Public Debt Management Issues R. Hackett- PFM Advisor, PFTAC/IMF

Transcription

1 Public Debt Management Issues R. Hackett- PFM Advisor, PFTA/IMF Page 1 Topics 1 Audit Office Role in Debt Management 2 What is Debt Management? Traditional View Broader View 3 What do PEFAs Say About PI Debt Management? 4 Importance of omprehensiveness in the Analysis Sub-national governments, SOEs, & independent bodies formal debt, arrears,,g guarantees, and PPPs 5 Processes for review, approval, monitoring, and reporting 6 Donor Standards for Good Debt Management Special Problems: Evaluating Guarantees, PPPs, and 7 Other ontingent Liabilities

2 Audit Office Role in Debt Management Page 2 What is the situation Now and how should it hange?: What are the mandates, roles, and responsibilities of audit functions in relation to debt management? How frequently are audits of debt management undertaken, and what is the basis of determining the audit program? What is the legal status, powers or authority, and degree of independence of the audit functions? What are the reporting lines and procedures for audit reports? What is the degree of commitment to address audit findings? How can existing i financial i audit practices be leveraged din order to support performance audits of debt management activities? Is this an area where External Auditors should regularly focus on system, process, or procedure matters because of the weakness of internal audit in most PIs? Think about these issues as we progress through the discussion.

3 Audit Office Role -Debt Management (ont d) Page 3 PI-26(i). Scope, nature and follow-up of external audit: Scope & nature of audit performed (incl. adherence to auditing standrds). Minimum Score Requirements All entities of central government are audited annually A covering revenue, expenditure and assets/liabilities. A full range offinancial audits and some aspects of performance audit are performed and generally adhere to auditing standards, focusing on significant and systemic issues. B D entral government entities representing at least 75% of total expenditures are audited annually, at least covering revenue and expenditure. A wide range of financial audits are performed and generally adheres to auditing standards, focusing on significant and systemic issues. This percentage refers to the amount expenditure of the entities covered by annual audit activities. It does not refer to the sample of transactions selected by the auditors for examination within those entities. entral government entities representing at least 50% of total expenditures are audited annually. Audits predominantly comprise transaction level testing, but reports identify significant issues. Audit standards may be disclosed to a limited extent only. Audits cover central government entities representing less than 50% of total expenditures or audits have higher coverage but do not highlight the significant issues.

4 What is Debt Management? Page 2 Main objective: 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 management needs to be linked to a clear macroeconomic framework, under which governments seek to ensure that the level and rate of growth in public debt are sustainable. Poorly structured debt in terms of maturity, currency, or interest rate composition and large and unfunded contingent liabilities have been important factors in inducing or propagating economic crises in many countries.

5 What is Debt Management? (ontinued) Page 5 Sometimes the boundaries between Debt Management, Fiscal Policy, & PFM get blurry: Traditional DM Debt Management- Broadly onceived Fiscal Policy PFM

6 What is Debt Management? Page 6 Deciding on a sustainable amount of total debt Planning for debt payments Deciding what types of expenditures are appropriate for financing with debt Establishing a disciplined central procedure for evaluating all types of agreements to contract any type of debt, or agreements that could create debt Evaluating specific proposals for funding with debt Keeping good records on all debts and payments due Measures to: prevent the unplanned build-up of debt that could result from poor revenue forecasting, weak or incomplete expenditure planning practices, poor budget execution controls; and anticipate the future need to fund inevitable purchases whose timing is difficult to predict Traditional Debt Management Measures Broader View also includes Measures to Prevent Unplanned Debt Buildup

7 What is Debt Management? (ontinued) Page 7 Examples of debt management measures in the 2 nd group include: Insuring that revenue forecasts are reasonable- not based on risky assumptions just to allow larger budgets Establishing reasonable contingency accounts, or reserves, within the main spending funds to handle unexpected events (natural disasters, major infrastructure breakdown, etc) Regular rigorous budget review focused on all aspects of ministry i recurrent operations, including staffing. In developing countries, critical questions about government staffing levels are not often raised, and dbase funding allocations for positions ii continues increasing even if the positions are unfilled. Often this means that staff compensation lines in budgets are the only ones that increase, while others are squeezed to the point that supplies and materials needed to provide services are inadequate, or service agreements to maintain equipment/infrastructure are not renewed resulting eventually in more costly actions like complete replacement ---which (in the absence of donor grants for replacement) will likely only be possible with funding from debt instruments.

