation of annualized T-bill interest rate profiles from higher frequency figures MTDS
monthly; six-monthly, etc.could go forward as an interpolation of expected annual data
for the yeargiven actual outturns to date within the year. Alternatively, expectations for
the remainder of the year may be built from the higher-frequency data accumulated over the
period to date. Under these assumptions we have an explicit change in annual interest rate
(price) without having to use assumptions regarding rollover. In a case of exceptional shortterm volatility in markets, such as during the nadir of the global financial crisis government
interest rate assumptions will need be more carefully constructed, for example looking at
developments in private sector rates, notably Libor, and conditions affecting interbank
liquidity. Consultations with experts in the financial markets could pay a dividend under
such circumstances.

11

but an agreed approach

would be helpful.
What are the broad
characteristics
of
Sharia law facing a
country that wishes to
issue a bond into the
Islamic market?

Sharia law bans the sale and purchase of debt contracts, profit taking without real economic
activity, as well as activities that are not considered halal (Sharia compliant). Only interestfree forms of finance associated with investments that do not involve any association with
pork, alcohol, firearms, adult entertainment or gambling are considered permissible in
Islamic finance. Contractual relationships between financiers and borrowers and not
governed by capital-based investment gains, but by shared business risk (and returns) from
investment in lawful activities.
The Islamic finance market advanced by 15% per year over the three years to 2008, spurred
by demand for investments that comply with Islamic law. Sukuk, which are wholesale assetbased capital market securities have enjoyed the largest gain. Global issuance has largely
been denominated in U.S. dollars and concentrated in parts of Asia (e.g. Malaysia) and the
countries of the GCC. Despite the strong potential for the sukuk market, a number of hurdles
remain:
o
o
o

Jobst, Andreas, P.
Kunzel, P. Mills and
A.
Sy,
2008
Islamic
Bond
IssuanceWhat
Sovereign
Debt
Managers need to
Know IMF Policy
Discussion
Paper
08/3. (Washington:
International
Monetary Fund)

Identification of underlying assets that meet sharia requirements; and absence of structural
features that are standard in conventional securities
Limited historical performance data; potential illiquid secondary markets, tax disincentives
(double taxation)
Regulatory standards pertaining to sharia compliance vary considerably.

What are the main 1. Market Risk: refers to the risks associated with changes in market prices, such as
types of risk that the
interest rates, exchange rates, commodity prices, on the cost of the governments debt
debt manger should be
servicing. For both domestic and foreign currency debt, changes in interest rates affect
concerned with?
debt servicing costs on new issues when fixed rate debt is refinanced, and on floating
rate debt at the rate reset dates. Hence, short-duration debt (short-term or floating rate) is
usually considered to be more risky than long-term, fixed rate debt. (Excessive
concentration in very long-term, fixed rate debt also can be risky as future financing
requirements are uncertain.) Debt denominated in or indexed to foreign currencies also
adds volatility to debt servicing costs as measured in domestic currency owing to
exchange rate movements. Bonds with embedded put options can exacerbate market and
rollover
risks.
(http://treasury.worldbank.org/bdm/pdf/PDM_Guidelines_2001_english.pdf)

Wheeler, Graeme,
2004, Sound
Practice in
Government Debt
Management,
(Washington, World
Bank)

1.1. Interest rate risk: refers to the vulnerability of the debt portfolio, and the cost of
government debt, to higher market interest rates at the point at which the interest
12

