INTERNATIONAL MONETARY FUND AND THE WORLD BANK. Developing a Medium-Term Debt Management Strategy (MTDS) Guidance Note for Country Authorities

Transcription

1 INTERNATIONAL MONETARY FUND AND THE WORLD BANK Developing a Medium-Term Deb Managemen Sraegy (MTDS) Guidance Noe for Counry Auhoriies Prepared by he Saff of he IMF and World Bank March 3, 2009 Conens Page I. Inroducion...3 II. Developing a Medium-Term Deb Managemen Sraegy...11 III. Disseminaion...22 IV. Implemenaion and Follow-up...23 Figures 1a. Examples of Impac of Exchange Rae Depreciaion on he Raio of Public Deb o GDP 4 1b. REER and Deb in Sub-Saharan African LICs Key Inerlinkages Characerisics of he Curren Deb Porfolio: Counry A Sraegy Trade-offs: Counry A Characerisics of he Curren Deb Porfolio: Counry B Sraegy Trade-offs: Counry B...54 Boxes 1. Key Inerlinkages MTDS, DSA and he DSF: The linkages Linkage Beween MTDS and Counry Specific Srucural Economic Facors The MTDS Cos-Risk Analyic Tool Elemens of a Sound Legal Framework for Public Deb Managemen Organizaional Arrangemen Desirable Elemens of a Deb Recording Sysem...29 Appendixes I. The Enabling Insiuional Framework...26 II. Designing an MTDS: Checklis for Deb Managers...30 III. Cos and Risk, and Deb Indicaors...33 IV. Poenial Sources of Financing...42 V. Formulaing he MTDS: Taking Accoun of he Coss of Moneary Policy Implemenaion47 VI. Developing a Medium-Term Deb Managemen Sraegy in Pracice: An Illusraion...48 VII. Templae for a Published Deb Managemen Sraegy Documen...55 VIII. Developing a Shor-erm Borrowing Plan: An Example...57

2 2 Appendix Tables 1. Cos and Risk Facors of Differen Financing Insrumens Srucural Macroeconomic Facors and Link o Choice of MTDS Sample Borrowing Plan...58

3 3 I. INTRODUCTION 1. Drawing on experience, he Inernaional Moneary Fund and World Bank have developed a sysemaic and comprehensive framework o help counries develop an effecive medium-erm deb managemen sraegy (MTDS). The developmen of his framework has benefied from consulaion wih a number of regional and inernaional bodies engaged in capaciy building in public deb managemen, and collaboraion and inpu from deb managemen officials in a number of developing counries. This noe describes a framework for developing a comprehensive MTDS, and provides a emplae for a public deb managemen sraegy documen. 1 The Guidance Noe is accompanied by an analyical ool ha can be used o underake basic cos and risk analysis, providing a key inpu ino he deb managemen sraegy decision-making process. 2. The financial crises of he 1990s illusraed very clearly why he composiion of he public deb porfolio is an imporan facor in he degree of resilience o exernal shocks. Figure 1a highlighs how, in some counries (e.g., Argenina, Brazil, Indonesia and Russia) he currency exposure was a key deerminan of he increase in deb levels. In oher cases, he realizaion of an implici coningen liabiliy relaed o he banking secor (e.g., Turkey, Korea or Thailand), or he cos of assuming oher privae secor liabiliies, aggravaed exising vulnerabiliies in he deb porfolio wih a similarly negaive impac on he overall deb level and he governmen s budge. In he specific case of low-income counries (LICs), developmens in real effecive exchange raes, ofen driven by unfavorable commodiy price rends, conribued significanly o deb susainabiliy problems, also underscoring he imporance of following a sound deb managemen sraegy (see Figure 1b). Such experience highlighs he imporance of developing effecive deb managemen sraegies o help miigae risk. 3. The recen financial crisis has also helped highligh he benefis of developing and implemening a sound deb managemen sraegy, wih some middle-income counries beer placed o mee he relaed financing and fiscal challenges as a consequence of susained effors o reduce vulnerabiliies in heir deb porfolios The Mulilaeral Deb Relief Iniiaive (MDRI) has significanly reduced he deb burden in many LICs, freeing resources o help finance governmens growh programs. I has also opened new opporuniies o access non-concessional sources of financing, including access o he inernaional capial markes. While he recen financial crisis may have emporarily closed some of hose financing avenues, neverheless hey are likely o become a 1 Consequenly i complemens and augmens he discussion on deb managemen sraegy developmen in he IMF-World Bank (2003) Guidelines for Public Deb Managemen (he Guidelines). The noe has been prepared under he auspices of a join IMF-World Bank working group comprising from wihin he IMF, Bernardin Akioby, Myrvin Anhony, Allison Holland, Peer Kunzel, Chrisian Mumssen, Chrisian Mulder, Perry Perone, and Abdourahmane Sarr, and from wihin he World Bank, Karina Garcia-Casalderrey, Lars Jessen, Shyamalendu Pal, Angelique de Plaa, Abha Prasad, Francis Rowe, Tihomir Sucka, Mark Thomas, Eriko Togo, and Anonio Velandia-Rubiano. 2 See discussion in Managing Public Deb: Formulaing Sraegies and Srenghening Insiuional Capaciy (forhcoming), a join IMF-World Bank board paper.

