1 Introduction

International Monetary Fund
Published Date:
August 2003
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A government’s debt portfolio is usually the largest financial portfolio in the country. It often contains complex financial structures and can create substantial balance-sheet risk for the government. Large and poorly structured debt portfolios also make governments more vulnerable to economic and financial shocks and have often been a major factor in economic crises. Recognizing the important role that public debt management can play in helping countries cope with economic and financial shocks, the International Monetary and Financial Committee (IMFC)1 requested that staff from the International Monetary Fund and World Bank work together in cooperation with national debt management experts to develop a set of guidelines on public debt management to assist countries in their efforts to reduce financial vulnerability. The IMFC’s request, which was endorsed by the Financial Stability Forum, was made as part of a search for broad principles that could help governments improve the quality of their policy frameworks for managing the effects of volatility in the international monetary and financial system.

By involving national debt management authorities in the preparation of the guidelines, the process sought to strengthen countries’ sense of ownership of them and helped to ensure that they are in line with sound practice. Government debt managers from about 30 countries provided input to an initial draft that was discussed by the Executive Boards of the IMF and World Bank in July 2000. Following these discussions, more than 300 representatives from 122 countries attended five outreach conferences on the guidelines in Abu Dhabi, United Arab Emirates; Hong Kong Special Administrative Region; Johannesburg, South Africa; London, United Kingdom; and Santiago, Chile.2 The feedback provided was taken into account in the final version that was approved by the Executive Boards of the two institutions in March 2001, and endorsed by the IMFC and the Development Committee3 at their meetings in April 2001. Since then, the guidelines have been available on the IMF and World Bank web sites in five languages (English, French, Spanish, Russian, and Arabic), and a hard copy version was published by the two institutions in September 2001.4 The guidelines are summarized in Appendix I.

In the course of the Board discussions, the Executive Directors of the IMF and the World Bank asked their staff to prepare an accompanying document to the guidelines that would contain sample case studies of countries that are developing strong systems of public debt management. At the same time, the Boards requested that this report should not expand or add to the guidelines, but instead delineate the experiences of various countries in the form of case studies. In response, staff from the IMF and the World Bank have prepared this document, which contains 18 country case studies to illustrate how a range of countries from around the world and at different stages of economic and financial development are developing their capacity in debt management in a manner consistent with the guidelines. The diverse nature of the countries represented in the case studies is illustrated by the economic and financial indicators presented in Table I.1. The experience of these countries should offer some useful practical suggestions of the kinds of steps that other countries could take as they strive to build their capacity in government debt management.

Table I.1.Selected Macroeconomic and Financial Indicators for Case Study Countries in 2001
Standard and Poor’s long-term debt ratings
Nominal GDP per capita (US$)General government net debt (%GDP)Broad money (M2) (%GDP)Stock market capitalization (1999 data) (%GDP)Foreign currencyLocal currencyMoody’s long-term debt ratings
New Zealand12,687188952AA+AAAAa2
South Africa2,49043a60200BBB–A–Baa2
United Kingdom23,7653195203AAAAAAAaa
United States36,7164253182AAAAAAAaa

Gross debt as a percent of GDP.

M2 data are not available at the national level for members of the European Monetary Union.

End of fiscal year 2001–02.

Source: IMF World Economic Outlook, Bankscope databases, and IMF staff estimates.

Gross debt as a percent of GDP.

M2 data are not available at the national level for members of the European Monetary Union.

End of fiscal year 2001–02.

Source: IMF World Economic Outlook, Bankscope databases, and IMF staff estimates.

In line with the process adopted for the guidelines, the preparation of the accompanying document has sought to foster countries’ sense of ownership of the product and ensure that the descriptions of individual country practice and the lessons learned are well grounded. The 18 country case studies were prepared by government debt managers coordinated by IMF and World Bank staff. They cover both their domestic debt management and foreign financing activities. After collecting the information and preparing initial drafts of the case studies, the officials involved in preparing the case studies were invited to an outreach conference in Washington in September 2002 to discuss the conclusions drawn from the cases by IMF and World Bank staff, as well as the document as a whole.

What Is Public Debt Management and Why Is It Important?

Public debt management is the process of establishing and executing a strategy for managing the government’s debt to raise the required amount of funding, pursue its cost/risk objectives, and meet any other public debt management goals the government may have set, such as developing and maintaining an efficient and liquid market for government securities.