rate on variable rate debt and fixed rate debt that is maturing is being re-priced.
http://siteresources.worldbank.org/INTDEBTDEPT/Resources/4689801238442914363/MTDSGudianceNoteCA.pdf
1.2. Exchange rate risk: relates to the vulnerability of the debt portfolio, and the
governments debt cost, to a depreciation/devaluation in the external value of the
domestic currency.
2. Refinancing or Rollover Risk: The risk that debt will have to be rolled over at an
unusually high cost or, in extreme cases, cannot be rolled over at all. To the extent that
rollover risk is limited to the risk that debt might have to be rolled over at higher interest
rates, including changes in credit spreads, it may be considered a type of market risk.
However, because the inability to roll over debt and/or exceptionally large increases in
government funding costs can lead to, or exacerbate a debt crisis and thereby cause real
economic losses. In addition to the purely financial effects of higher interest rates, it is
often treated separately. Managing this risk is particularly important for emerging
market
countries.
(http://treasury.worldbank.org/bdm/pdf/PDM_Guidelines_2001_english.pdf)
3. Liquidity Risk: There are two types of liquidity risk. One refers to the cost or penalty
investors face in trying to exit a position when the number of actors has markedly
decreased or because of the lack of depth of a particular market. This risk is particularly
relevant in cases where debt management includes the management of liquid assets or
the use of derivatives contracts. The other form of liquidity risk, for a borrower, refers to
a situation where the volume of liquid assets can diminish quickly in the face of
unanticipated cash flow obligations and/or a possible difficulty in raising cash through
borrowing in a short period of time.
(http://treasury.worldbank.org/bdm/pdf/PDM_Guidelines_2001_english.pdf)
4. Credit Risk: The risk of non- performance by borrowers on loans or other financial
assets or by a counterparty on financial contracts. This risk is particularly relevant in
cases where debt management includes the management of liquid assets. It may also be
relevant in the acceptance of bids in auctions of securities issued by the government as
well as in relation to contingent liabilities, and in derivative contracts entered into by the
debt manager
(http://treasury.worldbank.org/bdm/pdf/PDM_Guidelines_2001_english.pdf)
5. Settlement Risk: Refers to the potential loss that the government, as counterparty could
suffer as a result of failure to settle, for whatever reason other than default by
counterparty...
(http://treasury.worldbank.org/bdm/pdf/PDM_Guidelines_2001_english.pdf)
13

i.

ii.

i.

ii.

i.

What is an
annual
borrowing
plan? How is
this
plan
related to the
medium-term
debt
management
strategy?
How should
this plan be
expressed?
What is assetliability
management
for
a
government?

6. Operational Risk: This includes a range of different types of risks, including transaction
errors in the various stages of executing and recording transactions; inadequacies or
failures in internal controls, or in systems and services; reputation risk; legal risk;
security breaches; or natural disasters that affect business activity.
(http://treasury.worldbank.org/bdm/pdf/PDM_Guidelines_2001_english.pdf)
An annual borrowing plan should be developed, consistent with the MTDS and taking DeMPA
account of the underlying volatility in government cash flows. The specifics on size and
timing of new borrowing are determined in conjunction with the forecast of cash needs
given the expected implementation of the budget, and taking account of any specific market
characteristics or creditor behavior, and objectives of regular and stable issuance in the
domestic market. An important factor in determining the effectiveness of the borrowing plan
will be the quality and robustness of government cash management and forecasting. An
annual borrowing plan should be expressed with great transparency, communicating plans
and other market activities well in advance. This approach can lead to lower costs by
providing investors with a degree of certainty, increasing liquidity and serving to broaden
the investor base.

Asset-Liability Management (ALM) comprises a range of risk management techniques Treasury

designed to look at an entitys (central governments) asset and liability portfolios in
combination, with a view to reducing the effect of market-related volatility on the balance
sheet. In many respects ALM for governments are comparable to those of a large
diversified private sector corporation
The key elements for the DMU in managing the overall balance sheet of the government is
(first), the effectiveness and accuracy of forecasts of government debt servicing and
government cash flows, particularly to determine the aggregate level of cash balances in
government bank accounts; and (second) the extent to which the management of the
aggregate level of cash balances is integrated with DeM activities such as issuance or buyback of T-bills.