4 4 more general feaure of LICs financing opions going forward. These opporuniies, while welcome, raise new risks and challenges. Counries are frequenly faced wih new and conflicing proposals from he marke on possible financing opions, while in many cases lacking a coheren framework o fully assess he relaed coss and risks. For example, how should he appropriae mix of concessional and quasi-concessional deb be deermined? Should a counry ap he inernaional capial markes? Wha are he cos-risk implicaions of exending he mauriy of domesic borrowing? As many emerging marke counries have experienced, poor financial choices, including on he erms and srucure of new deb, can conribue o he re-emergence of significan deb vulnerabiliies, puing deb susainabiliy a risk, and jeopardizing he achievemen of macroeconomic policy arges. 5. The framework seeks o help counries develop an MTDS ha explicily recognizes he relaive coss and risks involved, akes accoun of he linkages wih oher key macroeconomic policies, is consisen wih mainaining deb susainabiliy, and can faciliae domesic deb marke developmen. 3 In ha way, risks o he sovereign balance shee can be conained, while minimizing he poenial deb-relaed burden on ax payers and maximizing he resources available for oher expendiures. Figure 1a. Examples of he Impac of Exchange Rae Depreciaion on he Raio of Public Deb o GDP (percenage poins of GDP) Figure 1b: REER and Deb in Sub- Saharan African LICs % Increase in he Public Deb o GDP raio 250 REER Deb / GDP 140 Conribuion of Exchange Rae Depreciaion Argenina Uruguay Turkey Brazil Russia Indonesia Korea Thailand While his framework was specifically developed aking ino accoun he LIC conex, i is more general in is applicaion and could be equally useful in oher developing and emerging marke economies.

