A recipe for sound debt management

A public debt manager’s job is finding the best borrowing solutions to raise the amount of funding needed by the government at the lowest possible level of cost and risk. This is an increasingly complex task in IDA countries: the composition of public sector debt has moved away from traditional, concessional sources of financing towards more market-based debt and new bilateral creditors (see Figures 1 and 2). Additionally, public debt choices are made under increasingly volatile macro and market environments.

Common questions debt managers address include: Should debt be in local or foreign currency? Short-term or long-term?  Fixed or variable interest rate? These choices have a critical impact on both the cost/risk profile of the debt portfolio and the country’s future budget balances.

At the risk of oversimplification, the role of a debt manager is similar to that of a baker who is asked to prepare a pie : he or she can choose to add sugar and fat to please the customer, or figure out the right mix of the ingredients to deliver a healthy but still tasty pie. Similarly, debt managers can choose between two different options to meet the country’s borrowing needs: an opportunistic or a strategic one. The former entails disclosing limited amounts of information on future borrowing intentions and taking advantage of possible short-term gains that may arise in the markets. The latter involves assessing the impact of different borrowing options, and ultimately following a transparent strategy approved by the government and reported to stakeholders.

Both game theory and country experience show that a strategic approach delivers better outcomes in the long run. This is why the World Bank Group supports debt management offices around the world in implementing debt management strategies (DMS). A DMS sets out how the government intends to borrow and manage its debt to achieve a portfolio that reflects its cost and risk preferences. It guides debt management decisions and ongoing operations, playing a critical role in helping a government manage the risk exposures arising from its debt portfolio. The implementation of a sound DMS strengthens transparency, increases policy makers’ accountability and supports fiscal policy.

The World Bank and the IMF jointly developed a framework to help country authorities in the process of developing a Medium-Term Debt Management Strategy (MTDS). The accompanying analytical tool has been recently revised to incorporate recent developments in debt management, such as the wider variety of debt instruments that IDA countries have now at their disposal, or the increased use of liability management operations like buybacks or exchanges. A revised user manual is also available. The World Bank regularly provides technical assistance in this area, often through the Debt Management Facility. Sri Lanka, Cote d’Ivoire and Dominican Republic are all countries that have recently published debt management strategies.

Now back to the pie example. Just as it is not the baker but the client who decides the size of the pie, it is not the debt manager but the government that influences the borrowing needs through its fiscal policy —ideally, guided by a debt sustainability analysis. Given the client’s demands, the baker must mix the ingredients (debt instruments) to prepare a healthy pie (low-risk) within the budget (low cost). In doing so, following a recipe like a debt management strategy surely helps.