8 What is Debt Management? (ontinued) Page 8 Examples of debt management measures in the 2 nd group include: Insuring that revenue forecasts are reasonable- not based on risky assumptions just to allow larger budgets Establishing reasonable contingency accounts, or reserves, within the main spending funds to handle unexpected events (natural disasters, major infrastructure breakdown, etc) Regular rigorous budget review focused on all aspects of ministry i recurrent operations, including staffing. In developing countries, critical questions about government staffing levels are not often raised, and dbase funding allocations for positions ii continues increasing even if the positions are unfilled. Often this means that staff compensation lines in budgets are the only ones that increase, while others are squeezed to the point that supplies and materials needed to provide services are inadequate, or service agreements to maintain equipment/infrastructure are not renewed resulting eventually in more costly actions like complete replacement ---which (in the absence of donor grants for replacement) will likely only be possible with funding from debt instruments.

9 What is Debt Management? (ontinued) Page 9 A rigorous process for prioritizing i i i requests to expand recurring and ddevelopment expenditures. This has: Technical aspects, as well as Policy prioritization aspects that can only be resolved at the abinet/legislative levels through reasoned consideration Ensuring that a medium-term framework is in place to: Remind decision-makers and civil servants of the future costs of their past decisions and promises; and Assist decision-makers in weighing the future costs of policy changes, changes to recurring budgets, or new development projects that they may be considering for adoption.

10 Roles in Debt management Page 10 The legal l framework should clarify the authority to borrow and to issue new debt, invest, and undertake transactions on the government s behalf. bhlf The organizational framework for debt management should be well specified, and ensure that mandates and roles are well articulated. The allocation of responsibilities among the ministry of finance, the central bank, or a separate debt management agency should be publicly disclosed.

11 What do PEFAs Say About PI Debt Management? What are PEFAs? Page 11 PEFA = Public Expenditure and Financial Accountability Management tool to assess strengths and weaknesses of PFM systems Developed by: IMF, WB, E, UK, France, Norway, Switzerland Global, standard set of high-level indicators to measure current status of PFM Based on international best practice Focus is on PFM systems, not budget policy or quality of spending

12 What do PEFAs Say About PI Debt Management? What are PEFAs? omprises: Page 12 standard set of high level indicators for measuring current status of PFM (baseline) accompanying report to provide explanation of indicator scores and draw a summary from the analysis Indicators: 28 government performance indicators 3 donor practice indicators High level measures related to 6 key dimensions of PFM performance

13 What are the 6 key dimensions of PFM? Budget redibility: Is the budget realistic, and implemented as intended? Accountability and External Scrutiny: Are effective external financial accountability and transparency arrangements in place? omprehensiveness and Transparency: (i) Does the budget capture all relevant fiscal transactions; (ii) are fiscal risks monitored/managed; (iii) is budget information available to the public? Six key PFM dimensions for evaluation Accounting, recording, reporting: Is adequate fiscal, revenue and expenditure information produced and disseminated to meet decision-making and management purposes? Policy-based Budgeting: Is the budget prepared with due regard to government policy? Predictability/control in budget execution: Is effective control and stewardship exercised in the use of public funds?