5 5 Wha is an MTDS? 6. When deermining how bes o mee he governmen s financing requiremen, he deb manager (DM) 4 is faced wih many poenially difficul rade-offs beween alernaive insrumens. For insance, if foreign ineres raes are lower han domesic ineres raes, foreign currency deb may seem aracive. However, he radeoff becomes less clear once he exchange rae risk, which will deermine he ex-pos cos of foreign currency deb, and / or oher consideraions regarding governmen objecives wih respec o domesic governmen deb marke developmen, are aken ino accoun. The deb managemen sraegy should idenify and explain hese rade-offs. 7. An MTDS is a plan ha he governmen inends o implemen over he mediumerm 5 in order o achieve a desired composiion of he governmen deb porfolio, which capures he governmen s preferences wih regard o he cos-risk radeoff. I operaionalizes counry auhoriies deb managemen objecives e.g., ensuring he governmen s financing needs and paymen obligaions are me a he lowes possible cos consisen wih a pruden degree of risk. An MTDS has a srong focus on managing he risk exposure embedded in he deb porfolio specifically, poenial variaions in he cos of deb servicing and is impac on he budge. In paricular, an MTDS idenifies how cos and risk vary wih he composiion of he deb. While a sound MTDS can be developed wihou he use of a quaniaive ool, especially where counries are severely consrained in heir choices, he use of scenario analysis provides useful informaion, enabling he DM o quanify he poenial risks o he budge of alernaive deb managemen sraegies. 8. In principle, he MTDS covers oal non-financial public secor deb. This comprises he deb of he cenral governmen (budgeary, exra-budgeary and social securiy funds), he sae and local governmens, and he deb of non-financial public corporaions. In pracice, however, i is ofen useful o iniially focus on cenral governmen deb, where generally daa are more readily available and he auhoriy exiss o implemen he sraegy. The scope of he MTDS can be exended as informaion becomes available and where he insiuional arrangemens allow for a broader and more comprehensive sraegy o be implemened. For example, o effecively exend he MTDS o cover he oaliy of non-financial public secor deb would require some elemen of cenral governmen conrol on borrowing decisions of sae and local governmens, and non-financial public corporaions. 4 The erm deb manager is used here o generically describe hose auhoriies responsible for developing he MTDS. While primary responsibiliy will lie, along wih he decision-making auhoriy, wih he Miniser of Finance, his erm encompasses he deb managemen uni or office, who would ypically ake he lead in preparing he sraegy proposal; however, i could also cover a macroeconomic uni in he Minisry of Finance if involved in deermining policies affecing he choice of deb composiion. 5 The medium-erm is ypically defined as 3 5 years. If he ime horizon is oo shor, e.g., he budge cycle, here is a risk ha shor-erm expediency will dominae, urning he focus on shor-erm coss and away from risks ha could maerialize laer. The evaluaion of he cos and risks underlying he sraegy should aim o capure he full economic cycle, allowing poenially higher shor-erm ineres raes and subsanive movemens in he exchange rae o emerge, boh of which may significanly increase he cos of deb.

6 6 9. The focus of he MTDS is ypically on acual direc liabiliies of he governmen, raher han coningen liabiliies. 6 Neverheless, coningen liabiliies may have an imporan bearing on he susainabiliy of deb and robusness of he MTDS. Consequenly, i would be pruden o consider he poenial risk ha coningen liabiliies could maerialize under specific scenarios. I should be noed ha his requires he DM o have good informaion on he naure of hese liabiliies. 7 Benefis 10. An MTDS provides a framework wihin which he auhoriies can make informed choices on how he governmen s financing requiremen should be me, while aking due accoun of consrains and poenial risks. Such a sysemaic approach o decision-making can help srenghen he deb managemen funcion, enhance analyical capaciy and help reduce operaional risk even where capaciy is consrained. 11. Adoping an explici and formal MTDS enables he auhoriies o: Evaluae he cos-risk rade-offs: The MTDS allows informed decisions o be made, ensuring he coss and risks associaed wih alernaive sraegies are clearly recognized and idenified. Seing clear medium-erm sraegic goals will help DMs avoid poor decisions made solely on he basis of cos, or for he sake of shor-erm expediency. Idenify and manage risk: Even where financing choices are limied, he MTDS helps idenify and monior key financial risks, and esablish sraegies ha ensure counries are well placed o ake advanage of new borrowing opporuniies, in a considered and risk conscious way. The MTDS also faciliaes risk managemen by enabling he consideraion of opions for risk miigaion. This could include supporing he developmen of he domesic deb marke, mainaining cash or reserves buffers, or esablishing commied lines of credi. 12. In addiion, an MTDS provides benefis wih respec o: Coordinaion: The MTDS will faciliae coordinaion wih fiscal and moneary managemen, helping o reconcile various objecives and consrains, including on marke developmen and balance of paymens issues. Along wih enhancing coordinaion, i enables each agen o focus more clearly on is core objecives, helping o achieve greaer clariy and accounabiliy for deb managemen separae from fiscal and moneary policies. Idenificaion of consrains: I helps idenify he consrains ha affec he DM s choices, allowing where possible, seps o be idenified o ease hose consrains. 6 Alhough some counries may include all he direc explici exposures of he cenral governmen, including guaranees, in heir definiion of deb. 7 In some insances, he lack of adequae monioring and informaion on governmen guaranees has significanly aggravaed deb vulnerabiliies.

