External Debt Management Best Practices

Sustainability of External Debt - Conceptual Issues
And International Best Practices
Dr. Tarun Das1,

Economic Adviser, Ministry of Finance, India
And Resource Person, UN-ESCAP, Bangkok.
January 2006
1
This report expresses personal views of the author and should not be attributed to the
views of the Ministry of Finance, Government of India or the UN-ESCAP, Bangkok. The
author would like to express his gratitude to the UN-ESCAP, particularly the Poverty
and Development Division, for providing an opportunity to prepare this report and the
Ministry of Finance, Government of India for granting necessary permission for that.
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Dr. Tarun Das,

CONTENTS
1. Conceptual Issues
1.1 Definition of external debt
1.2 Debt Sustainability and Fiscal Deficit
1.3 Debt Sustainability and Current Account Deficit
1.4 Liquidity versus Solvency
2. Risk and Debt Sustainability Measurements

2.1 Economy wide model in ALM framework
2.2 Different Types of Risk
2.3 Risk Management
2.4 Sustainability Indicators
2.5 World Bank Classification of External debt
3. Management of External Debt

3.1 Governance of external debt
3.2 Legal framework and accountability
3.3 Legal and Institutional Set up
3.4 Best institutional practices
3.4.1 New Zealand
3.4.2 Australia
3.4.3 Ireland
3.4.4 European Union
3.5 World Bank Survey on Sovereign Debt Management
4 The IMF Institutional Framework Guideline

4.1 Best Practices
5. The IMF Transparency and Accountability Guideline

5.1 Issues
5.2 Best Practices
6 The IMF Debt Management Objectives and Coordination Guideline

6.1 Issues
6.2 Best Practices
ANNEX
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EXAMPLE TEXTS FROM LAWS AND RELATED DEBT MANAGEMENT DOCUMENTS
OF SELECTED COUNTRIES
1. Brazil (Fiscal Responsibility Law of 4 May 2000)

2. India (Fiscal Responsibility and Budget Management Act of 26 August 2003)
3. Ireland (National Treasury Management Agency Act, 1990)
4. New Zealand (Fiscal Responsibility Act of 1994, now part of the Public Finance Act
of 1989)
5-A Poland (Constitution)
5-B Poland (Public Finance Act of 1998, as amended)
5-C Poland – Document entitled The Public Finance Sector, Debt Management Strategy in the
years 2006 –2008
5-C Poland – Document entitled The Public Finance Sector, Debt Management Strategy in the
years 2006 –2008
6-A UK (Finance Act of 1998)
6-B UK – Debt Management Office: Strategic Objectives 2005-06
Selected References
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Dr. Tarun Das,

1. Conceptual Issues
Debt sustainability basically implies the ability of a country to service all debts – internal
and external on both public and private accounts- on a continuous basis without affecting
adversely its prospects for growth and overall economic development. It is linked to the
credit rating and the creditworthiness of a country. However, there is no simple answer to
the question- what should be the sustainable or optimal level of debt for a country?
Before discussing various measures for sustainable debt management, it is useful to
clarify certain basic concepts regarding measurement of external debt.
1.1 Definition of external debt
The Guide on external debt statistics jointly produced by the Bank for International
Settlements (BIS), Commonwealth Secretariat (CS), Eurostat, International Monetary
Fund (IMF), Organisation for Economic Co-operation and Development (OECD), Paris
Club Secretariat, United Nations Conference on Trade and Development (UNCTAD) and
the World Bank and published by the IMF (2003) defines “Gross external debt, at any
time, as the amount of disbursed and outstanding contractual liabilities of residents of a
country to non-residents to repay the principal with or without interest, or to pay interest
with or without principal”.
This definition is crucial for collection of data and analysis of external debt:
1. First, it talks of gross external debt, which is directly related to the problem of
debt service, and not net debt.
2. Second, for a liability to be included in external debt it must exist and must be
outstanding. It takes into account the part of the loan, which has been disbursed
and remains outstanding, and does not consider the sanctioned debt, which is yet
to be disbursed, or the part of the debt, which has already been repaid.
3. Third, it links debt with contractual agreements and thereby excludes equity
participation by the non-residents, which does not contain any liability to make
specified payments.
4. Fourth, the concept of “residence” rather than “nationality” is used to define a
debt transaction hereby excluding debt transaction between foreign-owned and
domestic entity within the geographical boundary of an economy. Besides, while
borrowing of overseas branches of domestic entities including banks would be
excluded from external debt, borrowing from such overseas branches by domestic
entities would b included as part of external debt.
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5. Fifth, it talks of contractual agreements, and excludes contingent liabilities. For a
liability to be included in external debt, it must exist at present and must have
contractual agreement.
6. Finally, the words “principal with or without interest” include interest free loans
as these involve contractual repayment liabilities, and the words “interest with or
without principal” include loans with infinite maturity such as recently popular
perpetual bonds as these have contractual interest payments liabilities.
Three other concepts- one relating to interest payments, another relating to currency and
another relating to short-term debt need some clarification. While calculating interest, in
general an accrual method rather than the actual cash-flow method is used. As regards
currency, debt is made in different currencies and it is a common practice to convert all
debt in a single foreign currency, say US dollar, and also in domestic currency. In some
cases, debt from non-residents could be denominated in terms of domestic currency. As
per definition of external debt, such debt should form a part of external debt, even though
it may not be fully convertible.
In general, short-term debt is defined as debt having original maturity of less than one
year. However, Southeast Asian crisis highlighted the necessity to monitor debt by
residual maturity. Short-term debt by residual maturity comprises all outstanding debt
having residual maturity of less than one year, irrespective of the length of the original
maturity. Residual maturity concept is distinctly superior to original maturity concept.
1.2 Debt Sustainability and Fiscal Deficit
Debt sustainability is closely related to the fiscal deficit, particularly to the primary
deficit (i.e. fiscal deficit less interest payments). Sustainability requires that there should
be a surplus on primary account. It also requires that the real economic growth should be
higher than the real interest rate. Countries with high primary deficit, low growth and
high real interest rates are likely to fall into debt trap.
1.3 Debt Sustainability and Current Account Deficit
Economic theory states that high fiscal deficit spills over current account deficit of the
balance of payments. Persistent and high levels of current account deficit is an indication
of the balance of payments crisis and needs to be tackled by encouraging exports and
non-debt creating financial inflows.
1.4 Liquidity versus Solvency
One important conceptual issue relates to the distinction between debt service problems
due to liquidity crunch and those due to insolvency. These concepts are borrowed from
the financial analysis of corporate bodies, but there are distinctions between firms and
countries (Raj Kumar 1999). If a firm has positive net worth but faces difficulty to meet
the obligations of debt service, it is considered to be solvent but to have liquidity
problem. When it has negative net worth, it is insolvent.
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There is difficulty to apply these concepts to a country, as it is difficult to value all the
assets of a country such as natural resources, wild life, antics in museum, heritage
buildings and monuments. Besides, firms can disappear due to insolvency problems, but
a country cannot become bankrupt nor disappear nor are overtaken or merged purely on
account of financial problems. So we need to consider medium and long term prospects
of a country in terms of growth and balance of payments.
2 Debt Sustainability Measurements
There are broadly two approaches to determine debt sustainability of a country. One is to
develop a comprehensive macroeconomic model for the medium term particularly
emphasizing fiscal and balance of payments problems, and another is to assess various
risks associated with debt and to monitor various debt sustainability ratios over time.
2.1 Economy wide model in ALM framework
Economy wide model in general is constructed in the Asset and Liability Management
(ALM) Framework and is aimed at minimizing cost of borrowing subject to specified
risks or to minimize risk subject to specified cost. Benefits of such models are quite
obvious in the sense that the model can be used not only for debt management but also
for determination of optimal growth, fiscal profiles, medium term balance of payments
etc. However, building up such models requires not only huge data but also expertise on
the part of modelers for which there may be constraints in developing countries.
2.2 Different Types of Risk
There should be a framework that identifies and assesses the financial and operational
risks for the management of external debt. Risks can be grouped in three broad heads viz.
(A) External market based risks which include

