INSTITUTIONAL FRAMEWORK FOR PUBLIC SECTOR
Mr. Nihal Kappagoda
Reference: Document No.17, September 2002)
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 , 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 defines external public debt as the sum
of public and publicly guaranteed debt. 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 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 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.
 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.
 Published in March 21, 2001.
 Global Development Finance 2002, The World Bank.
 This definition also applies to domestic public debt.
 Government Finance Statistics Manual, International Monetary Fund,
 Balance of Payments Manual (Fifth Edition), International Monetary
Importance of Public Debt Management
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