INSTITUTIONAL FRAMEWORK FOR PUBLIC SECTOR
BORROWING[1]
by Mr. Nihal Kappagoda
(Article Reference: Document No.17, September 2002)

Introduction

Efficient public sector borrowing in a country requires an effective and transparent legal and regulatory framework and organizational structure. The Guidelines for Public Debt Management[2] , a publication of the International Monetary Fund and World Bank, confirms that an effective governance structure for public debt management requires a clear legislative framework and well-defined organizational arrangements with the mandates of different agencies articulated to ensure that there is no overlap. Debt management operations should be supported by an accurate management information system which would enable analytical work to be undertaken as loan portfolios become more complex and governments wish to undertake debt and risk analyses. Sound debt management requires the conduct of annual audits to ensure comprehensive reporting on public debt. Staff working in debt offices should be required to work in a modern business environment with clear conflict-of-interest guidelines.

Definition of Public Sector Debt

In the aftermath of the Asian financial crisis, it became clear that the extent of government obligations go beyond its direct borrowings and guarantees issued to include unguaranteed borrowings of the public sector and a range of implicit guarantees. Consequently, there is a need for a more comprehensive coverage of public sector debt, at least for the purpose of collecting full and complete data on these obligations.

There are alternative definitions of public sector debt. In the World Debt Tables the World Bank[3] defines external public debt as the sum of public and publicly guaranteed debt[4]. These two categories are defined as follows:

a) Public debt is the sum of all domestic and external obligations of public debtors which include the central government and its agencies; states, provinces or similar political subdivisions including their agencies; and autonomous public bodies such as state enterprises and subsidiaries in which they have joint ownership with the private sector and a major shareholding. The obligations of public bodies outside the central government include borrowings that are both guaranteed and not guaranteed by the government.

b) Publicly guaranteed debt is the sum of all domestic and external obligations of the private sector that is guaranteed for repayment by a public entity.

In another definition, the International Monetary Fund[5] divides the public sector into the Financial and Non-Financial Public Sector. The financial public sector covers monetary and non-monetary institutions and the non-financial public sector covers the central government, states/provinces and local government authorities and non-financial state enterprises. Public monetary institutions include the Central or Reserve Bank and state owned depository financial institutions including commercial banks. Public non-monetary financial institutions are non-depository institutions such as state owned development finance lending agencies.

The breakdown of the public sector in this manner sometimes leads to the collection of loan data of only the non-financial public sector with data on the financial public sector being collected only if the loan is guaranteed by the government. The reason given for this is that the latter liabilities are included in the statistics of the monetary sector and do not require to be collected with public sector debt. Therefore it falls short of the total debt of the public sector as defined by the World Bank due to the exclusion of the debt of the Central Bank and unguaranteed borrowings of depository and non-depository state financial institutions.

Whatever definition is adopted, it is recommended that data be collected adopting the broadest possible definition. This will facilitate the reporting of public debt to different creditor agencies as it will enable reports to be prepared for a subset depending on the needs of the institution requiring the report.

The International Monetary Fund[6] and World Bank classify the debt of a country as external and domestic debt on the basis of residence of the lender. Accordingly, both foreign and domestic currency debt held by non-residents is classified as external debt and those held by residents is classified as domestic debt. This would not have any implications for total public sector debt though the breakdown into foreign and domestic debt would have to take this into account if this definition is used.

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[1] This paper was written by Mr. Nihal Kappagoda, a Debt Management Consultant residing in Ottawa, Canada. The author wishes to acknowledge with thanks the comments made by Ms. Malvina Pollock of the World Bank and Mr. Jose Maurel of the Commonwealth Secretariat.
[2] Published in March 21, 2001.
[3] Global Development Finance 2002, The World Bank.
[4] This definition also applies to domestic public debt.
[5] Government Finance Statistics Manual, International Monetary Fund, 2002.
[6] Balance of Payments Manual (Fifth Edition), International Monetary Fund, 1993.

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