14 PI PEFA Results on Indicators Most Relevant to Traditional Debt Management Indicator Page 14 Ave Rating PEFAs PI-4 Stock and monitoring of expenditure payment arrears B PI-6 PI-9 PI-4-1 PI-4-2 PI-9-1 PI-9-2 Stock of expenditure payment arrears (as a percentage of actual total expenditure for the corresponding fiscal year) and any recent change in the stock. Availability of data for monitoring the stock of expenditure payment arrears. omprehensiveness of information included in budget documentation Oversight of aggregate g fiscal risk from other public sector entities. Extent of central government monitoring of autonomous government agencies (AGAs) and public enterprises (PEs). Extent of central government monitoring of Sub-National (SN) governments fiscal position. B B D

15 PI PEFA Results on Indicators Most Relevant to Traditional Debt Management (ontinued) Indicator Page 15 Ave Rating PEFAs PI-10 Public access to key fiscal information PI-12 PI-17 Multi-year perspective in fiscal planning, expenditure policy and budgeting PI-12-2 Scope and frequency of debt sustainability analysis (DSA) Recording and management of cash balances, debt and guarantees PI Quality of debt data recording and reporting PI-17-2 Extent of consolidation of the government s cash balances PI-17-3 Systems for contracting loans and issuance of guarantees.

16 PI PEFA Results on Indicators Most Relevant to Traditional Debt Management (ontinued) Indicator Page 16 Ave Rating PEFAs PI-25 Quality and timeliness of annual financial statements PI-25-1 ompleteness of the financial statements PI-25-2 Timeliness of submission of the financial statements PI-25-3 Accounting standards used PI-27 Legislative scrutiny of the annual budget law PI-27-1 Scope of the legislature s scrutiny.

17 PEFA Results on Indicators Most Relevant to Preventing Unplanned Debt Build-up Indicator PI-1 PI-2-New PI-3 PI-2-1-New PI-2-2-New Aggregate expenditure out-turn turn compared to original approved budget omposition of expenditure out-turn compared to original ii approved dbd budget Extent of the variance in expenditure composition during the last three years, excluding contingency items. The average amount of expenditure actually charged to the contingency vote over the last three years Aggregate revenue out-turn compared to original approved budget Page 17 Ave Rating PEFAs PI-11 Orderliness & participation in annual budget process B PI-11-1 Existence of and adherence to a fixed budget calendar PI-11-2 Guidance on the preparation of budget submissions PI-11-3 Timely budget approval by the legislature B D A B B

18 PEFA Indicators Relevant to Preventing Unplanned Debt Build-up p( (ontinued) Indicator Page 18 Ave Rating PEFAs PI-12 PI-16 Multi-year perspective in fiscal planning, expenditure policy and budgeting PI-12-1 Multi-year fiscal forecasts and functional allocations PI-12-3 Eit Existence of costed tdsector strategies t D PI-12-4 Linkages between investment budgets and forward expenditure estimates Predictability in the availability ailabilit of funds for commitment of expenditures PI-16-1 Extent to which cash flows are forecast and monitored. Reliability and horizon of periodic in-year information to PI-16-2 ministries, departments, and agencies (MDAs) on ceilings for expenditure commitment Frequency and transparency of adjustments to budget PI-16-3 allocations, which are decided above the level of management of MDAs. D B B B B

19 PEFA Indicators Relevant to Preventing Unplanned Debt Build-up p( (ontinued) Indicator Page 19 Ave Rating PEFAs PI-18 Effectiveness of payroll controls PI-20 PI-18-1 Degree of integration and reconciliation between personnel records and payroll data. PI-18-2 Timeliness of changes to personnel records and the payroll B PI-18-3 Internal controls of changes to personnel records and the payroll. Ei Existence of payroll audits to identify if control weaknesses PI-18-4 and/or ghost workers Effectiveness of internal controls for non-salary expenditure PI-20-1 Effectiveness of expenditure commitment controls. PI-20-2 PI-20-3 omprehensiveness, relevance and understanding of other internal control rules/ procedures. Degree of compliance with rules for processing and recording transactions. B D