 Liquidity risk
 Interest rate risk
 Credit risk
 Currency risk
 Convertibility risk
 Budget/ Fiscal risk
(B) Operational and Management Risks which include
 Operational risk
 Control systems failure
 Financial error risk, and
(C) Country specific and political risks.
Box-1 provides a brief discussion the nature and implications of these risks.
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Box 1. Risks for Management of External Debt
(A) External Market-Based Risks
(A1) Liquidity risk. The pledging of reserves as collateral with foreign financial institutions as
support for loans to domestic entities, or foreign subsidiaries renders reserves illiquid until the
loans are repaid. Liquidity risks also arise from the direct lending of reserves to projects (such as
real estate and share markets) with returns in domestic currency or to activities which are subject
to shocks in external and domestic markets and unable to repay their liabilities in time.
In fact, one of the major factors leading to East Asian financial crisis in 1997-1998 was that
short-term external borrowing was invested in protected or illiquid sectors having low return and
long gestation period (real estate and petrochemicals in Indonesia, Thailand, Malaysia), sectors
with high or excess capacity having low or negative returns (steel, ships, semiconductors,
automobiles in Korea), non-tradable (such as land, office blocks and condominiums in Thailand)
that generate return in domestic currency and did not generate foreign exchange; in
automobiles and electronics with inadequate attention to profitability, and
speculative and unproductive lending in share markets. This created liquidity
problem due to maturity mismatch between assets and liabilities of the
financial intermediaries.
(A2) Interest rate risks. While fixed interest rate has the advantage of having fixed obligations
of interest payments over time, there may be a substantial loss in a regime of falling interest
rates and global trends of soft interest rates. Solution lies to have a proper mix of variable and
fixed interest rates. Losses may also arise on assets from variations in market yields that reduce
the value of marketable investments below their acquisition cost. Losses may also arise from
operations involving derivative financial instruments.
(A3) Credit risk. Losses may arise from the investment of reserves in high-yielding assets that
are made without due regard to the credit risk associated with the asset. Lending of reserves by
the Central Bank to domestic banks and overseas subsidiaries of reserve management entities,
may also expose reserve management entities to credit risk.
(A4) Currency risk. Some element of currency risk is unavoidable with external debt. But,
there are instances to denominate debt in a few currencies in anticipation of favorable exchange
rates. Subsequent adverse exchange rate movements may lead to large losses.
(A5) Convertibility risk: Easy convertibility of domestic currency may lead to flight of capital
at the slight anticipation of crisis.
(A6) Budget/ Fiscal Risk: Fiscal risk may arise from unanticipated shortfalls in revenue or
expenditure overruns. Government should consider both budget and off-budget liabilities and try
to minimise contingent liabilities, which may represent a significant balance sheet risk and
a potential source of future fiscal imbalances. Sound public policy requires the
government to carefully manage contingent liabilities by establishing clear criteria as to
when government guarantees will be used and to use them sparingly.
Experience in the industrialised countries suggests that more complete disclosure, better
risk sharing arrangements, improved governance structures for state-owned entities and
sound economic policies can lead to substantial reductions in the government’s exposure
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to contingent liabilities.
(B) Operational and Management Risks
(B1) Operational Risk is the risk that arises from improper management systems resulting in
financial loss. It is due to improper back office functions including inadequate book keeping and
maintenance of records, lack of basic internal controls, inexperienced personnel, and computer
failures. Probability of default is high with inadequate operational and management systems.
(B2) Control system failure risks arise due to outright fraud and money laundering because of
weak or missing control procedures, inadequate skills, and poor separation of duties.
(B3) Financial error risk. Incorrect measurement and accounting may lead to large and
unintended risks and losses.
(c) Country specific and political risks influence multinational companies choice
between exports and investments, and act as deterrents for foreign investment, whereas
scale economies, lower wages, fiscal incentives, high yields, trade openness and
agglomeration effects stimulate non-debt creating financial flows. Foreign capital is
attracted by countries which allow free repatriation of capital and profits, and donot
insist on appropriation of private capital in public interest.
2.3 Risk Management
Although there is no unique solution to tackle various types of risk, general risk
management practices of the government aim at minimizing risk for government bodies
and public enterprises. These include development of ideal benchmarks for public debt
and monitor and manage credit risk exposures. Typical risk management policies are
summarized in Table-1.
Table-1 Policies for Risk Management
Type of Risk Risk Management Policies
1. Liquidity risk (a) Monitor debt by residual maturity

(b) Monitor exchequer cash balance and flows
(c) Maintain certain minimum level of cash balance
(d) Maintain access to short-term borrowing
(e) But, fix limits for short-term debt
(f) Pre-finance maturing debt
(g) Do not negotiate for huge bullet loans
(h) Smooth the maturity profile to avoid bunching of debt services
(i) Develop liquidity benchmarks
2. Interest rate risk (j) Fix benchmark for ratio of fixed versus floating rate debt
(k) Maintain ratio of short-term versus long-term debt
(l) Use interest rate swaps
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3. Credit risk (m) Have credit rating of scrips by major credit rating organizations
such as S&P’s, Moody’s, and Japan Bond Research Institute etc.
(n) Identify key factors that determine credit-rating
(o) Develop a culture of co-operation and consultation among different
departments and with credit rating organisations
(p) Set overall and individual counter-party credit limits
4. Currency risk (q) Fix benchmark for the ratio of domestic and external debt
(r) Fix ratios of short-term and long-term debt
(s) Fix composition of currencies for external debt
(t) Fix single currency and currency pool debt
(u) Use currency swaps and have policies for use of market derivatives
(v) Try to have natural hedge by linking dominant currency of exports
and remittances to the currency denomination of debt
5. Convertibility risk (w) Gradual approach towards capital account convertibility.
(x) The liberalisation of capital accounts should be done
in an orderly manner in line with the strengthening of
domestic financial systems through adequate
prudential and supervisory regulations.
(y) The golden rule is to encourage initially non-debt
creating financial flows (such as foreign direct
investment and portfolio equity investment) followed
by long term capital flows.
(z) Short term or volatile capital flows may be liberalised
only at the end of capital account convertibility.
6. Budget Risk (aa) Enact a Fiscal Responsibility Act.
(bb) Put limits on debt outstanding and annual borrowing
(cc) Use government guarantees and other contingent liabilities (such
as insurance and pensions etc.) judiciously and sparingly
(dd) Fix limits on contingent liabilities
(ee) Fix targets on fiscal deficit and primary deficit
(ff) Fix limits on short term borrowing
(gg) Monitor debt service payments
7. Operational risks(hh) Allow independence and transparency of different offices
(such as front, back, middle and head offices) dealing with
public debt
(ii) Strengthen capability of different offices
(jj) Try to achieve general political consensus in policy
formulations.
8. Country specific (kk) Have stable and sound macro-economic policies
and political risk (ll) Have co-ordination among monetary and fiscal authorities
(mm) Try to achieve general political consensus for policy
formulation.
2.4 Sustainability Indicators
Debt sustainability indicators are the most widely used ratios for debt management. These
indicators express outstanding external debt and debt services as a percentage of gross
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domestic product or other variables indicating the strength of the economy. Some
commonly used debt sustainability indicators are given in Table-2.
Table-2: Debt Sustainability Indicators
Purpose Indicators
1. Solvency ratios (a) Interest service ratio – the ratio of interest payments to
exports of goods and services (XGS).
(b) External debt to GDP ratio
(c) External debt to exports ratio
(d) External debt to revenue ratio
(e) Present value of debt services to GDP ratio
(f) Present value of debt services to exports ratio
(g) Present value of debt services to revenue ratio
2. Liquidity (h) Basic debt service ratio- Ratio of total debt services
monitoring ratios (interest payments plus repayments of principal) to XGS
(i) Cash-flow ratio for total debt or the total debt service
ratio (i.e. the ratio of total debt services to XGS)
(j) Interest payments to reserves ratio.
(k) Ratio of short-term debt to XGS
(l) Import cover ratio- Ratio of total imports to total foreign
exchange reserves.
(m) International reserves to short-term debt ratio
(n) Short-term debt to total debt ratio
3. Debt burden ratio (o) Total external debt outstanding to GDP (or GNP) ratio
(p) Total external debt outstanding to XGS ratio
(q) Debt services to GDP (or GNP) ratio
(r) Total public debt to budget revenue ratio
(s) Ratio of concessional debt to total debt
4. Debt structure (t) Rollover ratio- ratio of amortization (i.e. repayments of
indicators principal) to total disbursements
(u) Ratio of interest payments to total debt services
(v) Ratio of short-term debt to total debt
5. Public sector (w) Public sector debt to total external debt
indicators (x) Public sector debt services to exports ratio
(y) Public sector debt to GDP ratio
(z) Public sector debt to revenue ratio
(aa) Average maturity of non-concessional debt
(bb) Foreign currency debt over total debt
6. Financial sector (cc) Open foreign exchange position- Foreign currency assets
indicators minus liabilities plus long term position in foreign
currency stemming from off-balance sheet transactions
(dd) Foreign currency maturity mismatch
(ee) Ratio of foreign currency loans for real estate to total
credits given by the commercial banks
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(ff) External sector related contingent liabilities
(gg) Trends of share market prices
(hh) GDRs and Foreign currency convertible bonds issued
(ii) Inflows of FDI and portfolio investment
7. Corporate sector (jj) Leverage (debt/ equity ratio)- Ratio of debt to equity
indicators (kk) Interest to cash flow ratio
(ll) Short-term debt to total debt
(mm) Return on assets
(nn) Exports to total output ratio
(oo) Net foreign currency cash flow
(pp) Net foreign currency debt over equity
8. Dynamic ratios (qq) Average interest rate/ growth rate of exports
(rr) Average interest rate/ growth rate of GDP
(ss) Average interest rate/ growth rate of revenue
(tt) Change of PV of debt service/ change of exports
(uu) Change of PV of debt service/ change of GDP
(vv) Change of PV of debt service/ change of revenue
Source: Raj Kumar (1999) and IMF (2003)
2.5 World Bank Classification of External debt
On the basis of ratio of PV to GNI and PV to XGS (exports of goods and services), the
World Bank in their report on Global Development Finance 2005 has classified countries
into three categories viz. low indebted, moderately indebted, and severely indebted
countries as indicated in Table-3. While PV takes into account all debt servicing
obligations over the life span of debt, GNI indicates country’s total potentials and XGS
indicates foreign exchange earnings reflecting debt-servicing ability. Countries are also
classified into low and middle income depending on the level of per capita income.
Table-3 Cross classification of countries by income level and indebtedness
Indebtedness → Severely Indebted Moderately Indebted Either Less Indebted