What role does

the debt office
play
in
managing the
overall balance
sheet of the
government?
How does a Normally cash-in projections would be sourced from the Revenue/Taxation Authority, DeMPA
government
Customs, and other government units following services/ trade, to account for royalties,
forecast cash commissions, and further, remittances, taxable FDI income flows and other portfolio income
14

ii.

iii.

i.

in-and
outflows?

accrued under government accounts. Cash outflows would be sourced from the Authorities
budgetary unit which has the responsibility to collate projections of recurrent expenditure
items and capital outlays from various federal agencies.

How
can
forecasts
be
improved and
lead to better
cash
management
(lower debt)?
What is the
role of the debt
manager
in
effective cash
forecasting
and
cash
management?
Issuance
of
global
bondswhat
is the role of
debt offices?

To the degree that the frequency at which these steps are undertaken are moved from annual
to quarterly or semi-annual, is a step can familiarize staff with the vagaries (or seasonality)
of data flows, and get a better handle on the dynamics of the forecast. Close monitoring of
the macro economy and its potential effects on inflows and outlays should receive strong
management support to boost the usefulness of the forecasting exercise. Improved forecast
accuracy, and stepped-up use of investment of surplus funds, or management of excess
liquidity can help to underpin a more efficient system, and in turn, help to lower debt.
For cash forecasting and management activities the DMU is responsible for providing to the
Budget Unit and others the best estimate of total government debt servicedomestic and
international. Improvement in the accuracy of such projections for the budget should remain
an outstanding objective for the Unit.

The DMU together with legal and economic/financial advisors will interface with the
underwriter of a premier issue for a global bond. Governments/DMU should plan their
actions within a timeframe that extends well beyond the date of first-time market access, and
contemplate a bond issue within a wider, medium-term debt sustainability framework. These
considerations are especially important for LICs, given the small size of their economy
http://www.imf.org/external/pubs/ft/wp/2008/wp08261.pdf

Das,
U.
M.
Papaioannou,
(2008)
Strategic
Considerations for
first-time Sovereign
Bond Issuers. IMF
Working
Paper
If the debt issuer wishes to establish its presence in international markets (more likely for 08/261
emerging market economies, but also recently an increasing trend among selected LICs), it
should opt for a bond with characteristics that would insure a large investor base, liquidity in
the secondary market, and if possible, inclusion in at least one of the major bond indices
used by investors and asset managers. Under favorable external economic conditions, many
African, Asian and European LICs are becoming debut issuers; but should such positive
conditions not prevail in the international context, sovereign bond issuers with unfamiliar
profiles or lower credit ratings will likely face increased scrutiny and possible worsening of
issuance terms (e.g. smaller sizes and higher spreads, if not a total inability to access
markets).

15

10

ii.

How can a
global
bond
issuance
be
prepared?

iii.

How are cash

proceeds from
global
bond
issuance
managed?
Contingent
liabilitieswhat are they,
and what is the
role of the debt
manager
in
identifying,
monitoring
and managing
them?

i.

ii.

11

i.

Countries needing to borrow internationally generally do not do so publicly unless the

borrowing is sufficiently large to justify the costs involved. To prepare for global bond
issuance, underlying legal and procedural documentation are sound, and are contracted on
the most beneficial or cost-effective terms. Because issuance of a dollar/or euro
denominated bond can carry high foreign exchange rate risk, it is also important that the
principle Dem entity responsible for external borrowings carefully assess and manage the
risks associated with foreign currency debt. All-in-costs should be evaluated for each form
of external borrowing, but especially for global bonds.
http://treasury.worldbank.org/services/financial+products+lending+rates+and+loan+charges/
The preparation of a terms sheet (physical or electronic) by the relevant front office staff
without undue delay is a minimum requirement to satisfy concerns over the time taken
(especially in LICs) to capture bond or loan recording into the debt management system
If the international bond issue is a bulleti.e. one-off repayment at a term of 10 years, it
would be prudent, following the set off of funds designated for special projects or other
support to (i) create a sinking fund, supporting by proceeds generated by the project to
prepare for eventual repayment; (ii) if the bond used is based upon coupon payments, with a
medium-range term, earlier buy-backs could be initiated to smooth the retirement process.
Contingent liabilities (CL) are the taking on by government of guarantees for loans
contracted by other entities normally within the public sector (SOES or parastatals) but also
for private sector players in the economy. Credit risk is an important element here, and the
debt manager can take a number of steps to identify, monitor and manage such risks and
uncertainties. The DMO, on the basis of its work for government debt, can be allocated
responsibilities for these tasks. This, as it is also naturally concerned about the governments
creditworthiness, which can be eroded by taking on more risk in the form of guarantees.