20 PEFA Indicators Relevant to Preventing Unplanned Debt Build-up p( (ontinued) Indicator Page 20 Ave Rating PEFAs PI-22 Timeliness and regularity of accounts reconciliation PI-22-1 Regularity of bank reconciliations PI-22-2 Regularity of reconciliation and clearance of suspense accounts and advances PI-24 Quality and timeliness of in-year budget reports Scope of reports in terms of coverage and compatibility PI-24-1 B with budget estimates B PI-24-2 Timeliness of the issue of reports B PI-24-3 Quality of information

21 PEFA Indicators Relevant to Preventing Unplanned Debt Build-up p( (ontinued) Indicator Page 21 Ave Rating PEFAs PI-26 Scope, nature and dfollow-up of external audit PI-26-1 Scope/nature of audit performed (incl. adherence to auditing standards). PI Timeliness of submission i of audit reports to legislature. l PI-26-3 Evidence of follow up on audit recommendations. PI-28 Legislative scrutiny of external audit reports PI-28-1 PI-28-2 PI-28-3 Timeliness of examination of audit reports by the legislature (for reports received within the last three years). Et Extent tof fhearings on key findings fidi undertaken tk by the legislature. Issuance of recommended actions by the legislature and implementation by the executive.

22 Importance of omprehensiveness in the Analysis Page 22 Analysis of Public Debt should cover all levels of government and all bodies owned /controlled by government: National government Sub-national governments, SOEs Independent bodies (development banks, pension funds, colleges/universities Any other organization where national government may have a moral obligation to make the debt payments if the body officially responsible cannot.

23 Importance of omprehensiveness in the Analysis Page 23 Types of hard debt (IMF definition): Loans Suppliers credits Leases Draws on overdraft accounts Arrears in payments to employees or service providers Penalties and judicially awarded damages arising from failure to make a payment under a contractual t obligation ontingent Liabilities: Guarantees Some forms of public-private partnerships (PPPs) with performance thresholds Other contingent liabilities (Pensions promised under defined benefit plans?)

24 Risk Management Page 24 Key Risks Inherent in Government Debt Portfolios: - Regulatory and legal risk. - Operational risk (the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events). - redit risk. -Market risk A framework should be developed to enable debt managers to identify and manage the trade-offs between expected cost and risk in the government debt portfolio.

25 ash Management vs Debt Management Page 25 - ash management has a relatively short-term outlook. Key objective is having the right amount of money in the right place at the right time to meet government obligations in the most cost-effective way - Debt management has a medium- to long-term horizon. Main goal of 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 term, consistent with a prudent degree of risk. Despite the differences, they intersect at many points. Joint responsibility for cash and ddebt management: -Increases the incentives to manage all government financial resources as a single portfolio; - Helps ensure that confusing signals are not sent to the market regarding government s financial management strategy; - Ensures that debt issuance decisions are made in the context of the government s overall cash flows. Information systems and transaction processing procedures are integrated.

26 Processes for review, approval, monitoring, and reporting Page 26 PI-17(iii). Recording and management of cash balances, debt and guarantees: Systems for contracting loans and issuance of guarantees. Minimum Score Requirements entral government s contracting of loans and issuance of guarantees are A made against transparent criteria and fiscal targets, and always approved by a single responsible government entity. entral government s contracting of loans and issuance of guarantees are B made within limits for total debt and total guarantees, and always approved by a single responsible government entity. D entral government s contracting of loans and issuance of guarantees are always approved by asingle responsible government entity, but are not decided on the basis of clear guidelines, criteria or overall ceilings. entral government s contracting of loans and issuance of guarantees are approved by different government entities, without a unified overview mechanism.

27 Some pitfalls in Debt Management Page 27 - Increasing the vulnerability of the government s financial i position by increasing risk, even though it may lead to lower costs and a lower deficit in the short run. -Debt management practices that distort private vs. government decisions, as well as understate the true interest cost. - Misreporting of contingent or guaranteed debt liabilities. - Use of non-market ktfinancing i channels - Improper oversight and/or recording of debt contracting and payment, and/or of debt holders.