Either PV/XGS > 220% Or 132%<PV/XGS<220% Both PV/XGS<132%
PV/GNP > 80% or 48%<PV/GNP<80% and PV/GNP<48%
Income Level ↓
Low income: GNI per Severely Indebted Moderately Indebted Less Indebted
capita less than US$765 Low income (SILI) Low income (MILI) Low income (LILI)
Middle income: GNI per Severely Indebted Moderately Indebted Less Indebted
capita between US$766 Middle income (SIMI) Middle income (MIMI) Middle income (LIMI)
and US$9,385
3. Management of External Debt -
External debt management practices by leading debt offices bears many valuable lessons
for countries in the process of strengthening their debt management capacity. As in other
spheres, there is no unique answer as to what constitute sound debt management practices
at all the times and for all countries. Selective discretion should be used while
11
ameliorating debt management practices based on international experiences. More
importantly, the country specific requirements should be carefully analyzed so that the
international best practices could be grafted effectively. A country should own its system
and develop it over the years.
International experience suggests that centralized debt offices in most countries are
located under the Ministry of Finance. This is because MOF in general is in charge of
dealing multilateral financial institutions and bilateral donors. Within this institutional
structure, in most of the advanced countries, the debt offices are set up as an autonomous
or separate entity within a Treasury or as a statutory unit. This enables the debt office to
assume sufficient degree of operational independence
The main argument for entrusting sovereign debt management responsibility within the
Ministry of Finance or Treasury is the proximity of location, which enables the senior
management within the Ministry of Finance to review and assess the performance of the
entity more easily. Another factor, which prompted many governments to locate the debt
office within the Ministry of Finance is that the public debt has budgetary implications
and co-ordination between budget making and the debt office facilitates effective
management of debt and fiscal deficit. This arrangement thereby minimizes chances of
any conflict arising from the budgetary process wherein the annual borrowing
requirements are determined and the management of such liabilities.
3.1 Governance of External Debt
As regards governance of external debt, most of the countries donot allow Subnational or
provincial governments to borrow directly from the external sources (Table-4). Only the
Central government borrows from multilateral and bilateral sources and then on lends
money to the states and local governments. Nearly all of the autonomous debt
management offices have adopted an organizational structure similar to that in leading
corporate treasury and investment banks. They divide functional responsibilities for
managing transactions into different offices within the debt management organization and
established procedures to ensure internal control and accountability. Sound governance
considerations suggest that debt management functions should be organized as separate
units given their different objectives, responsibilities and staffing needs. Usual practice is
to establish a separate front, middle, back and head offices.
(i) The Front office
The front office is responsible for the efficient execution of all portfolio transactions and
negotiations with lenders consistent with the portfolio management policy of the agency.
These transactions may include short- and medium-term borrowing in domestic and
foreign currencies, management of trading positions and hedging transactions, the
investment of foreign currency liquidity and any excess cash balances associated with the
government's daily departmental cash management. Within the front office, individual
portfolio managers are assigned different functional responsibilities (e.g., foreign
currency borrowing, liquidity management, domestic currency funding) on an instrument,
market, or currency basis.
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Table-4: Institutional Framework for Foreign Currency Debt Management in
Emerging Economies
Countries Central State and Local State Owned
Government Government Enterprises
China MOF Not allowed SOEs
India MOF Not allowed SOEs
Indonesia MOF Not allowed
Korea MOF Own responsibility SOEs
Singapore None
Thailand DMO under MOF None MOF
Argentina MOF Own responsibility
Chile MOF Not allowed MOF
Colombia MOF State Govts./MOF SOEs/MOF
Mexico MOF State Owned banks MOF
Peru DMO under MOF DMO under MOF MOF
Venezuela MOF Not allowed Not allowed
Czech Republic None MOF SOEs
Hungary DMO under MOF None
Poland MOF Own responsibility
Russia MOF Regional agencies
Israel MOF Own responsibility SOEs
South Africa DMO under MOF Not allowed MOF
Source: “Managing foreign debt and liquidity risks in emerging economies: an overview”, John Hawkins
and Philip Turner, as excerpted in “Managing Foreign Debt and Liquidity Risks”, BIS Policy Papers, No.
8, September 2000.
(ii) The Middle office
The middle office (or risk management office) is responsible for establishing a risk
management framework for the debt office and for monitoring compliance against the
portfolio and risk management policies, which form part of asset-liability management. It
is also responsible for identification, measurement and monitoring of debt and risk,
establishment of benchmarks, dissemination of data and policy formulation for both short
and medium term and public and private debt.
(iii) Back Office
It is responsible for accounting, auditing, data consolidation and the dealing office
functions for debt servicing.
(iv) Head Office
It is the final authority to approve all public debt- both domestic and external.
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3.2 Legal Framework and Accountability
Sound governance practices are an integral part of sovereign debt management. In order
to establish appropriate accountability for managing the sovereign debt portfolio, most
governments have in place legislation pertaining to powers to borrow, invest, issue
guarantees and undertake transactions on behalf of the government. This overcomes the
need to request specific authorizations from the Parliament or the constitutional authority
for individual transactions, which can introduce and a range of political factors into the
decision-making and considerable delay the execution of transactions.
The above arrangements are supplemented with establishment of a risk management

