With a few taps on a smartphone, I can check the weather, send messages to friends around the world, review my bank account, or even order food. But even in our hyper-connected, data-driven world, it’s exceedingly difficult to pin down government debt – even for researchers with advanced skills and access to big databases. And that’s not for lack of trying.
“Hidden debt” crops up far too frequently and often during or just before a crisis, creating a nasty surprise. Such was the case in 2016, when the revelation of previously undisclosed debt derailed Mozambique’s development agenda, tainted its reputation as a growth and investment star, and sent its financial sector into crisis. More recently, Chad and Zambia’s debt restructuring negotiations were delayed when their respective debt offices couldn’t produce current and complete records of what was owed (and to whom).
But how can government debt be hidden?
Beyond its potential to delay restructuring talks or even send an economy into tailspin, hidden debt also prevents borrowers and lenders from making informed and responsible financing decisions. Furthermore, it prevents taxpayers and civil society organizations from scrutinizing the borrowing decisions of governments. Given these very severe downsides of hidden debt, you might wonder why it exists in the first place.
A key culprit is confidentiality clauses – language inserted into loan contracts that dictates secrecy about the loan. In many cases, confidentiality clauses prevent the transaction itself from ever being disclosed (let alone the terms of the deal). In other words, the loan’s existence is only known to those who happen to be in on the agreement. It’s time to call out these clauses for what they are: bad practices that often prove to be destructive.
So why do they exist?
Secrecy clauses are inserted for many reasons, some of which may be justifiable, others less so. Some information may indeed need to be protected, such as proprietary financial calculations or formulas. But that is no reason to hide the deal as a whole.
More often than not, confidentiality clauses are the result of more unsavory motivations : political considerations like upcoming elections; a reluctance to reveal the true state of public finances; or, simply, corruption.
By focusing on four key areas, policymakers can create a better way for borrowers and lenders alike:
- First, refrain from using confidentiality clauses. Secrecy may be tempting in the short run, but, over the long run, transparency can bolster a borrower’s reputation, which, in turn, will improve investor confidence and lower borrowing costs. Should market conditions deteriorate and credit relief become necessary, transparency also facilitates effective debt assessments by avoiding “hidden” and “surprise” debt and fostering efficient restructuring.
- Second, explicitly state in contracts the right of borrowers to share detailed information about public debt transactions with the World Bank and International Monetary Fund, who, among other activities, conduct debt sustainability assessments, generate global debt statistics, and provide emergency financing in times of crisis.
- Third, codify debt-transparency requirements into national law. Debt reporting should not be a matter of routine or norms. National legal frameworks should be established that specify how, when, and where debt information will be disclosed.
- Fourth, ensure that debt disclosure is sufficiently detailed to allow lenders, analysts, and the public to scrutinize government actions. The details should be published in an easily accessible manner – such as a single website associated with a government debt management office.
With several emerging market and developing economies facing the very real prospect of not being able to service their debt in the coming 12 months or so, a “hidden debt surprise” could compound an already complicated situation and hinder efforts to assist these vulnerable countries.
Confidentiality clauses aren’t solely responsible for hidden debt. In some cases, hidden debt crops up because of a lack of state capacity to adequately track debt obligations. But confidentiality clauses in public debt are inserted by sophisticated actors. Foregoing them will not end the problem of hidden debt, but it will go a long way toward steering countries in a more transparent and financially optimized direction.
If you find these issues interesting and want a deep dive, I’d recommend taking a look at Enhancing Debt Transparency by Strengthening Public Debt Transaction Disclosure Practices by my colleagues Susan Maslen and Cigdem Aslan, as well as Debt Transparency in Developing Economies by Diego Rivetti.
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