7 7 Cos: An MTDS can poenially lower he cos of deb servicing, as an effecive and ransparen MTDS will suppor domesic deb marke developmen, and faciliae he relaionship wih invesors, crediors and raing agencies. Transparency: A formal and explici MTDS can help build broad-based suppor for responsible financial sewardship, enhancing governance and accounabiliy. How does he MTDS fi in he macroeconomic framework? 13. In order o ensure consisency beween he MTDS and he overall macroeconomic framework, i is imporan ha he inerlinkages and feedback effecs are well undersood and ha coordinaion mechanisms are in place (see Box 1). Indeed, for LICs, hese inerlinkages are likely o be more significan, parly due o underdeveloped domesic deb markes, and parly due o capaciy consrains and relaively weak insiuional seing. 8 In his conex, close coordinaion is vial o ensure ha he overall policy mix is susainable. 14. In pracice, he DM deermines he MTDS aking ino accoun consrains semming mainly from he macroeconomic framework and he level of developmen of he domesic financial marke. In urn, he analysis of he MTDS can provide inpu o he macroeconomic policy analysis. Similarly, given is medium-erm perspecive, he MTDS can suppor effors o develop he domesic deb marke by faciliaing a ransparen and predicable sraegy for domesic borrowing, which will suppor he sysemaic inroducion of new insrumens, and by highlighing where impedimens migh exis, paricularly in marke infrasrucure and insiuions, ha he DM and oher auhoriies could work o remove. 9 8 Developing and implemening an effecive MTDS may require a significan srenghening of capaciy in many developing counries, see Appendix I for a discussion of he enabling insiuional framework. In addiion, capaciy may need o be srenghened in oher complemenary areas such as governmen cash managemen and forecasing, medium-erm fiscal and expendiure frameworks, moneary policy implemenaion o maximize he benefis of an MTDS. 9 For example, he DM can inroduce a new poin on he yield curve confiden ha i can be susained wih coninued issuance in he medium-erm; his commimen o coninued issuance of his new insrumen can hen be communicaed o marke paricipans. See he Inernaional Moneary Fund and World Bank (2003a, revised), Guidelines for Public Deb Managemen, and he Inernaional Moneary Fund and World Bank (2001), Developing Governmen Bond Markes: A Handbook for a broader discussion of he benefis of regulariy and predicabiliy in issuance.