framework. The strategic benchmarks for portfolio management of the sovereign debt, in
terms of the currency, interest and maturity mix, produced by the debt office needs to be
approved by the Minister of Finance on an annual basis. For countries where the debt
agency is outside the Ministry of Finance or Treasury, the recommendations made to the
Minister of Finance are made by the Ministry of Finance in conjunction with the debt
office. This requires a counterpart unit in the Ministry of Finance, which is usually
compact, to supplement the recommendations of the debt office while approving the
strategic benchmarks. Once the benchmarks are approved, the debt office would be
independent to operate for achieving such strategic benchmarks.
Irrespective of the institutional structure of the debt office, legal arrangements clearly
specify the organisational set-up for debt management. Authorizing an outside body of
advisors (constituting of a board of directors etc.) is used frequently to provide quality
advice on debt management on a regular basis to the head of the debt office and the
Finance Minister. Thus, autonomous debt agencies in countries like Sweden and
Portugal, are managed by boards, appointed by the government and chaired by the head
of the debt office. Advisory boards with mainly non-governmental members work with
the autonomous debt agency in Ireland. In countries like Belgium, Colombia, Hungary
and South Africa where the debt office is located within the Ministry of Finance,
committees staffed mainly from the Finance Ministry, other government agencies and the
central bank, meet regularly with the government debt managers to discuss broader
government debt and asset management issues. On the other hand, for the debt office in
New Zealand, which is located in the Treasury, the Advisory Board comprises mainly of
non-governmental members to establish greater transparency in the decision-making and
supervision process.
3.3 Legal and Institutional Set up
It is not possible to provide specific suggestions for any country without understanding
their existing legal and institutional systems for management of external debt and public
debt. We may wait for the country presentations before giving our recommendations. An
attempt is made here to provide international best practices on legal and institutional set
up so that the countries can improve their systems.
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Most of the international best practices dealing with sovereign debt (such as the IMF
Guidelines for Public Debt Management1- the “IMF Guidelines”) is concerned with the
management of public or government debt in total, not just external debt. Likewise, most
of the legal systems and laws deal with the total public debt. This is quite evident from
the titles of such laws such as Public Finance Law, Fiscal Responsibility Law, Financial
Management and Accountability Act, Budget Law, Fiscal Prudence and Transparency
Law etc2. The World Bank maintains a list of such laws on their website2.
However, it may be remembered that there are limitations on what any legal and
institutional set-up dealing with debt management can achieve. The law can provide
directives to the government, can formulate rules and regulations for effective debt
management, and can set up the necessary institutions and legal framework. Much
however will still be left to secondary legislation and/or government policy statements
and related documents. Secondary legislation is usually issued, and can be subsequently
amended, by Ministerial or Presidential Decree. However, a balance must be achieved.
Certain key matters and important principles must be contained in the law. But, as
mentioned clearly in the IMF Guidelines, a good law and sound debt management
policies and institutions are no substitutes for good macro economic policies and sound
fiscal and monetary management, but they should assist in reducing future external debt
problems and even improving the current external debt situations.
3.4 Best institutional practices
External debt management practices by leading debt offices bears many valuable lessons
for countries in the process of strengthening their debt management capacity. As in other
spheres, there is no unique answer as to what constitute sound debt management practices
at all the times and for all countries. Selective discretion should be used while
ameliorating debt management practices based on international experiences. More
importantly, the country specific requirements should be carefully analysed so that the
international best practices could be grafted effectively. A country should own its system
and develop it over the years.
International experience suggests that centralized debt offices in most countries are
located under the Ministry of Finance (MOF). This is because MOF in general is in
charge of dealing with multilateral financial institutions and bilateral donors. Within this
institutional structure, in most of the advanced countries, the debt offices are set up as an
autonomous or separate entity within a Treasury or as a statutory unit. This enables the
debt office to assume sufficient degree of operational independence. In this respect the
selected articles from the laws of Brazil, India, Ireland, New Zealand, Poland and the UK
set out in the Annex should be noted. As a general rule it is the Minister of Finance who
is concerned with all matters relating to state finance, both in the context of representing
1
Prepared by the Staffs of the International Monetary Fund and the World Bank, 21 March 2001.
2
See http://www1.worldbank.org/publicsector/pe/countrybudgetlaws.cfm
2
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the state externally, but also with respect to internal matters such as reporting to
Parliament and managing the national debt3.
The main argument for entrusting sovereign debt management responsibility within the
Ministry of Finance or Treasury is the proximity of location, which enables the senior
management within the Ministry of Finance to review and assess the performance of the
entity more easily. Another factor, which prompted many governments to locate the debt
office within the Ministry of Finance, is that the public debt has budgetary implications,
and co-ordination between budget making and the debt office facilitates effective
management of debt and fiscal deficit. This arrangement thereby minimizes chances of
any conflict arising from the budgetary process wherein the annual borrowing
requirements are determined and the management of such liabilities.
3.4.1 New Zealand
The New Zealand Debt Management Office (NZDMO) is responsible for the
management of public debt since the separation of debt management policy from
monetary policy in 1988. Although NZDMO is placed in a division in Treasury, it
maintains some degree of autonomy from the rest of the government and has its own
advisory board. The board meets at least four times a year and consists of a senior
member of the Treasury and experts in risk management. The board provides advice and
oversight on wide range of issues relating to operational risk management and promotes
transparency in debt management policies and supervision.
The treasurer or the head of the NZDMO recommends benchmarks for sovereign debt in
terms of currency mix and interest rate sensitivity, and trading limits imposed on the
portfolio manager. The basic objective of the NZDMO is to identify a low risk portfolio
of net liabilities consistent with the government’s aversion to risk and expected costs for
risk reduction. In order to minimize the net risk exposure, the NZDMO has set the
duration and currency profile of the liabilities to match its assets. As most of the
government assets are denominated in New Zealand dollars, the strategy has entailed
gradual elimination of net foreign currency debt (which was achieved in September 1996)
and lengthening maturity of domestic debt. Assets and liabilities are monitored on daily
basis and the model also incorporates private sector debt management practices. The
actual performance of portfolio managers is evaluated against the benchmark portfolio on
daily basis.
Over these years NZDMO has undertaken considerable amount of works relating to
analysis and management of the government liabilities within an Asset and Liability
Management (ALM) framework (Anderson 1999). It has developed both economy wide
models and specific models for the management of public debt. In the wider model, basic
objective is to construct a debt portfolio, which aims at hedging the economy as a whole
against shocks to national income or net worth. It requires information on the nature and
degree of private hedging mechanisms, which are highly dispersed and very expensive to
3
See, for example, articles 4 and 32 of the Brazil Law, articles 47 (1) and 54 of the New Zealand Law, and
articles 37, 38 and 43 of the Poland Law, quoted in the Annex in this paper.
16
collect. Therefore, NZDMO concentrates on the management of the government assets
and liabilities. It has improved accounting principals and has adopted generally accepted
accounting and auditing practices.
In recent times, focus has been on maximizing returns and minimizing costs of assets and
liabilities using the modern portfolio theory. In contrast to earlier works, it does not
include physical assets that do not directly produce returns. The model estimates the
relationship between the values of various asserts classes (e.g. equities, real estate etc,)
and various government liabilities (e.g. debt and the undefended pension liabilities). To
reflect the Crown’s total portfolio, the model also includes the measures of the Crown’s
future tax revenues and future social expenditure liability.
ALM relates essentially to the management of market risk and derivatives are used to
achieve desired outcomes. On the basis of ALM modeling, NZDMO specifies
benchmarks for various sustainability indicators such as ratio of domestic and external
debt, ratio between debts with floating and fixed interest rates, currency mix, maturity
mix, limits on short term debt, interest rates etc.
Like many sovereign debt management agencies the NZDMO is committed to the
principles of transparency, neutrality and even-handedness in its activities. The
experience of NZDMO (Anderson 2000) leads to the following conclusions:
(a) ALM framework is conceptually appealing but requires huge data.

(b) It is relatively easy to include all financial assets and liabilities.
(c) The extension of ALM to physical assets and non-traded sovereign
instruments raises a number of issues and practical difficulties.
(d) ALM framework is only one component of prudent debt management.
Measures to manage other risks, particularly refinancing, liquidity, and
operational risks need to be established. However, gains in risk
management and cost reduction are considerable.
3.4.2 Australia
The Australian Office of Financial Management (AOFM) established on July 1, 1999 is

an independent agency within Treasury and a specialised office to manage Australian
government’s debt position (McCray 2000). However, it has important practical linkages
with the parent departments. Its major task is to identify, measure, monitor and analyze
all kinds of risk, particularly market risk, funding/ liquidity risk, credit risk, operational
risk etc.
AOFM recognizes that capital account convertibility and liberalisation of trade and
financial flows present both opportunities and challenges for debt management.
Opportunities lie in accessing a truly global and expanded market for debt with
potentially low cost. However, risks arise due to increased financial market volatility and
internationally mobile creditors and investors leading to vulnerability of debt service
costs, market exposures of debt portfolio and balance sheet net worth.
17
Australian government introduced accrual budgeting and accounting systems to tackle
risks and contingent liabilities. There is an increasing emphasis on outcomes-oriented
approach to performance reporting, public sector transparency and accountability, and
focus on net worth and risks to net worth.
A comprehensive risk management framework encompassing funding, market, credit,

liquidity and operational risks provide the basis for a coherent and objective planning for
debt. A unique feature of the Australian debt management is that the basic organisational
structure, staffing numbers, skill net, financial resourcing, delegation powers and
accountability arrangements within AOFM had practically remained unchanged since its
inception.
3.4.3 Ireland
The National Treasury Management Agency (NTMA) in Ireland is an independent public

debt office and is in charge of management of all public debt- either internal or external
and also all contingent liabilities (such as savings schemes of the government, pension,
provident and insurance funds). The benchmarks are designed in consistent with the
annual debt-service budget within which the NTMA has to operate. As such the review of
the benchmark is annual and matches the budget cycle.
At the beginning of the year, NTMA signs a Memorandum of Understanding (MOU)

with the Finance Minister and specifies benchmarks for various parameters such as extent
of internal and external loan, currency mix, maturity mix, interest rare mix etc. These
benchmarks are developed after careful examination and measurement of various risks
such as liquidity, debt refinancing, maturity of debt etc. MOF does not interfere with the
day-to-day working of the NTMA, which has distinct front, back, middle and head
offices and dealing rooms.
The NTMA attempts to beat the benchmark both by funding at different dates than the
benchmark stipulations in order to take advantage of favourable market conditions, and
by issuing at different maturities within the broad guidelines regarding proportions of
foreign currency and floating rate debt. The performance of the NTMA is evaluated at the
end of the year in terms of actual and benchmark portfolios and costs. If NTMA performs
better than the benchmarks agreed in the MOU, it retains the profits of debt management.
Over the years, NTMA has emerged as a highly technical, efficient and profitable
organisation in debt management.
3.4.4 European Union
The Maastricht Treaty of the European Union set up the framework for the European
Monetary Union, which includes introduction of common currency – the Euro. The
Treaty also sets out four convergence criteria to achieve price stability, fiscal prudence
and debt sustainability. These include the following:
18
(1) Average consumer price inflation should be sustainable and, in the year prior to
examination, should not be more than 1.5 percentage points over that of, at most,
the three best performing countries.
(2) The country should not have an excessive deficit. Prima facie a government’s
budget deficit should not exceed 3% of GDP, and
(3) Its debt should not be more than 60% of GDP.
(4) Average nominal long-term interest rates should not exceed, by more than two
percentage points the long-term interest rates of, at most, the three best
performing member states in terms of price stability.
Individual countries within European Union have developed independent debt

management systems and procedures within these broad principles. Several countries
have developed benchmarks for currency composition and maturity mix of external debt.
Institutional constraints that limit influence the benchmarks include limiting currency
composition of foreign debt to that of reserves portfolio (e.g. United Kingdom) and
maintaining a fixed percentage of foreign exchange in a specific currency such as the
ECU to develop debt market of that currency (e.g. France and Italy).
In Sweden, the benchmark serves as the limit within which the foreign currency debt may
be exposed to currency and interest rate risks. The Sweden debt Office (SNDO) lays
down the risk limits and takes position in the foreign exchange and bond markets to bring
the long-term cost of the debt below that of benchmark portfolio. The currency
composition of the benchmark primarily matches the weights of the currencies in the
ECU basket while US dollar and Japanese Yen are included in the portfolio for
diversification. The SNDO may deviate from the currency mix benchmark by 3
percentage points, and that for duration benchmark by 0.5 percentage points. The interest
rate structure of the benchmark is based on diversified borrowing along the yield curve to
reduce shocks to specific parts of the yield curve and to reduce bunching of debt
payments over time. In Denmark, benchmarks for various indicators and the maximum
level of deviations from the benchmarks are specified.
In Hungary, the debt management office located in the Ministry of Finance is responsible
for servicing the cost of the net sovereign external debt. The authorities align the
currency composition of the external debt through hedging operations with that of the
currency basket to which the national currency is pegged. Emphasis is placed on
lengthening the maturing of the debt, maintaining more than three quarters of the debt in
fixed rate instruments, and evenly spreading debt redemptions to avoid rollover risks.
3.5 World Bank Survey on Sovereign Debt Management
While organizing the Second Forum on Sovereign Debt Management in November 1999,
World Bank conducted a survey on sovereign debt management practices in the countries
participating in the Forum. The results of the survey summarized in Table-5 are revealing
and self-explanatory. Some of the survey results are at variance with that analyzed in the
preceding sections. This is because the survey results are based on the replies given by
19
the respondents, and majority of the participants did not send any reply. Therefore, the
analysis is only indicative and may not be true for the universe.
Table-5 World Bank Survey on Second Sovereign Debt Management Forum
Items % in total respondents
1. Public Debt management objectives and priorities
(a) To minimize financial costs and risks 38