In a broader macroeconomic context for public policy, governments should seek to ensure that both the level and the rate of growth in their public debt are fundamentally sustainable over time and can be serviced under a wide range of circumstances while meeting cost/risk objectives. Government debt managers share fiscal and monetary policy advisers’ concerns that public sector indebtedness remains on a sustainable path and that a credible strategy is in place to reduce excessive levels of debt. Debt managers should ensure that the fiscal authorities are aware of the impact of government financing requirements and debt levels on borrowing costs.5 Examples of indicators that address the issue of debt sustainability include the public sector debt-service ratio and ratios of public debt to GDP and to tax revenue.6

Every government faces policy choices concerning debt management objectives, its preferred risk tolerance, which part of the government balance sheet those managing debt should be responsible for, how to manage contingent liabilities, and how to establish sound governance for public debt management. On many of these issues, there is increasing convergence in the global debt management community on what are considered prudent sovereign debt management practices that can also reduce vulnerability to contagion and financial shocks. These include (a) recognition of the benefits of clear objectives for debt management; (b) weighing risks against cost considerations; (c) the separation and coordination of debt and monetary management objectives and accountabilities; (d) a limit on debt expansion; (e) the need to carefully manage refinancing and market risks and the interest costs of debt burdens; (f) the necessity of developing a sound institutional structure and policies for reducing operational risk, including clear delegation of responsibilities and associated accountabilities among government agencies involved in debt management; and (g) the need to carefully identify and manage the risks associated with contingent liabilities.

Public debt management problems often originate in the lack of attention paid by policymakers to the benefits of having a prudent debt management strategy and the costs of weak macroeconomic management and excessive debt levels. In the first case, authorities should pay greater attention to the benefits of having a prudent debt management strategy, framework, and policies that are coordinated with a sound macropolicy framework. In the second, inappropriate fiscal, monetary, or exchange rate policies generate uncertainty in financial markets regarding the future returns available on local currency–denominated investments, thereby inducing investors to demand higher risk premiums. Particularly in developing and emerging markets, borrowers and lenders alike may refrain from entering into longer-term commitments, which can stifle the development of domestic financial markets and severely hinder debt managers’ efforts to protect the government from excessive rollover and foreign exchange risk. A good track record of implementing sound macropolicies can help to alleviate this uncertainty. This should be supplemented with appropriate technical infrastructure—such as a central registry and payments and settlement systems—to facilitate the development of domestic financial markets.

In addition, poorly structured debt in terms of maturity, currency, or interest rate composition and large and unfunded contingent liabilities has been important factors in inducing or propagating economic crises in many countries throughout history. For example, irrespective of the exchange rate regime, or whether domestic or foreign currency debt is involved, crises have often arisen because of an excessive focus by governments on possible cost savings associated with large volumes of short-term or floating-rate debt. This has left government budgets seriously exposed to changing financial market conditions, including changes in the country’s creditworthiness, when this debt has to be rolled over. Foreign currency debt also poses particular risks, and excessive reliance on foreign currency debt can lead to exchange rate or monetary pressures or both if investors become reluctant to refinance the government’s foreign currency debt. By reducing the risk that the government’s own portfolio management will become a source of instability for the private sector, prudent government debt management, along with sound policies for managing contingent liabilities, can make countries less susceptible to contagion and financial risk.

The size and complexity of a government’s debt portfolio often can generate substantial risk to the government’s balance sheet and to the country’s financial stability. As noted by the Financial Stability Forum’s Working Group on Capital Flows, “recent experience has highlighted the need for governments to limit the build-up of liquidity exposures and other risks that make their economies especially vulnerable to external shocks.”7 Therefore, sound risk management by the public sector is also essential for risk management by other sectors of the economy “because individual entities within the private sector typically are faced with enormous problems when inadequate sovereign risk management generates vulnerability to a liquidity crisis.” Sound debt structures help governments reduce their exposure to interest rate, currency, and other risks. Sometimes these risks can be readily addressed by relatively straightforward measures, such as lengthening the maturities of borrowings and paying the associated higher debt-servicing costs (assuming an upward-sloping yield curve), adjusting the amount, maturity, and composition of foreign exchange reserves, and reviewing criteria and governance arrangements for contingent liabilities.

There are, however, limits to what sound debt management policies can deliver in and of themselves. Sound debt management policies are no panacea or substitute for sound fiscal and monetary management. If macroeconomic policy settings are poor, sound sovereign debt management may not by itself prevent any crisis. Even so, sound debt management policies can reduce susceptibility to contagion and financial risk by playing a catalytic role for broader financial market development and financial deepening.