28 Debt Burden Thresholds Under the Debt Sustainability Framework Page 28 Low-income countries with weaker policies and institutions tend to face repayment problems at lower levels of debt than countries with stronger policies and institutions. The DSF, therefore, classifies countries into one of three policy performance categories (strong, medium, and poor) using the World Bank's ountry Policy and Institutional Assessment (PIA) index, and uses different indicative thresholds for debt burdens depending on the performance category. Thresholds corresponding to strong policy performers are highest, indicating that in countries with good policies debt accumulation is less risky. PV of Debt In Percent of: Debt Service in Percent of: Exports GDP Revenue Exports Revenue Weak Policy Mdi Medium Pli Policy Strong Policy

29 Other Assessments- WB s ountry Policy & Institutional Assessment Page 29 Rating Scale. For each criterion, countries are rated on a scale of 1 (low) to 6 (high). 1 = very weak performance, and 6= very strong performance.

30 Other Assessments: WB s PIAs Page 30

31 Other Assessments: WB s PIAs Page 31

32 Donor Standards for Good Debt Management Page 32 (a) the extent to which external and domestic debt is contracted with a view to achieving/maintaining debt sustainability Highest PIA rating is achieved if: Government faces a low risk of external and/or domestic debt distress. For Low Income ountries, all external debt burden indicators are well below the thresholds. Stress-testing testing and alternative scenarios do not result in indicators breaching any thresholds. Levels of public and publicly guaranteed domestic debt are low and are not expected to rise. For Middle Income ountries, debt burden indicators are low and stable. For both LIs and MIs, risks associated with contingent liabilities appear to be manageable.

33 Donor Standards for Good Debt Management Page 33 (b) effectiveness of debt management functions Highest PIA rating is achieved if: There is very strong coordination between debt management and macroeconomic policies. AA debt management unit is well established; There is good coordination and regular and frequent information sharing between different agencies responsible for contracting debt, which are supported by efficient & reliable systems & have strong analytic capacity.

34 Donor Standards for Good Debt Management Page 34 (b) effectiveness of debt management functions (continued) Highest PIA rating is achieved if: Regular, comprehensive, & accurate statistics produced & published. Government annually produces a debt management strategy defining how the composition of debt is projected to evolve over the medium term, based on thorough analysis of risk & cost while taking into account the constraints that the government faces. The legal l framework for public borrowing is clearly l defined d and includes borrowing purposes, objectives for debt management, and the requirement to develop a debt management strategy.

35 Special Problems: Evaluating Guarantees, PPPs, and Other ontingent Liabilities Page 35 Financial reporting standards differ in approaches for valuing liabilities associated with guarantees, PPP s, and contingent liabilities but are in basic agreement that they should all be disclosed/reported in some manner (for example, through notes in a financial statement) However, the fact that there may not be agreement on valuing these things for purposes of formal financial reporting, does not mean that realistic estimates should not be attempted when preparing budgets for contingency accounts.

36 Special Problems: Evaluating Guarantees, PPPs, and Other ontingent Liabilities Page 36 Value of the liability or an annual payment requirement is determined by the probability that conditions triggering a pay-out will occur. Methods for valuing can be complicated (using Monte arlo and other statistical techniques) or very simple like in the following example. Suppose a country has guaranteed re-payment of an SOE loan for $100,000: If the probability bilit of default by the SOE is low (say 25%), the government s liability may be only $25,000 On the other hand, if the default probability is high (say 75%), the government s liability may be $75,000 Assigning these probabilities is not an exact science it is more a matter of informed judgments based on: Regular l monitoring i of operations for evidence of good budgeting and expenditure management Receiving regular financial reports Good information on past debt service payment or activation of other payment triggers

37 Special Problems: Evaluating Guarantees, PPPs, and Other ontingent Liabilities Page 37 Sometimes Public-Private Partnerships can include performance thresholds (for instance arrangements to build/maintain a toll road might require the government to make a payment to the operator if a certain minimum level of traffic is not reached) So, when doing analysis to decide on the amount of a contingency account, one would want to estimate the probability that the performance threshold would not be met and a payment would be required.