Shedding a light on domestic debt

After being shut out of international financial markets in the wake of COVID-19 and the rise in international interest rates, many low-income countries have increasingly resorted to domestic debt issuance to cope with growing financing needs.  The trend highlights the importance of developing well-functioning and liquid domestic securities markets. They can serve as essential safeguards during challenging times and a reliable source of funding during more stable periods. However, not all domestic debt is created equal.

For the latest update of the Domestic Debt Securities Heatmap, we have collected new data on domestic debt stocks across 53 out of the 75 countries borrowing from IDA, the World Bank’s fund for the poorest. The data, directly sourced from government’s statistics, reveals that domestic debt amounts to 23.6% of the countries’ GDP on average. In nine countries, it exceeds 40%.

To assess the first transparency indicator of the heatmap—share of domestic debt issued through auctions—we analyzed the composition of domestic debt across different types of instruments, including bonds, T-bills, bank loans and other non-marketable instruments, and Central Bank financing. On average, outstanding T-bills represent one fifth of the total amount of domestic debt outstanding, while bonds represent half of it. The remaining debt is in the form of non-tradable instruments, including Central Bank advances, bank loans or recognized arrears. These are the least transparent types of domestic debt instruments, with financial terms—and in some cases even their existence—often undisclosed.

The heatmap also shows that securities via auctions—by far the most common issuing mechanism in emerging and advanced economies—constitute most of the domestic debt stock in only 42% of low-income countries. This ratio has remained roughly constant over the last two years. One key reason is that the development of auction-based domestic market in these countries has been often accompanied by the increased use of bank syndications, which tend to be more opaque since the all-in cost (including fees) is not disclosed. As an example, the graphic below illustrates the parallel increase in the use of these two issuance mechanisms in countries that are members of the West African Economic and Monetary Union (WAEMU).