Curry,
Elizabeth
(2002)
The
Potential Role of
Government Debt
Management
Offices
in
Monitoring
and
Managing
The DMO can help give management of contingent liabilities a degree of market disciple Contingent
through: centralizing CL data to help the Budget Office maintain current information of the Liabilities. CEPAL
sources and users of guarantees, so that they can be properly charged as expense (if so (January 2002)
needed); helping to estimate default risk on the guarantee; quantifying the expected cost and
How do you risk of the guarantee; charging a premium for the beneficiaries; establishing risk-sharing
price the risk mechanisms as partial guarantees, and helping to manage or monitor a special purpose fund
related
to created to provide for the expected payouts of explicit contingent guarantees
contingent
liabilities?
What is on- On-lending is, for example, a borrowing by the central government, the proceeds of which DeMPA
16

lending, and
how can a
portfolio
of
on-lent loans
be managed?
What are the
risks?

are passed on to a second entity (e.g. SOE or other parastatal). In management of onlending, it is important to monitor risks (especially credit risks). To cover credit risk and
administrative charges, the government can seek to mitigate risks by charging a guarantee
fee or adding an on-lending fee or risk premium to the cost of borrowing. It is also important
that documented policies and procedures exist for on-lending. And monitoring of
ii.
development post-lending is critical the people tasked with the assignment, and methods
employed.
Credit risk is the single largest uncertainty facing the central government in on-lending
what is the creditworthiness of the on-lendee and how might this evolve over the course of
the loan. To mitigate credit risk and administrative charges the government can, as noted
above, charge an on-lending fee, or risk premium to the cost of borrowing.
Domestic/foreign borrowing and debt
1 What are the common The goals for government borrowing in local currency in the domestic market are to achieve MTDS / DeMPA
impediments
to transparency and predictability, providing the government with a means to finance its
expanding
the expenditures in a cost-effective manner while minimizing the risks. To the extent possible
domestic market for T- debt issuance should use market based mechanisms, including competitive auctions, tap
bills
(eventually issues and syndications.
bonds) in a typical
low-income country?
Common impediments for expanding the market for domestic T-bills (eventually bonds)
include several issues, among which: (i) lack of final private sector demand for domestic
government securities, grounded in mistrust of the level of transparency in auction
pricing, or lack of tradition of private holding of public securities; (ii) overwhelming
holdings of government paper by the public sector (a function of (i) above), with frequent
financing actions between the central bank and the central governmentmuddying the
waters regarding the purpose of T-bill sales (for government financeor for monetary
policy (OMO)); (iii) earlier unsuccessful attempts at extending the yield curve without
sufficient prerequisites to prepare the markets.
do
foreign Foreign participation in domestic security markets contributes or adds to risk in several MTDS
2 How
investors contribute or manners. First, foreign exchange rates now enter the equation for investment by overseas
add risk to the local agents, and capital in- or outflows will be driven to a degree by actual or anticipated
markets?
movements in FEX-cross rates. So foreign exchange risk (or uncertainty) emerges to be
mitigated. Second, liquidity risk will also now play a role if foreign inflows are large, with
the potential for an in-out dynamics that can roil the underlying fundamentals of domestic
market conditions, and influence monetary policy and foreign reserve management.
3 How often and how Auctions in the domestic market should be held as frequently as the underlying management DeMPA
predictable should debt apparatus will allow without a compromise of principles. Operations in the domestic
17

auctions be in
domestic market?

the primary market should be transparent and predictable, including publishing borrowing plans
well in advance, and acting consistently when issuing new securities into the wholesale
market, regardless of the mechanism used for borrowing.

