Blog Post

02 Jun
By: ict 0

World Bank Debt Management Facility Stakeholders’ Forum: The Role Of The Debt Management Office

Remarks By
Honourable Winston Jordan
Minister of Finance for the Government of Guyana
Lusaka, Zambia
(May 30th, 2016)

Introductions

Ladies and gentlemen: Welcome to our breakout session, “The Role of the Debt Management Office”. First, I would like to thank the World Bank Debt Management Facility (DMF) for organising and sponsoring this Forum, which gives us an opportunity to come together and discuss a topic that is crucial to our countries’ future growth and development. I would also like to thank our hosts, the Government of Zambia, for welcoming us to their beautiful country.

I am honoured to be joined in this panel discussion by Mr. Zsolt Bango, Head of the Treasury Department, Government Debt Management Agency of Hungary; Ms. Lilia Razlog, Senior Debt Specialist, World Bank Group, and Ms. Rekha Warriar, Chief General Manager of the Internal Debt Management Department of the Reserve Bank of India. I will open our session with some short comments on the Role of the Debt Management Office in Guyana.  I will then turn the floor over to my distinguished fellow panellists for their comments. We will conclude with a question and answer session.

The Role and Importance of Debt Management Offices

As we are aware, debt management offices in developing countries play the critical role of ensuring that our governments can raise the funds we need to invest in sustainable growth and development, at the lowest possible cost within an acceptable amount of risk.  They must guide borrowing so as to reduce their country’s vulnerability to domestic and external shocks. History has shown that no economy is immune from financial crisis, but this role is especially important for small, emerging market economies, which are often less diversified, have a smaller base of domestic financial savings, and may be more susceptible to global shocks or financial contagion.

Background on Guyana’s Public Debt

The case of Guyana illustrates the importance of a good debt management office, by showing how a burdensome debt can be a drag on the economic growth of a country for years—and how development can blossom under a sustainable debt strategy and good economic management.

After being declared ineligible to draw on the resources of the IMF and World Bank , in 1982 and  1983 respectively, Guyana embarked on a bold and innovative recovery programme involving the implementation of tough economic reform measures, and negotiating substantial debt forgiveness and restructuring with external creditors. After repeated rounds of debt cancellation and rescheduling, the external debt returned to sustainable levels in the early 2000s.

Guyana is now faced with the challenge of maintaining debt sustainability in a volatile and uncertain global economy. Our Debt Sustainability Analyses indicate that Guyana remains vulnerable to external shocks. Commodity price fluctuations have added to the volatility of our export earnings and tax revenues, as well as the financial performance of state-owned agricultural enterprises. Borrowing has also become more uncertain.  Guyana recently graduated to Lower Middle Income status, and concessional lending has become scarcer. To access affordable financing, Guyana has sought out alternative funding sources, especially from our South-South partners such as EXIM Bank of China, EXIM Bank of India, the Mexican Agency for International Cooperation and Development, and the Islamic Development Bank. At the same time, we sought to maintain close ties with the multilateral agencies (World Bank, IDB and CDB) and our more traditional western bilateral donors.

Because of these developments, Guyana’s debt portfolio and the risks associated with it are becoming more complex. It is increasingly important for us to have sufficient capacity to develop and implement a sophisticated, comprehensive debt strategy.

The Role of the Debt Management Office in Guyana

It is recognized that a fully functioning and effective debt management office must perform several functions, with its core responsibility being to develop and implement a comprehensive debt management strategy consistent with a country’s macroeconomic and development goals.

To effectively accomplish this objective, a debt management office must be well organised and must perform certain key functions. These resourcing, analytical, and accounting functions (which are typically described as front office, middle office, and back office functions) should, for efficiency and effectiveness, be centralized within the debt office. All these functions support the overarching mandate of developing and implementing a sustainable and comprehensive debt management strategy.

Front office functions tend to focus on mobilizing resources and engaging with donors, lenders, and borrowers. These functions include negotiating aid and signing agreements, issuing securities, conducting auctions, on-lending, and issuing loan guarantees. Middle office functions are focused on analysis and policy development, and include analysing debt and risk, and developing policies and strategies for borrowing, on-lending, and guarantee issuance. They also include reporting debt to the public. Back office functions include administering debt payments, and maintaining records of debt data.

Guyana’s Debt Management Division (DMD) was formally established in 1986 as the central agency within the Ministry of Finance, to manage all of the country’s external public debt. By being placed within the Office of the Budget of the Ministry of Finance, the DMD facilitated improved coordination with departments responsible for fiscal operations and macroeconomic programming.

This, notwithstanding, debt functions remain fragmented, resulting in duplicated functions and ineffective coordination. For example, although the DMD is recognized informally as the lead agency on debt management, it is currently not formally responsible for aid coordination and the registry of grants. Therefore, it is not able to monitor all forms of aid that Guyana receives. It does not have a comprehensive database of all aid inflows into Guyana and has no mandate to undertake such an exercise. Also, because new loans are predominantly negotiated by other departments/divisions, the DMD is not always able to analyse and review new facilities prior to their negotiation and, therefore, may not be able to monitor the new financing ceilings and limits in respect of public debt management.