Purpose of the Guidelines

The guidelines are designed to assist policymakers in considering reforms to strengthen the quality of their public debt management and reduce their country’s vulnerability to domestic and international financial shocks. Vulnerability is often greater for smaller and emerging market countries because their economies may be less diversified, have smaller bases of domestic financial savings (relative to GDP), and less developed financial systems. They could also be more susceptible to financial contagion, if foreign investor exposures are significant, through the relative magnitudes of capital flows. As a result, the guidelines should be considered within a broader context of the factors and forces more generally affecting a government’s liquidity and the management of its balance sheet. Governments often manage large foreign exchange reserves portfolios, their fiscal positions are frequently subject to real and monetary shocks, and they can have large exposures to contingent liabilities and to the consequences of poor balance-sheet management in the private sector. However, irrespective of whether financial shocks originate within the domestic banking sector or from global financial contagion, prudent government debt management policies, along with sound macroeconomic and regulatory policies, are essential for containing the human and output costs associated with such shocks.

The guidelines cover both domestic and external public debt and encompass a broad range of financial claims on the government. They seek to identify areas in which there is broad agreement on what generally constitutes sound practices in public debt management. The guidelines focus on principles applicable to a broad range of countries at different stages of development and with various institutional structures of national debt management. They should not be viewed as a set of binding practices or mandatory standards or codes, nor should they suggest that a unique set of sound practices or prescriptions exists that would apply to all countries in all situations. The guidelines are mainly intended to assist policymakers by disseminating sound practices adopted by member countries in debt management strategy and operations. Their implementation will vary from country to country, depending on each country’s circumstances, such as its state of financial development. Heavily indebted poor countries (HIPCs) face special challenges in this regard.8 The terms and conditions surrounding debt relief provided to them typically include provisions that focus on the need to improve debt management practices in ways that are consistent with the guidelines (see Box I.1).

Building capacity in sovereign debt management can take several years, and country situations and needs vary widely. Their needs are shaped by the capital market constraints they face; the exchange rate regime; the quality of their macroeconomic, fiscal, and regulatory policies; the effectiveness of the budget management system; the institutional capacity to design and implement reforms; and the country’s credit standing. Capacity building and technical assistance therefore must be carefully tailored to meet stated policy goals, while recognizing the policy settings, institutional framework, technology, and human and financial resources that are available. The guidelines should assist policy advisers and decision makers involved in designing debt management reforms as they raise public policy issues that are relevant for all countries. This is the case whether the public debt comprises marketable debt or debt from bilateral or multilateral official sources, although the specific measures to be taken will differ, to take into account a country’s circumstances.

Box I.1.Applying the Guidelines to the HIPCs

The HIPC Initiative was launched by the World Bank and the IMF in 1996 (and later enhanced in 1999) as a comprehensive effort to eliminate unsustainable debt in the world’s poorest, most heavily indebted countries. Through the provision of debt relief to eligible HIPCs that show a strong track record of economic adjustment and reform, the initiative was designed to help these countries achieve a sustainable debt position over the medium term. Insufficient attention paid to public debt management is widely thought to have been one of the most important factors that contributed to the accumulation of unsustainable levels of debt in these countries. Together with sound overall macroeconomic policy settings, prudent debt management in the HIPCs remains central to ensuring a durable exit from the unsustainable debt burden.

A recent survey by staff of the World Bank and the IMF revealed that several very important weaknesses continue to exist in key aspects of debt management in the HIPCs, notably in the design of their legal and institutional frameworks, coordination of debt management with macroeconomic policies, new borrowing policy, and the human and technical requirements for performing basic debt management functions.a In the area of the legal framework, although most HIPCs have an explicit legal instrument governing the debt office and its functions, the legal framework is not always clearly defined and adequately implemented. In addition, transparency and accountability in debt management, including public access to debt information, require strengthening. Institutional responsibilities for debt management in many HIPCs are also not clearly defined and coordinated. Moreover, their debt management activities are undermined by a number of institutional weaknesses and low implementation capacity due to insufficient human, technical, and financial resources. To overcome these difficulties, a first step could be to implement clear and transparent legal and institutional frameworks. The guidelines and the governance lessons drawn from the case studies can help HIPCs strengthen their legal and institutional frameworks for debt management. For example, they highlight some ways in which borrowing authority can be delegated from the parliament and the council of ministers to debt managers with appropriate accountability mechanisms, the merits of centralizing debt management activities in a single unit, and some ways in which appropriate controls can be introduced to manage the operational risks associated with debt management activities. They also illustrate how some countries have taken steps to obtain more control over contingent liabilities issued in the name of the government.