(b) To raise funds for financing government budget 26
(c) Management of debt 15
(d) Development of financial markets 9
(e) Others 13
2. Establishment of benchmarks for risk management
(a) Countries establishing guidelines for risk management 45
(b) Countries establishing benchmarks for foreign currency debt 24
(c) Countries establishing benchmarks for portfolio performance 21
(d) Countries establishing benchmarks for domestic debt 13
3. Risk management guidelines
(a) Limits on currency risk 35
(b) To avoid excessive short-term debt /smooth maturity profile 29
(c) Incur debt in least volatile currency 24
(d) Limits on debt with floating interest rate 18
(e) To maintain debt matching reserves 12
(f) Others 18
4. Analytical techniques for undertaking risk analysis
(a) Not using any analytical techniques 32
(b) Value-at-Risk (VAR)/ Cost-at-Risk (CAR) 23
(c) Debt sustainability indicators 16
(d) Others 29
5. Constraints for establishing benchmarks
(a) Lack of debt management policy 23
(b) Lack of debt management expertise 23
(c) No access to financial markets 13
(d) Lack of debt monitoring 10
(e) Difficult economic environment 10
(f) Others 21
6. Use of derivatives to hedge currency and interest rate risks
(a) Currency swaps 31
(b) Interest rate swaps 24
(c) Use of exchange commodity futures and options 7
20
Items % in total
respondents
7. Constraints for using derivatives
(a) Lack of technical knowledge 71
(b) Undeveloped financial markets 17
(c) Legal constraints 12
8. Institutions managing the foreign currency debt
(a) Ministry of Finance 51
(b) Jointly by the Ministry of Finance and the Central Bank 30
(c) Central Bank 11
(d) Independent Debt Office 9
9. Coordination of both public and private debt
(a) Ministry of Finance 35
(b) Jointly by the Ministry of Finance (MOF) and the Central Bank 24
(CB)
(c) Partly by MOF and partly and independently by the Central Bank 24
(d) Debt Management Committee 18
10. Highest authority for approval of foreign currency debt Dom. debt Ext.Debt
(a) Finance minister/ Governor of the Central Bank 72 49
(b) Parliament 6 21
(c) Interministerial board 8 12
(d) President/ Prime Minister 6 9
(e) DG of independent authority 8 9
11. Average time taken for approval of external debt
(a) One day or less 10
(b) Less than a week 13
(c) More than a week, but less than three months 65
(d) More than three months 13
12. Management of Contingent liabilities
(a) Sub-national entities are allowed to raise their own funding abroad 69
(b) Central govt provides explicit guarantees for IBRD loans 68
(c) Central govt bears fully the exchange rate risk for IBRD loans 41
(d) Central govt shares partially the exchange rate risk 11
13. Efficiency of Middle Office
(a) Use of Market Information system (MIS) 76
(b) Access to internet 91
(c) No Middle Office Unit 43
(d) Distinct Middle Office Unit 43
(e) Middle Office placed under the direction of the Front Office 3
14. Main constraints for external debt management
(a) Lack of proper organizational structure 31
(b) Macroeconomic risk 14
(c) Lack of technical staff in the middle office 12
(d) Lack of technical staff in the back office 6
(e) Lack of legal framework 6
(f) Limited local debt market 6
Source: Fred Jensen (2000) as given in World Bank (2000)
21
4 The IMF Institutional Framework Guideline
a) Governance. The IMF Institutional Framework Guideline states as follows: “The legal
framework should clarify the authority to borrow and to issue new debt, invest and
undertake transactions on the government’s behalf. Sound governance practices are an
important component of sovereign debt management given the size of the government
portfolios……..The organizational framework for debt management should be well
specified, and ensure that the mandates and roles are well articulated.”
Governments should have in place legislation dealing with the powers to borrow, invest,
issue guarantees, and to undertake related transactions on behalf of the government
subject to limits on annual and overall outstanding indebtedness. In this way the need to
obtain specific authorisations from Parliament for individual transactions is avoided
(although there may be occasions when this is rightly required, for example, due to the
size or nature of transaction). Usually the authority to borrow will be granted to the
Minister of Finance and he/she is in some way accountable to Parliament. The Minister
will then delegate certain powers to the debt managers.
b) Internal operational controls. The IMF Institutional Framework Guideline also deals
with the management of internal operations. “Risks of government losses from
inadequate operational controls should be managed according to sound business
practices, including well articulated responsibilities for staff and clear monitoring and
control policies and reporting arrangements”. The Guideline proceeds to talk of the need
for a code-of-conduct, conflict of interest guidelines, and business recovery procedures.
4.1 Best Practices
a) Governance. The IMF Guidelines are clear on the trends in respect of establishing an
institutional framework, a debt management strategy, and a risk management framework.
However, they do not contain recommendations as to whether these matters should be
covered by legislation aside from the institutional framework. When looking at
international best practices, it seems clear that in most cases the basic rules for the
institutional framework are set down by law, but not the existence of an administrative
structure involving front, middle or back offices. This is dealt with either by regulation or
by internal ministerial policy.
However, the power of the Minister of Finance to borrow is usually clearly stated (see,
for example, article 47 (1) of the New Zealand Law and article 37 and 43 of the Poland
Law, quoted in the Annex).
In many countries (e.g., Brazil, India, Ireland, New Zealand and Poland4) the role of
Parliament is limited to approving the budget and not to separately approving specific
4
For example, the Union Budget of India provides estimates of provisions for externally aided projects as a
whole for the budget year, and also the actual central assistance provided for the externally aided projects
in Sub-National governments during last three years preceding the budget year.
22
projects or financing agreements. In some cases such as Poland and India long-term
investment projects are listed separately as part of the budget.
b) Internal operational controls. International experience clearly demonstrates that the

debt management office is usually located in the Ministry of Finance. There are only a
few exceptions where this is not the case. The debt office is often set up as separate entity
within the Finance Ministry or the Treasury with varying degrees of autonomy. A few
countries have specific laws dealing with the establishment of the debt management unit
(Ireland, for example, the National Treasury Management Agency Act of 1990) but this
law does still not deal with its internal structure. In most other countries, the units in
question, such as the Public Debt Department in Poland or the Debt Management Office
in the UK, there is no legislation establishing the debt management unit and the office set
up by way of internal ministerial decision5. In addition, it is not usual for legislation to
structure the office, for example, by setting out the establishment and roles of front,
middle and back offices. This is dealt with in other ways, either by regulation or internal
ministerial policy or administrative decision. Likewise code-of-conducts, conflict of
interest guidelines, and business recovery procedures are set up internally and are not the
subject of legislation.
5. The IMF Transparency and Accountability Guideline
5.1 Issues
The IMF Transparency and Accountability Guideline states as follows: “The allocation
of responsibilities among the minister of finance, the central bank…should be publicly
disclosed…The objectives for debt management should be clearly defined and publicly
disclosed…The public should be provided with information on the past, current and
projected budgetary activity including its financing, and the consolidated financial
position of the government…The government should regularly publish information on the
stock and composition of its debt...Debt management activities should be audited
annually by external auditors.”
5.2 Best Practices
The IMF Guidelines in general demonstrate clearly the trend in the world to greater
transparency and accountability. All countries covered by the Guidelines have high levels
of transparency and accountability. The amount of information published does, however,
vary from country to country.
For example, in New Zealand the level of publication is very high with the publication of
a fiscal strategy report, a statement on the long-term fiscal position, a budget policy
statement, and fiscal updates (articles 26I, 26J, 26N, 26X of the New Zealand Law); in
India under the Fiscal Responsibilility and Budget Management Act, the central
government is required to lay before both houses of Parliament a Medium Term Fiscal
5
See www.dmo.gov.uk for more information on the UK debt management office. See also
www.nzdmo.govt.nz for information on the New Zealand debt management office.
23
Policy Statement, a Fiscal Policy Strategy Statement and a Macro Economic Framework
Statement along with the Annual Financial Statement and Demand for Grants; in Poland,
the following (inter alia) are published as required by the Public Finance Act in addition
to the budget itself - annual reports on the finances and activities of units belong to the
public finance sector, aggregate data on public finances, amount of state debt, un-matured
commitments due to guarantees issued by the state, certain financial ratios such as GDP
to public debt, the deficit etc (articles 11 and 12 of the Poland Law).
In the Polish law there are six articles and 21 sub-articles under the heading Openness
and Transparency of Public Finances. There are 43 articles dealing with liability for
violating the disciplinary rules set up for public finance. In the Brazil Law (article 32 §
4), the public must have access to the “centralized and electronic record of the internal
and external public debts”. In addition (article 54), various instruments of “fiscal
management transparency” must be disclosed in the electronic media, including “plans,
budgets, and Budgetary Directives Laws, Summary Budget Execution Report and Fiscal
Management Report”.
6 The IMF Debt Management Objectives and Coordination Guideline
6.1 Issues
The IMF Debt Management Objectives and Coordination Guideline states as follows:
“The main objective of public debt management is to ensure that the government’s
financing needs and its payment obligations are met at the lowest possible cost over the
medium to long run, consistent with a prudent degree of risk.” “Debt managers, fiscal
policy advisers and central bankers should share an understanding of the objectives of
debt management, fiscal and monetary policies…”
6.2 Best Practices
a) Debt Management Objectives The Guideline recommends the introduction of well