The DMD is only responsible for some front office functions. Though it is responsible for external debt, the DMD does not issue or record domestic Treasury bills, nor does it record and monitor grant aid, although it is ultimately responsible for analysing and developing policy for these financing sources.  Treasury Bills are issued and monitored by the Bank of Guyana, which is also responsible for issuing domestic debt securities and conducting auctions for them. The DMD has no say in the tenor, timing or size of the issues even though the government ultimately services this debt. Grant aid is monitored and recorded by the Project Cycle Management Division of the Ministry of Finance.

Front office functions are managed by the Project Cycle Management Division, with input from the DMD, the Ministry of Foreign Affairs, and the Ministry of Legal Affairs.  The Project Cycle Management Division plans all government borrowing, and works with the other agencies to negotiate and contract loans and grant aid.

The DMD is also responsible for performing middle office and back office functions related to public debt (except Treasury Bills). The DMD is responsible for performing those middle office functions related to developing a debt management strategy as well as assuming the responsibility of undertaking debt sustainability analyses.  Substantial reforms are needed to place debt strategy formulation and implementation at the forefront of debt management activity and economic policy-making.

The DMD is also responsible for servicing the public debt and monitoring and managing Guyana’s debt, including maintaining an inventory of all public and publicly guaranteed external loans, and recording loan by loan data in the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS). These back office functions are the current mainstay of the debt management unit and there is strong capacity in this regard. In spite of this, debt recording is not sufficiently comprehensive and still does not fully include the capture of domestic debt.  Thus, obtaining a holistic view of the public debt is still a work in progress.

Areas for Capacity Building for Debt Management in Guyana

There are four main areas where Guyana hopes to improve its debt management capacity in the coming years. These are:

1.     Strategy Formulation: The real focus of a debt management office should be developing and implementing a medium-term debt management strategy. This requires staff with a strong understanding of how to formulate debt strategy, including designing a Medium Term Debt Strategy (MTDS). Increasingly, this also requires the ability to analyse complex financial instruments. Debt management staff must understand financial conventions, financial market calculations, and the mathematics behind the instruments being contracted. They must be able to conduct cost-benefit analyses that allows us to make smart decisions when faced with a menu of instruments or borrowing terms.

2.    Self-Assessment: A modern debt management office should not have to rely solely on external reviews to guide its improvement. We need to master the use of self-assessment tools, such as the Debt Management Performance Assessment (DeMPA), so that our debt management teams can be more proactive in identifying and remedying weak areas in debt management operations and in the institutional framework for public debt management on our own.

3.    Operational Risk Management: We give a lot of attention to managing debt risk, but our internal operations must be robust as well. Debt management offices are responsible for recording debt data, instructing debt payments, and storing loan agreements. Storing information non-systematically, or only in paper form, puts us at risk for data loss. For example, many of Guyana’s government institutions are housed in wooden heritage buildings. While beautiful, these facilities could be devastated by fire or flooding. When Guyana’s Ministry of Finance Annex was burnt by fire several years ago, important grant and tender board documents were destroyed, and information was lost. We must improve records management and data storage to avoid such losses, by improving our systems and taking advantage of new technology. In effect, we must develop much greater capacity in operational risk management, especially in debt management operations in order to minimise the possibility of loss from system failures, human error and misconduct as well as from natural disasters, such as fires and floods.

4.    Negotiations: Every country should be able to borrow on terms that are fair and mutually advantageous and that achieve government’s cost and risk debt management objectives. To do this, we must be able to negotiate well. This requires better understanding of complex borrowing instruments, as well as a trained team of professionals with demonstrated skills in negotiation strategies and techniques.

The Way Forward: Institutional Challenges for Capacity Building

Improving debt management capacity in these four areas will require Guyana to address a number of institutional challenges.

Improving the Legal and Governance Framework for Debt

The legal framework for debt management in Guyana comes from a patchwork of legislation, much of it outdated, including the External Loans Act (last updated in 1991), the Guarantee of Loans Act (1974), the General Loans Act (last updated in 1984), the Financial Administration and Audit Act (1963), and the Fiscal Management and Accountability Act (2003).  Ideally, a debt management legal framework should address authority to borrow, borrowing limits, guarantees, and on-lending arrangements, and establish institutional structures for debt management. Current laws place some limits on government borrowing, and assign general debt management responsibilities to different agencies. However, especially with regard to institutional roles and procedures, the laws do not provide a clear legal framework for Guyana’s increasingly modern and complex debt management.

The broad mandates in the current legislation omit specific parameters for contracting, guaranteeing and servicing external and domestic debt.  For example, there are no guidelines regarding the issuance and management of guarantees. The existing legal structure also fails to clearly delineate roles, responsibilities and protocols among the agencies that share debt management functions. More importantly, there is no requirement to develop and implement a comprehensive debt management strategy consistent with a clearly articulated view by the government of the portfolio costs and risks it is willing to bear. In addition, there is no requirement under the law to report on debt management performance and whether it has achieved its stated debt management objectives.