How often do debt

markets
use
derivatives? In which
cases should they be
recommended?

What are the typical

tradeoffs
between
issuing bonds abroad
or in the domestic
market?

Terms and conditions of new issues should be publicly disclosed and clearly understood by
investors. And documented procedures for DMU/Treasury borrowing in the T-bill market
should exist. All borrowing in the domestic market should be done in accordance with the
governments DeM strategy.
In low income countries use of derivatives for hedging various exposures is at a fairly DeMPA/ MTDS
primitive stage, through use of such instruments by Emerging Markets has advanced at a
fairly rapid pace over recent years. The key requirement for derivatives use is to ensure the
presence of a risk management framework and documented procedures and policies for the
use of such. Even with these safeguards in place, derivatives used as hedging instruments
(for example, swaps, caps and futures) will normally entail market and credit risk, and
should be recommended cautiously for any purpose.
Foreign exchange risk comes to the fore when an international (global, euro etc.) bond is MTDS
issued, while sale of a local currency bond on the domestic market does not entail such risks.
One must also examine carefully the loads, advisory fees, and other payments required of
international underwriters, not generally a feature of domestic debt issuance.

18

i.

What is a
primary
market
for
government
securities?

ii.

How can the

primary
market
be
improved, and
what is the
role of the debt
manager in the
development
of an active
primary
market?

i.

What is a
secondary
market
for
government
securities?
What are the
preconditions
for an active
market,
and
what is the
role of the debt
manager
in
developing an
active
secondary
market?

ii.

The need to develop domestic securities markets has, following the international financial
crisis, increasingly attracted the attention of national and international policy makers. For
many governments this presents immense challenges, as the problems that inhibit securities
market development run deep into the economy. For most countries, particularly for LICs,
standard marketable treasury bonds will be the main funding instrument (though T-bills are
referenced here as a building block toward a fully functioning government bond market).

Developing
a
Government Bond
Marketa
Handbook
(2010)
IMF and World
Bank.
(Financial
Stability
Forum
Selling and distributing government securities to investors efficiently involves the choice of 2008)
sales procedures (auctions, retail schemes, tap sales and/or syndication, and the possible use
of primary dealers). The method chosen for the primary marketauctions the most
common methodor where there is not a liquid secondary marketsyndications (or other
underwriting arrangement) can be used to minimize placement risk and ensure allocation.
The use of primary dealersfinancial intermediaries selected by the government to promote
activity in government bonds and the securities market generallycan often entail risk of
collusion, especially for countries with a small financial sector. DMUs can help ensure that
the use of a larger number of primary dealers can set the stage for development of the
secondary market. Needless to say, before undertaking a full-fledged primary dealer system,
the DMU should carry out an extensive review of the most effective ways to sell and
distribute government securities.
The secondary market, also called the aftermarket, is the financial market in which
previously issued instruments, such as stocks, bonds (government and corporate), options
and futures are bought and sold. After initial issuance, for example of government bonds
through the Treasury and or a group of primary dealers, investors can purchase from other
investors in the secondary market.
Promoting a vibrant secondary market for government securities has proved to be one of the
most difficult aspects of government securities market development. It requires the active
participation of many groups, the commitment of government to refrain from policy changes
affecting the value of government securities. Questions facing the DMU include: (i) which
transactions and market practices should be allowed? (ii) which type of intermediaries to
participate in the markets, and (iii) what is the appropriate level and form of transparency.

19