articulated objectives. However in most of the countries the objectives of debt
management are not clearly stated in legislation. Indeed it is probably true that the
number of countries that provide for this in their law is in a minority. Objectives are set
out in the Indian and New Zealand legislation and are quoted in Annex (Preamble of the
India Law and Article 26G of the New Zealand Law). In most cases, however, debt
management objectives are stated in other documents such as strategy policy statements
(see Polish objectives taken from a debt management strategy document issued by the
Ministry of Finance and UK objectives contained in a document issued by the UK Debt
Management Office, quoted in Annex).
b) Coordination. As stated above, the IMF Guideline recommends that there be good
coordination between the fiscal and monetary policy advisers and the debt management
function. But this is not usually a matter dealt within legislation, rather an operational
matter as agreed by the respective authorities.
24
ANNEX
EXAMPLE TEXTS FROM LAWS AND RELATED DEBT MANAGEMENT

DOCUMENTS OF SELECTED COUNTRIES
5. Brazil (Fiscal Responsibility Law of 4 May 2000)
Article 4 § 1. The Budgetary Directives Law must enclose a Fiscal Target Appendix, which
will set annual targets, in current and constant values, for revenues and expenditures, nominal
and primary results, and the public debt, for the current and for the two subsequent years.
Article 4 § 3. The Budgetary Guidelines must enclose a Fiscal Risk Appendix, evaluating
contingent liabilities and other risks that may affect public accounts, and detailing the
measures to be taken, should such occur.
Article 32. The Ministry of Finance must verify the compliance with the limits and conditions
for the contracting of credit operations by each Member of Federation as well as by any
enterprise directly or indirectly controlled by them.
Article 32 § 4. Without prejudice to the specific responsibilities of the Federal Senate and of
the Central Bank of Brazil, the Ministry of Finance must maintain a centralized and updated
electronic record of the internal and external public debts, guarantying public access to the
information, which must include:
I — charges and contracting conditions;
II — updated balances and limits for the consolidated and securities debt, credit operations
and guarantees.
Article 54. The instruments of fiscal management transparency, which must be widely
disclosed, even in electronic public media, include: plans, budgets, and Budgetary Directives
Laws; rendering of accounts and respective prior statement of opinion; Summary Budget
Execution Report and Fiscal Management Report; and the simplified versions of these
documents. (Article 48)
At the end of each four-month period, the Heads of the Branches and agencies mentioned in
Article 20 must issue a Fiscal Management Report, to be signed by:
I- the Head of the Executive Branch;
II- the President and other members of the Board or equivalent decision-making
body, pursuant to the internal bylaws of the Legislative Branch organs;
III- Presidents of Courts and other members of the Board or equivalent
decision-making body, pursuant to the internal bylaws of the Judiciary
Branch Organs;
IV- Head of the Office of the Public Prosecutor of the Federal government and of
the States.
Article 55. The Report must contain
I — a comparison between the limits set in this Supplementary Law and the following
amounts:
a) total personnel expenditures, specifying those with inactive personnel and
pensioners;
b) consolidated and securities debt;
c) guarantees granted;
d) credit operations, including those based on revenue anticipation;
e) expenditures mentioned in Article 4, item II;
II — indication or corrective measures taken or to be taken in case any of the limits is
exceeded;
III— statements, in the last four-month period:
25
a) of the amount of available financial resources on December 31;
b) of the amounts recorded in outstanding commitments or expenditures:
1) liquidated;
2) committed but not liquidated, recorded therein because they meet one of
the conditions set in Article 41, item II;
3) committed but not liquidated, recorded up to the limit of the cash
balance;
4) not recorded therein due to lack of available financial resources, for
which the respective commitments have been cancelled;
c) of the compliance with the provision of Article 38, item II, and item IV, b).
1§ The report issued by the Heads of the organs mentioned in Article 54, items II, III and IV,
must contain only the information relating to item 1, a,), and the documents listed in
items II and III.
2§. The report must be published within 30 days after the end of the base period, and widely
disclosed to the public, including by electronic media.
6. India (Fiscal Responsibility and Budget Management Act of 26 August 2003)
Preamble. An Act to provide for the responsibility of the Central Government to ensure inter-
generational equity in fiscal management and long-term macro-economic stability by achieving
sufficient revenue surplus and removing fiscal impediments in the effective conduct of monetary
policy and prudential debt management consistent with fiscal sustainability through limits on the
Central Government borrowings, debts and deficits, greater transparency in fiscal operations of
the Central Government and conducting fiscal policy in a medium-term framework and for
matters connected therewith or incidental thereto.
Article 3.1. The Central Government shall lay each financial year before both Houses of
Parliament the following statements of fiscal policy along with the annual financial statement and
demands for grants, namely:
a) The Medium-term Fiscal Policy Statement;
b) The Fiscal Policy Strategy Statement;
c) The Macro-economic Framework Statement.
Article 3.4. The Fiscal Policy Strategy Statement shall, inter alia, contain:
d) the policies of the Central Government for the ensuing financial year relating
to taxation, expenditure, market borrowings and other liabilities, lending and
investment, pricing of administered goods and services, securities and
descriptions of other activities such as underwriting and guarantees which
have potential budgetary implications;
e) the strategic priorities of the central Government for the ensuing financial
year in the fiscal area,
f) the key fiscal measures and rationale for any major deviation in fiscal
measures pertaining to taxation, subsidy, expenditure, administered pricing
and borrowings;
g) an evaluation as to how the current policies of the Central Government are in
conformity with the fiscal management principles set out in section 4 and the
objectives set out in the Medium-term Fiscal Policy Statement.
Article 5.6.1 The Central Government shall take suitable measures to ensure greater
transparency in its fiscal operations in the public interest and minimize as far as
practicable, secrecy in the preparation of the annual financial and demands for grants.
Article 5.6.2. In particular, and without prejudice to the generality of the foregoing
provision, the Central Government shall, at the time of presentation of annual financial
26
statement and demands for grants, make such disclosures and in such form as shall be
prescribed.
7. Ireland (National Treasury Management Agency Act, 1990)
Article 5 (1). The Government may by order delegate to the Agency the functions of the
Minister specified in the First Schedule and any other functions of the Minister in relation
to the management of the national debt or the borrowing of moneys for the Exchequer
that the Minister considers appropriate and are specified in the order.
Article 5 (2)(a). Without prejudice to the generality of subsection (1), when ever an order
under subsection (1) is in force, the Agency shall, if and in so far as the order so declares,
have the following functions:
(i) the preparation and the submission to the Minister as soon as may be in each year
of a scheme indicating, as respects the moneys proposed to be borrowed by the
Agency on behalf of the Minister for the Exchequer in that year, the proportion
thereof proposed to be borrowed in the currency of the State, in respect of that
year, the first such scheme being in respect of the year following that in which the
establishment day falls,
(ii) the review, and, where appropriate, the revision, from time to time as occasion
requires, of schemes prepared pursuant to subparagraph (i) and the submission of
any such revision to the Minister,
(iii) the determination of the terms and conditions on which moneys, whether in the
currency of the State or in any other currency, arc borrowed by the Agency on
behalf of the Minister for the Exchequer,
(v) Advising the Minister, whenever he so requests, in relation to the borrowing of
moneys by persons whose borrowing of moneys is subject to the consent of the
Minister, the timing of such borrowing and the terms and conditions thereof,
(vi) Advising the Minister whenever he so requests, in relation to -