8 8 Box 1. Key Inerlinkages Figure 2 oulines he key inerlinkages beween he MTDS and oher key policy areas, also indicaing how cosrisk analysis is used o pull his informaion ogeher and inform he choice of MTDS: MTDS, Fiscal Planning and Deb Susainabiliy Ex ane he level of deb is mainly deermined by fiscal policy, alhough ex-pos he deb composiion can play an imporan role (see Figure 1a). Given he medium-erm perspecive of he MTDS, o be mos effecive i should be formulaed wihin a fully operaional medium-erm fiscal framework (MTFF). Deb susainabiliy analysis (DSA) will assess wheher he fiscal policy implied by he MTFF, and he associaed deb level, is susainable over he long-erm. The Bank-Fund Deb Susainabiliy Framework (DSF), a key ool o underake ha analysis, includes alernaive scenarios o assess he realism of he oulook. This is underaken by showing he developmen of deb raios if (a) he primary balance does no change (improve) and (b) projecions of GDP growh are closer o he hisoric oucome han he assumed oulook; and hrough bound ess o examine he impac on deb of shocks o key macro variables. The MTDS will add o his by allowing a deailed analysis of he cos and risk characerisics of differen deb managemen sraegies. The MTDS could also help counry auhoriies move owards seing expendiure prioriies independen of financing sources, by idenifying sraegies ha generae a profile of ineres coss consisen wih deb susainabiliy, bu which do no rely on he availabiliy of specific projec financing. More generally, he MTDS can srenghen fiscal planning by conribuing an analysis of he likely, and possible, budge implicaions of implemening he MTDS. MTDS and Moneary Policy The moneary policy regime, he insrumens used for moneary policy operaions, he insiuional seing, as well as he credibiliy of moneary policy, all have imporan implicaions for he MTDS. For example lack of a credible moneary policy may resul in a high inflaion risk premium and make longer-erm domesic deb excessively cosly. Anoher example arises where serilizaion operaions o mop up liquidiy arising from capial inflows have led o large scale cenral bank issuance of securiies in is own name. 10 The consequen increase in quasi-fiscal deficis, and poenial replacemen of cenral bank deb wih cenral governmen deb, are also consideraions ha need o be aken ino accoun when developing an MTDS. MTDS, Exchange Rae Policy and Balance of Paymens The exchange rae policy, and expeced evoluion of he balance of paymens and consequen developmens in he real exchange rae may have consequences for he MTDS. For example, if he exchange rae is expeced o be on a downward rend, ha would increase he cos of exernal borrowing. Similarly, deb servicing may spike if he exchange rae is volaile. In general, borrowing in foreign currencies requires a good undersanding of balance of paymens rends and coordinaion wih exchange rae policies. In addiion, he exchange rae and capial conrol regime is perinen for he MTDS. For example, under a fixed exchange rae regime, and in he absence of capial conrols, capial fligh can lead o problems rolling over domesic deb, and erode inernaional reserves. In such cases, i may be appropriae o consider wheher addiional foreign currency reserve buffers are required o cover shor-erm domesic deb, or mauriies need o be lenghened. MTDS and he Developmen of Domesic Deb Markes Ofen he rade-offs beween borrowing domesically or exernally will be capped by he level of developmen of he domesic deb marke, and/or privae secor crowding ou consideraions. The MTDS can help idenify key challenges in his area, and in some insances he chosen sraegy can help address hose challenges. 10 See Appendix IV for a broader discussion of issues relaing o he ineracion wih moneary policy.

9 9 MTDS and Annual Borrowing Plan An annual borrowing plan should be developed, consisen wih he MTDS and aking accoun of he underlying volailiy in governmen cash flows. The borrowing plan helps operaionalize he MTDS. The specifics on size and iming of new borrowing are deermined in conjuncion wih he forecas of cash needs given he expeced implemenaion of he budge, and aking accoun of any specific marke characerisics or credior behavior, and objecives of regular and sable issuance in he domesic marke. An imporan facor in deermining he effeciveness of he borrowing plan will be he qualiy and robusness of governmen cash managemen and forecasing. The plan also has imporan consequences for he cenral bank s assessmen of liquidiy condiions and should be shared wih i. Figure 2: Key Inerlinkages Cos - Risk Analysis Macro, marke and oher consrains Informaion on cos and risk MTDS Formulaion Macroeconomic Framework / Deb Susainabiliy Consisency / Consrains Budge projecions Informaion on cos and risk Desired insrumen composiion Demand consrains / Pricing facors Marke developmen iniiaives Financing Sources / Marke Developmen Marke developmen facors Annual Borrowing Plan Developing an MTDS 15. The MTDS is mos effecively developed where an appropriae enabling framework already exiss, including a well-developed medium-erm macroeconomic framework, wih clear and consisen objecives for fiscal and moneary policies. 11 Key elemens of such a framework include (see Appendix I): (i) an adequae legal framework; (ii) effecive insiuional arrangemens; and (iii) comprehensive and efficien deb recording. While 11 The Guidance Noe recognizes ha many of hese elemens may no be fully in place in many developing counries; neverheless, an effecive MTDS could help idenify needed reforms.

