By Kiana Wilburg
Debt management offices in developing countries play the important role of ensuring that governments
can raise the finances needed to invest in sustainable growth and development, at the lowest possible cost and within an acceptable amount of risk. They must guide borrowing so as to reduce their country’s vulnerability to domestic and external shocks.
History has shown that no economy is immune from financial crisis, but this role is especially important for small, emerging market economies, which are often less diversified, have a smaller base of domestic financial savings, and may be more susceptible to global shocks or financial contagion.
The case of Guyana illustrates the importance of a good debt management office, by showing how a burdensome debt can be a drag on the economic growth of a country for years—and how development can blossom under a sustainable debt strategy and good economic management.
According to Finance Minister Winston Jordan, after being declared ineligible to draw on the resources of the IMF and World Bank, in 1982 and 1983 respectively, Guyana embarked on a bold and innovative recovery programme involving the implementation of tough economic reform measures, and negotiating substantial debt forgiveness and restructuring with external creditors.
Jordan said that after repeated rounds of debt cancellation and rescheduling, the external debt returned to sustainable levels in the early 2000s. He explained that Guyana is now faced with the challenge of maintaining debt sustainability in a volatile and uncertain global economy.
He said that Guyana’s Debt Sustainability Analyses indicate that the country remains vulnerable to external shocks. Commodity price fluctuations have added to the volatility of export earnings and tax revenues, as well as the financial performance of state-owned agricultural enterprises. Borrowing has also become more uncertain.
The Finance Minister said that Guyana recently graduated to Lower Middle Income status, and concessional lending has become scarcer.
To access affordable financing, Guyana has sought out alternative funding sources, especially from its South-South partners such as EXIM Bank of China, EXIM Bank of India, the Mexican Agency for International Cooperation and Development, and the Islamic Development Bank.
At the same time, Jordan said that the Government sought to maintain close ties with the multilateral agencies (World Bank, IDB and CDB) and more traditional western bilateral donors.
Because of these developments, he commented that Guyana’s debt portfolio and the risks associated with it are becoming more complex. He said that it is increasingly important for nations to have sufficient capacity to develop and implement a sophisticated, comprehensive debt strategy.
With regard to the role of the Debt Management Office in Guyana, Jordan said that it is recognized that a fully functioning and effective debt management office must perform several functions, with its core responsibility being to develop and implement a comprehensive debt management strategy consistent with a country’s macroeconomic and development goals.
To effectively accomplish this objective, he said that a debt management office must be well organized and must perform certain key functions. He said that these resourcing, analytical and accounting functions (which are typically described as front office, middle office, and back office functions) should, for efficiency and effectiveness, be centralized within the debt office.
The Finance Minister said that all these functions support the overarching mandate of developing and implementing a sustainable and comprehensive debt management strategy.
He said that front office functions tend to focus on mobilizing resources and engaging with donors, lenders, and borrowers, and that these functions include negotiating aid and signing agreements, issuing securities, conducting auctions, on-lending, and issuing loan guarantees.
He noted that middle office functions are focused on analysis and policy development, and include analyzing debt and risk, and developing policies and strategies for borrowing, on-lending, and guarantee issuance. They also include reporting debt to the public.
Back office functions include administering debt payments, and maintaining records of debt data.
Jordan said that Guyana’s Debt Management Division (DMD) was formally established in 1986 as the central agency within the Ministry of Finance, to manage all of the country’s external public debt. By being placed within the Office of the Budget of the Ministry of Finance, the DMD facilitated improved coordination with departments responsible for fiscal operations and macroeconomic programming.
This, notwithstanding, debt functions remain fragmented, resulting in duplicated functions and ineffective coordination.
“For example, although the DMD is recognized informally as the lead agency on debt management, it is currently not formally responsible for aid coordination and the registry of grants. Therefore, it is not able to monitor all forms of aid that Guyana receives. It does not have a comprehensive database of all aid inflows into Guyana and has no mandate to undertake such an exercise,” Jordan expressed.
He said, too, that because new loans are predominantly negotiated by other departments/divisions, the DMD is not always able to analyze and review new facilities prior to their negotiation and, therefore, may not be able to monitor the new financing ceilings and limits in respect of public debt management.
The Finance Minister said that the DMD is only responsible for some front office functions. Though it is responsible for external debt, he said that the DMD does not issue or record domestic Treasury Bills, nor does it record and monitor grant aid, although it is ultimately responsible for analysing and developing policy for these financing sources.
Treasury Bills are issued and monitored by the Bank of Guyana, which is also responsible for issuing domestic debt securities and conducting auctions for them. The DMD has no say in the tenor, timing or size of the issues even though the government ultimately services this debt. Grant aid is monitored and recorded by the Project Cycle Management Division of the Ministry of Finance.
Jordan explained that front office functions are managed by the Project Cycle Management Division, with input from the DMD, the Ministry of Foreign Affairs, and the Ministry of Legal Affairs. The Project Cycle Management Division plans all government borrowing, and works with the other agencies to negotiate and contract loans and grant aid.
The Minister said that the DMD is also responsible for performing middle office and back office functions related to public debt (except Treasury Bills). He noted also that the DMD is responsible for performing those middle office functions related to developing a debt management strategy as well as assuming the responsibility of undertaking debt sustainability analyses.
Jordan opined however that substantial reforms are needed to place debt strategy formulation and implementation at the forefront of debt management activity and economic policy-making.
Moreover, he said that the DMD is also responsible for servicing the public debt and monitoring and managing Guyana’s debt, including maintaining an inventory of all public and publicly guaranteed external loans, and recording loan by loan data in the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS).
He said that these back office functions are the current mainstay of the debt management unit and there is strong capacity in this regard.
In spite of this, Jordan said that debt recording is not sufficiently comprehensive and still does not fully include the capture of domestic debt. Thus, obtaining a holistic view of the public debt is still a work in progress.
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