(I) The management of the national debt and matters connected therewith,
(vii) advising the Minister in relation to the borrowing (whether actual or proposed) of
moneys in the name or on behalf of the Minister for the Exchequer, the total of
such borrowings and the implications for, and effect on, the national finances and
the economy generally of differ rent totals of such borrowings,
8. New Zealand (Fiscal Responsibility Act of 1994,

now part of the Public Finance Act of 1989)
Article 26G. Principles of Responsible fiscal management
(1) The Government must pursue its policy objectives in accordance with the following
principles (the principles of responsible fiscal management):
(a) reducing total debt to prudent levels so as to provide a buffer against factors that
may impact adversely on the level of total debt in the future by ensuring that, until those levels
have been achieved, total operating expenses in each financial year are less than total operating
expenses do not exceed total operating revenues; and
(b) once prudent levels of total debt have been achieved, ensuring that, on average,
over a reasonable period of time, total operating expenses do not exceed total operating revenues;
and
27
(c) achieving and maintaining levels of total net worth that provide a buffer against
factors that may impact adversely on total net worth in the future; and
(d) managing prudently the fiscal risks facing the Government; and
(e) pursuing policies that are consistent with a reasonable degree of predictability
about the level and stability of tax rates for future years.
(2) However, the Government may depart from the principles of responsible fiscal
management if:
(a) the departure from those principles and
(b) the Minister, in accordance with this Act, states—
(i) me reasons for the departure from those principles; and
(ii) the approach the Government intends to take to return to those principles;
and
(iii) the period of time that the Government expects to take to return
to those principles.
Article 26I. Fiscal strategy report
(1) The Minister must, in each financial year and in accordance with subsection 2, present to
the House of Representatives a report on the Government’s fiscal strategy.
Article 26J. Contents of fiscal strategy report - long term objectives
The fiscal strategy report must:
(a) state the Government’s long-term objectives for fiscal policy and, in particular,
for the following variables:
(i) total operating expenses:
(ii) total operating revenues:
(iii) the balance between total operating expenses and total operating
revenues:
(iv) the level of total debt:
(v) the level of total net worth; and
(b) explain how those long-term objectives accord with the principles of responsible
fiscal management; and
(c) State the period to which those long-term objectives relate (which must be a
period of 10 or more constructive financial years commencing with the financial
year to with the fiscal strategy report relates).
Article 26N. Statement on long-term fiscal position
(1) Before the end of the second financial year after the commencement of this
section and then at intervals not exceeding 4 years,
(a) the Treasury must prepare a statement on the long-term fiscal position
;and
(b) the Minister must present each statement to the House of Representatives.
(2) The Statement must :
(a) relate to a period of at least 40 consecutive financial years commencing
with the financial year in which the statement is prepared; and
(b) be accompanied by:
28
(i) a statement of responsibility signed by the Secretary stating that
the Treasury has, n preparing the statement under subsection (1),
used its best professional judgments about the risks and the
outlook; and
(ii) a statement of all significant assumptions underling any
projections included in the statement under subsection (1).
Article 26Q. Fiscal forecasts
(1) The fiscal forecasts contained in the economic and fiscal updates prepared under
section 26O must for each of the 3 financial years to which they relate, include
forecast financial statements.
(2) In addition to the forecast financial statements required by section (1), the fiscal
forecasts must include - :
(a) a statement of borrowings that reflect the forecast borrowing activities for
each of those financial years:
(b) …….
(3) The fiscal forecasts must also include -:
(a) …….
(b) a statement of specific risks of the Government as at the day on which the
forecast financial statements are finalised….
Article 26U Disclosure of policy decisions and other circumstances that may influence future
fiscal situations
(1) An economic and fiscal update prepared under section 26O…must incorporate to
the fullest extent possible…….all Government decisions and all other
circumstances that may have a material effect on the fiscal and economic outlook.
Article 26X. The Minister may arrange for the following to be published in advance of their
being presented to the House of Representatives:
(a) a budget policy statement under section 26M(1):
(b) a half-year economic and fiscal update under section 26S(1):
(c) a pre-election economic and fiscal update under section 26T(1).
Article 47. (1) The Minister can borrow on behalf of the Crown may borrow money if it
appears to the Minister to be necessary or expedient in the public interest to do so.
Article 54. For the purpose of section 47, the Minister may borrow money on any terms and
conditions that the Minister thinks fit.
5-A Poland (Constitution)
Article 216. 4
Any contracting of loans as well as granting of guarantees and financial sureties by the State
shall be done in accordance with principles and procedures laid down by statute.
Article 216. 5
It shall be neither permissible to contract loans nor provide guarantees and financial sureties
which would engender a national public debt exceeding three-fifths of the value of the gross
domestic product. The method for calculating gross domestic product and national public
debt shall be specified by statute.
29
5-B Poland (Public Finance Act of 1998, as amended)
Article 8
The loan needs of the state budget shall be understood as the financial resources
necessary for financing the state budget deficit, repayment of commitments drawn earlier,
financing loans granted by the State Treasury and for performing other financial
transactions connected with the State Treasury debt.
Article 11
1. Public finances shall be open.
2. The openness of public finances shall be effected especially through the
following, except as provided under para. 3:
1). openness of the Sejm budgetary debate and budgetary debates of local
government units,
2). openness of the Sejm debate on the report on the execution of the state
budget and debates on the execution of budgetary reports of local
government units,
3). announcing publicly:
a) the sums of subsidies granted from the state budget and budgets
of local government units,
b) aggregate data concerning public finances by the Minister of
Finance,
4). making available annual reports concerning finances and the activity of
units belonging to the pubic finance sector.
3. Openness of public finances shall be excluded in the case of public funds the
origin or appropriation of which is considered to be state secrecy on the basis of
separate regulations or if this follows from international agreements.
4. Units of the public finance sector shall apply uniform rules of accounting.
Article 12.
The Minister of Finance shall announce by a statement in the Official Gazette of the
Republic of Poland, Monitor Polski:
1) the amount of:
a) the state public debt,
b) unmatured commitments due to guarantees extended by entities of the
public finance sector,
c) the debt of the State Treasury,
d) unmatured commitments due to guarantees extended by the State
Treasury,
2) the ratios of the following to the gross domestic product:
a) the amount of the state public debt,
b) the total amount of the state public debt increased by the amount of
predicted payments due to guarantees extended by entities of the public
finance sector, to the gross domestic product,
c) the amounts of the debt of the State Treasury,
d) the total amount of the debt of the State Treasury increased by the
amount of predicted payments due to guarantees extended by the State
Treasury , to the gross domestic product.
Article 37
30
1. The Minister of Finance shall perform control of the public finance sector with
regard to observance of the principle whereby the public debt, increased by the
amount of predicted payment under guarantees , may not exceed 3/5 of the value
of the annual gross domestic product.
2. The Minister of Finance shall perform control of the State Treasury debt for the
purpose of ensuring that the principle referred to in para. 1 is observed.
Article 38
1. The Minister of Finance shall draw up the strategy of management of the State
Treasury debt and the state public debt, containing the following in particular:
a) the macroeconomic stability of the economy and its capacity for
development,
b) security in financing the loan needs of the state budget,
c) the costs of servicing the Stale Treasury debt,
d) modelling the indebtedness structure,
e) the impact of debt transactions on the domestic financial market,
2. The Minister of Finance shall draw up a three-year strategy of influencing the
public finance sector.
3. The Minister of Finance shal1 put forward the documents referred to in para. 1 to
the Council of Ministers for approval.
4. After approving the documents referred to in para. 1, the Council of Ministers
shall put them forward to the Sejm together with a justification of the draft
Budgetary Act.
Article 40
For the purpose of financing the loan needs of the state budget referred to in art. 8, and in
connection with management of the State Treasury debt, the Minister of Finance shall be
authorized to:
1) draw financial commitments in the name of the State Treasury, especially through
the issue of securities and drawing loans and credits on the domestic and foreign
market,
2) repay the drawn commitments referred to in subpart. 1,
3) carry out other financial transactions connected with debt management, including
transactions related with derivative financial instruments.
Article 43
1. The State Treasury may draw loans and credits only for financing the needs
referred to in art. 8.
2. In the name of the State Treasury, loans and credits may be drawn only by the
Minister of Finance, except as provided under para. 3.
3. In the case of drawing a loan and credit by an international agreement in which it
is required that the body acting in the name of the borrower be the government,
the Council of Ministers shall authorize the Minister of Finance to sign the
agreement and shall define the conditions of executing it.
4. The amount at drawn loans and credits referred to in para. 1 may not exceed the
limit of debt increase defined in the Budgetary Act.
31
5-C Poland – Document entitled The Public Finance Sector,
Debt Management Strategy in the years 2006 –2008
The objective of the Strategy, which will govern the debt management, will remain as
follows: minimisation of debt servicing costs over the longer time horizon with accepted
limitations regarding the level of:
a) refinancing risk,
b) exchange rate risk,
c) interest rate risk,
d) state budget liquidity risk,
e) other risks, in particular credit risk and operational risk,
f) distribution of debt servicing costs over time.
6-A UK (Finance Act of 1998)
Article 155. (1) It shall be the duty of the Treasury to prepare and lay before Parliament
a code for the application of the key principles to the formulation and implementation of-
(9) fiscal policy, and

(b) policy for the management of the National Debt.
(9) The key principles are transparency, stability, responsibility, fairness and
efficiency.
(9) The code prepared under this section must set out, in particular-
(a) the Treasury’s understanding of what each of the key principles involves
in relation to fiscal policy and policy for the management of the National
Debt;
(b) the provision appearing to the Treasury to be necessary for the purposes
of so much of section 156 below as refers to the code; and
(c) the methods and principles of accounting to be applied in the preparation
of accounts, forecasts and other documents used for the purposes of the
formulation and implementation of the policies mentioned in subsection (1)
above.
(4) Where any code has been laid before Parliament under subsection (1) above, the
Treasury may from time to time modify that code; but, if they do so, they shall lay the
modified code before Parliament.
(5) A code (including a modified code) that has been laid before Parliament under this
section shall not come into force until it has been approved by a resolution of the House
of Commons.
(6) It shall be the duty of the Treasury to publish, in such manner as they think fit, any
code which has been laid before Parliament and approved by the House of Commons
under this section.
(7) The first code to be laid before Parliament under this section shall be so laid before
31st December 1998.
32
Article 156. (1) It shall be the duty of the Treasury, for each financial year, to prepare
and lay before Parliament the following documents, that is to say-
(9) a Financial Statement and Budget Report;