Attempts to address these gaps have begun. A single Public Debt and Aid Management Act and Regulations, drafted since 2006, is under active consideration. Once enacted, this legislation would combine the current, disparate laws into a single public debt management framework. Borrowing limits would be specified for total public debt (external and domestic) and provide the needed flexibility to borrow in new markets and with new instruments in tandem with the changing financial architecture.

The legislation would also establish rules for on-lending arrangements. It would create a legal mandate for the DMD established in the Ministry of Finance, and formalise its role as the lead agency for public debt management. It would also establish domestic debt functions in the DMD. By assigning responsibility for roles, defining debt management objectives, and establishing audit procedures, the legislation would improve the accountability and transparency of Guyana’s debt management.

Improving Coordination and Information Flow:

As I previously mentioned, debt management functions in Guyana are highly fragmented and shared among many agencies. The current legal framework does not provide clear guides for roles or coordination, and with the exception of the DMD, the agencies responsible for dent management functions lack formal Terms of Reference delineating their responsibilities. This results in a duplication of tasks, lack of information flow, and hinders the prior analysis of loan terms and the full assessment of on-lending arrangements.

The government has worked to address the problem of coordination by increasing the flow of information among agencies. This was achieved through political commitment at high levels to establish procedures for information sharing. However, these procedures have not been formalised in any way.  While political will is critical to improving debt management capacity, Guyana’s past experiences have shown that relying on political will alone, without formally codifying procedures in rules or regulations, creates a risk that the procedures will fall by the wayside when political will wanes. Guyana’s Debt Strategy Technical Working Group, which was first convened in 1999, suffered this fate. The Working Group was initially successful, proving instrumental in creating Guyana’s first debt strategy, but subsequently fell away and ceased to meet.

To prevent our progress on coordination capacity from eroding, the Ministry of Finance will work with each agency to develop a clear Terms of Reference regarding debt functions. The government also plans to create a Public Debt Management Procedures Manual to specify the functions and linkages of all the institutions, including data and information flows, computer software applications and reporting requirements. These TORs and procedures will give the DMD a mandate to monitor and coordinate all public debt.

A further step that will strengthen public debt management is to establish a high-level Debt Policy Committee that provides broad oversight of public debt management and steers debt policy and debt strategy formulation. Ideally, it would be envisaged that the work of the Technical Working Group – the group preparing the debt management strategy and other technical documents – would inform the Debt Policy Committee.

Staff training and skills development:

Building capacity in debt management has been a challenge for Guyana. In recent years, the tertiary institutions in our region have not turned out enough graduates with quantitative and analytical skills, and high turnover in key positions has also made it difficult to retain the skills and knowledge. The DMD is quite small, currently with a staff of four, so even moderate turnover can quickly reduce its capacity. To address this, Guyana adopting a multi-faceted approach.

First, the Ministry of Finance continues to invest in a consistent and comprehensive capacity building plan to develop the skills-set that is required to understand public debt management and its inter-linkages.  Given the increasing complexity of public debt management, this is a policy imperative. So far, Guyana has benefitted from assistance provided by partners such as the Commonwealth Secretariat, Debt Relief International (DRI), CEMLA, the World Bank, IDB and the European Union to build capacity for analytical work, including workshops and training DMD staff to conduct Debt Sustainability Analysis and develop a Medium Term Debt Strategy.

Second, we need to do more to retain and propagate knowledge and skills within the Debt Management Division, to reduce our reliance on training provided by our external partners. In this regard, the Ministry of Finance is exploring undertaking training for new staff on a semi-annual basis, with experienced staff serving as trainers.

Third, the Ministry of Finance is examining ways to attract and retain staff, including reviewing salaries at the national level, as well as developing clear succession plans, challenging staff to produce high quality technical work and, last but not least, using their outputs to inform and strengthen overall national economic policy.

Political Will:

The challenges to improving debt management capacity are not new, nor are many of the proposals to address them. Some, like the Public Debt and Aid Management Act, have languished for years. Governments must appreciate the importance of sound debt management.  In Guyana’s experience, political will has been critical to improving capacity, such as in the case of improved information flow among debt management agencies. At the same time, lack of political will has allowed our debt management capacity to atrophy, such as when the Debt Strategy Technical Working Group ceased to meet. To meaningfully and sustainably build our debt management capacity, we must be farsighted enough to make investments in our institutions today that could stave off crisis many years down the road. My young government, which turned 1 year old two weeks ago, intends to lead through proactive action, so as to improve Guyana’s performance in sovereign debt management.

Conclusion:

Guyana’s graduation to Lower Middle Income status, along with volatile global economic conditions, have posed new challenges for debt management, including greater responsibilities for our Debt Management Division. We must give our debt management offices the ability to meet these responsibilities, by continuing to improve our debt management institutions and capacity. These are challenges to which I believe many emerging economies can relate.  I, therefore, look forward to hearing the experiences of my fellow panellists, and to having an interactive and productive discussion with this group.

Without further ado, I would like to turn the discussion over to Mr. Bango.

Thank you.

Leave a Reply