Regarding policy coordination, the survey showed that fewer than half of the HIPCs have in place a comprehensive, forward-looking strategy focused on medium-term debt sustainability. Many do not regularly conduct a debt sustainability analysis, and very little coordination of information between debt offices and other agencies involved in macroeconomic management takes place. Clearly, coordination of debt management with macroeconomic policies, as well as regular conduct of debt sustainability analysis, are critical, not only as part of the requirements for the HIPC Initiative process, but also if these countries are not to relapse into an unsustainable debt position. In particular, close coordination among the budget, cash management, and planning functions and the debt management office is essential. Again, the guidelines and the lessons drawn from the case studies provide some insights into how they can develop debt management strategies that pay attention to the medium- to long-term implications of economic policies and the resulting implications for debt sustainability. For example, they show how various countries have built linkages among debt managers, cash managers, and monetary and fiscal policymakers to ensure that relevant information is regularly shared and their respective policies and operational activities are appropriately coordinated.

Unsustainable debt burdens in the HIPCs have also resulted from unsound policies regarding new borrowing even after benefiting from concessions, including rescheduling. To date, up to two-thirds of these countries still do not have in place a sound policy framework for new borrowing, a direct consequence of the fact that they have yet to develop a comprehensive debt strategy, and many lack complete information on the total debt they have incurred or guaranteed. Moreover, even though domestic debt is becoming an important aspect of fiscal sustainability in some low-income countries, including the HIPCs, underdeveloped domestic financial markets seriously limit the role of domestic debt in most HIPCs. If they are to ensure long-term sustainability beyond the HIPC Initiative completion point, however, they need to develop borrowing strategies that are clear, transparent, and enforceable and begin to develop a domestic debt market so that they can broaden the range of borrowing options available to them. The guidelines and the case studies offer some lessons on how they could implement a framework that they could not only use to develop an overall debt management strategy—including sound new borrowing policies—and develop their domestic debt markets, but also allow debt managers in these countries to identify and manage the trade-offs between the expected costs and risks in the government debt portfolio. For example, they highlight the benefits of using an asset and liability management (ALM) approach to assessing the debt service costs of different borrowing strategies in tandem with the financial characteristics of government revenues, expenditures, and financial assets. They encourage debt managers to stress test the results obtained so that debt strategy decision makers have an understanding of how the chosen strategy will perform in a variety of economic and financial settings. They also note how increased transparency in debt management activities and the choice of borrowing instruments can be used to promote the development of a liquid market for domestic government securities.

To be able to develop strong systems for debt management in a manner consistent with the guidelines, the HIPCs will continue to need technical assistance to build their debt management capacity. Long-term debt sustainability should be viewed not only in relation to the debt burden but also in terms of the structures, processes, and management information services required to manage the debt burden effectively. The HIPC Initiative process itself recognizes this by focusing on, among other things, the technical assistance requirements of HIPCs reaching the decision point. At the same time, the countries themselves must supplement the assistance efforts by ensuring that there are adequate numbers of motivated staff in debt offices that could benefit from technical assistance. In addition, full political support is critical to the success of any efforts to strengthen debt management capacity.

In general, the guidelines and the lessons drawn from the case studies should be useful for all countries striving to develop their policy frameworks and capacity for debt management, but they are particularly relevant for the HIPCs. For them, the guidelines and lessons drawn can not only facilitate achievement of the decision and completion points of the HIPC Initiative process, but, more important, they can help ensure that debt sustainability is maintained for many years to come.

a See International Development Association, “External Debt Management in Heavily Indebted Poor Countries,” Board Discussion Paper IDA/SecM2002-0148, (Washington), 2002.

The IMFC is an advisory body that reports to the IMF’s Board of Governors on issues regarding the management of the international monetary and financial system.


In addition, staff from the IMF and the World Bank participated in a seminar on debt and fiscal management in Whistler, Canada, attended by representatives from Western Hemisphere countries, which included a discussion of the draft guidelines.


The Development Committee of the Boards of Governors of the IMF and the World Bank advises the two Boards on critical development issues and on the financial resources required to promote economic development in developing countries.


International Monetary Fund and the World Bank, 2001, Guidelines for Public Debt Management Washington.


Excessive levels of debt that result in higher interest rates can have adverse effects on real output. See, for example, A. Alesina, M. de Broeck, A. Prati, and G. Tabellini, “Default Risk on Government Debt in OECD Countries,” Economic Policy: A European Forum (October 1992), pp. 428–63.


Guidelines for Public Debt Management, p. 1. For a discussion of indicators of external vulnerability for a country, see International Monetary Fund, Debt- and Reserve-Related Indicators of External Vulnerability, SM/00/65 (Washington), 2000.


Financial Stability Forum, Report of the Working Group on Capital Flows, (Basel), April 5, 2000, p. 2.


Forty-one countries are considered to be HIPCs. A list of the HIPCs and an overview of the HIPC Initiative can be found in International Monetary Fund and the World Bank, Debt Relief for Poverty Reduction: The Role of the Enhanced HIPC Initiative (Washington), 2001.

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