(b) an Economic and Fiscal Strategy Report; and
(9) ©a Debt Management Report.
(9) The preparation and laying before Parliament of the Financial Statement and Budget
Report for any financial year shall be preceded, in such cases and by such period as
may be set out in the code for fiscal stability, by the preparation by the Treasury of a
document to be known as the Pre-Budget Report.
(9) The Treasury shall lay before Parliament any Pre-Budget Report prepared by them
under subsection (2) above.
(4) The contents of the documents, which the Treasury are required to prepare and lay
before Parliament under this section, and the occasions on which those documents are to
be so laid, must conform to any provision about those matters made by the code for fiscal
stability.
(5) It shall be the duty of the Comptroller and Auditor General to examine and report to
the House of Commons on such of the conventions and assumptions underlying the
preparation by the Treasury of the documents prepared by them under this section as, in
accordance with the code for fiscal stability, are submitted to him by the Treasury for his
examination.
(6) A report by the Comptroller and Auditor General under subsection (5) above must be
made at the same time as, or as soon as reasonably practicable after, the laying before
Parliament of the documents to which it is referable.
(7) It shall be the duty of the Treasury to secure the publication in the manner required by
the code for fiscal stability of any document, which they have laid before Parliament
under this section.
(8) In this section “the code for fiscal stability” means the code for the time being in force
under section 155 above.
(9) The first financial year for which the documents mentioned in subsection (1) above
are required to be prepared and laid before Parliament is the year beginning with 1 st April
1999.
6-B UK – Debt Management Office: Strategic Objectives 2005-06
1. To develop, provide advice on and implement [the government’s] debt management

strategy.
2. To develop, provide advice on and implement [the government’s] cash management
requirement.
3. To advise on the development and implementation of [the government’s] strategy for
managing [the government’s] balance sheet to secure sound public finances.
33
4. To develop and deliver its fund management responsibilities and, in particular, to provide
a cost-effective service for stakeholders.
5. To provide a cost-effective lending service to local authorities……
6. To resource, staff and manage the [debt management office] efficiently and cost-
effectively to ensure key responsibilities are achieved.
7. To manage, operate and develop an appropriate risk and control framework.
8. in addition to these objectives, the [debt management office] seeks to support [the
government’s] Objective III „Promote efficient, stable and fair financial markets, for their
users and the economy”, and VII “Achieve world-class standards or financial
management in government respectively. The [debt management office] intends to do this
by supporting efficiency, stability, fairness and innovation in the financial markets and in
working towards best domestic and international practice in the way that it delivers its
objectives.
34
Selected References
Das, Tarun (1999a) East Asian Economic Crisis and Lessons for External Debt Management,
pp.77-95, in External Debt Management, ed. by A. Vasudevan, April 1999, RBI, Mumbai,
India.
_______ (1999b) Fiscal Policies for Management of External Capital Flows, pp. 194-207, in
Corporate External Debt Management, edited by Jawahar Mulraj, December 1999, CRISIL,
Bombay.
_______ (2000) Sovereign Debt Management in India, pp.561-579, in Sovereign Debt

Management Forum: Compilation of Presentations, World Bank, Washington D.C.
_______ (2002a) Implications of Globalisation on Industrial Diversification in Asia, pp.ix+1-86,

UN Publications Sales No.E.02.II.F.52, March 2002, ESCAP, Bangkok.
_______ (2002b) Management of Contingent Liabilities in Philippines- Policies, Processes,

Legal Framework and Institutions, pp.1-60, March 2002, World Bank, Washington D.C.
______ With Raj Kumar, Anil. Bisen and M.R. Nair (2002) Contingent Liability
Management- A Study on India, pp.1-84, Commonwealth Secretariat, London
_______ (2003) Management of Public Debt in India, pp.85-110, in Guidelines for Public Debt
Management: Accompanying Document and Selected Case Studies, 2003, IMF and the World
Bank, Washington D.C.
_______ (2004) Financing International Cooperation- A Case Study for India, pp.1-46, Office of
Development Studies. March 2004, UNDP, UN Plaza, New York.
________ (2005) Sustainable external debt management- International Best Practices, pp.1-46,
paper prepared for UN-ESCAP, Bangkok, September 2005..
________ (2006a) Management of External Debt- International Experiences and Best
Practices, Best Practices series No.9, UNITAR, Geneva.
________ (2006b Management of Public Debt- International Experiences and Best

Practices, Best Practices series No.10, UNITAR, Geneva
ESCAP (2005) Implementing the Monterrey Consensus in the Asian and Pacific Region-
Achieving Coherence and Consistency, United Nations, New York, 2005.
Government of India, Ministry of Finance (2005) India’s External Debt- A Status Report,
June 2005, New Delhi.
International Monetary Fund (2003) External Debt Statistics- Guide for Compilers and Users,
2003, IMF, Washington D.C.
_______ And the World Bank (2003) Guidelines for Public Debt Management: Accompanying
Document and Selected Case Studies, 2003, Washington D.C.
35
Jensen, Fred (2000) Trends in sovereign debt management in IBRD countries over the past two
years, pp.14-25, in Sovereign Debt Management Forum: Compilation of Presentations,
November 2000, World Bank, Washington D.C.
McCray, Peter (2000) Organisational models for sovereign debt management, pp.297- 310, in
Sovereign Debt Management Forum: Compilation of Presentations, November 2000, World
Raj Kumar (1999) Debt Sustainability Issues- New Challenges for Liberalising Economies,
pp.53-76, in External Debt Management, ed. by A. Vasudevan, April 1999, RBI, Mumbai,
India.
Reserve Bank of India (RBI) (1999) External Debt Management- Issues, Lessons and
Preventive Measures, pp.1-372, edited by A. Vasudevan, RBI, Mumbai, April 1999.
Sullivan, Paul (2000) The design and use of strategic benchmarks in managing risk, pp.175-191,
in Sovereign Debt Management Forum: Compilation of Presentations, November 2000, World
World Bank (2000) Sovereign Debt Management Forum: Compilation of Presentations,

November 2000, World Bank, Washington D.C.
_______ (2005a) World Development Indicators 2005, World Bank, Washington. DC.
_______ (2005b) Global Development Finance 2005, World Bank, Washington. DC.
36

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External Debt Management Best Practices

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Sustainability of External Debt - Conceptual Issues

And International Best Practices

Dr. Tarun Das1,

Dr. Tarun Das,

2. Risk and Debt Sustainability Measurements

3. Management of External Debt

4 The IMF Institutional Framework Guideline

5. The IMF Transparency and Accountability Guideline

6 The IMF Debt Management Objectives and Coordination Guideline

1. Brazil (Fiscal Responsibility Law of 4 May 2000)

Dr. Tarun Das,

1.1 Definition of external debt

1.2 Debt Sustainability and Fiscal Deficit

1.3 Debt Sustainability and Current Account Deficit

1.4 Liquidity versus Solvency

2 Debt Sustainability Measurements

2.1 Economy wide model in ALM framework

2.2 Different Types of Risk

(A) External market based risks which include

(B) Operational and Management Risks

2.3 Risk Management

Table-1 Policies for Risk Management

Type of Risk Risk Management Policies

1. Liquidity risk (a) Monitor debt by residual maturity

2.4 Sustainability Indicators

Table-2: Debt Sustainability Indicators

2.5 World Bank Classification of External debt

Table-3 Cross classification of countries by income level and indebtedness

Indebtedness → Severely Indebted Moderately Indebted Either Less Indebted

3. Management of External Debt -

3.1 Governance of External Debt

(i) The Front office

(ii) The Middle office

(iii) Back Office

(iv) Head Office

The above arrangements are supplemented with establishment of a risk management

3.4 Best institutional practices

3.4.1 New Zealand

(a) ALM framework is conceptually appealing but requires huge data.

The Australian Office of Financial Management (AOFM) established on July 1, 1999 is

A comprehensive risk management framework encompassing funding, market, credit,

The National Treasury Management Agency (NTMA) in Ireland is an independent public

At the beginning of the year, NTMA signs a Memorandum of Understanding (MOU)

3.4.4 European Union

Individual countries within European Union have developed independent debt

3.5 World Bank Survey on Sovereign Debt Management

Table-5 World Bank Survey on Second Sovereign Debt Management Forum

Items % in total respondents

1. Public Debt management objectives and priorities

(a) To minimize financial costs and risks 38

4.1 Best Practices

b) Internal operational controls. International experience clearly demonstrates that the

5. The IMF Transparency and Accountability Guideline

5.2 Best Practices

6 The IMF Debt Management Objectives and Coordination Guideline

6.2 Best Practices

a) Debt Management Objectives The Guideline recommends the introduction of well

EXAMPLE TEXTS FROM LAWS AND RELATED DEBT MANAGEMENT

5. Brazil (Fiscal Responsibility Law of 4 May 2000)

6. India (Fiscal Responsibility and Budget Management Act of 26 August 2003)

7. Ireland (National Treasury Management Agency Act, 1990)

(vi) Advising the Minister whenever he so requests, in relation to -

8. New Zealand (Fiscal Responsibility Act of 1994,