10 10 counries ake differen approaches o each of hese, some key underlying principles generally hold rue. 12 The legal framework. This should clarify he auhoriy o borrow and o issue new deb, inves, and underake ransacions on he governmen s behalf. Ofen, he legal framework also ses ou he overall objecives for deb managemen, clarifies he accounabiliy, and oulines he desired reporing and audi requiremens. Insiuional arrangemens. The supporing governance srucure should clearly ouline and describe he roles and responsibiliies of all relevan insiuions involved in deb managemen aciviies. In paricular, i should be clear which agen is responsible for deb managemen decisions. Deb recording. The DM needs o have sufficien informaion available on he deb porfolio on which o base he analysis. Ofen, esablishing an effecive daabase which covers all ypes of deb presens a significan challenge. A precondiion for high-qualiy and comprehensive deb daa is efficien deb recording. 16. In addiion, given ha he purpose of he MTDS is o inform fuure financing choices, i is imperaive ha here is poliical commimen o, and srong ownership of, he process. 17. The seps involved in designing an MTDS are se ou below. Noe ha alhough hese seps are presened in a specific sequence, his is only indicaive. In pracice, he disincion beween each sep will no be so clear, several seps may be underaken simulaneously, and / or in a differen order: 1. Idenify he objecives for public deb managemen and scope of he MTDS. 2. Idenify he curren deb managemen sraegy and analyze he cos and risk of he exising deb. 3. Idenify and analyze poenial funding sources, including heir cos and risk characerisics. 4. Idenify baseline projecions and risks in key policy areas fiscal, moneary, exernal, and marke. 5. Review key longer-erm srucural facors. 6. Assess and rank alernaive sraegies on he basis of he cos-risk rade-off. 7. Review implicaions of candidae deb managemen sraegies wih fiscal and moneary policy auhoriies, and for marke condiions. 12 See he Guidelines for a fuller discussion.

11 11 8. Submi and secure agreemen on he MTDS. 18. Once he MTDS has been agreed, i should be disseminaed hrough a published sraegy documen. The DM should hen develop an annual borrowing plan ha is consisen wih he MTDS. 19. As he borrowing plans are implemened, heir impac on progress owards achieving he MTDS should be regularly moniored and evaluaed. In addiion, he MTDS should be reviewed on a regular basis (e.g., annual), or more ofen if macro or marke condiions change significanly. This monioring and review process is an imporan elemen of effecive risk managemen. II. DEVELOPING A MEDIUM-TERM DEBT MANAGEMENT STRATEGY Sep 1. Idenify he objecives for public deb managemen and scope of he MTDS Objecive: Idenify he main objecives for public deb managemen and define he scope of he MTDS. 20. To enhance accounabiliy, he objecives and scope for public deb managemen, which effecively deermine he DM s asks and responsibiliies, as well as he coverage of he MTDS, should be idenified. In counries where deb managemen objecives are no clearly saed, e.g., in a legal documen, he DM should agree on he primary objecives wih he highes auhoriy (preferably he Miniser of Finance) and ensure ha hese are clearly documened. 21. The relevan objecives for deb managemen are ofen framed in erms of ensuring ha he governmen s financing needs and paymen obligaions are me on a imely basis, and a he lowes possible cos, consisen wih a pruden degree of risk. Ofen a secondary objecive is supporing domesic deb marke developmen. Furhermore, he DM should idenify oher policy objecives ha may have implicaions for he formulaion of he MTDS, such as supporing he implemenaion of moneary or exchange rae policy. 22. A precondiion for developing and implemening a sound MTDS is a clear definiion of he scope for he sraegy. 13 A a minimum, he scope should include he oal (domesic and exernal) direc cenral governmen deb. The exac definiion of he scope will depend on he degree o which he DM can influence he risk exposure of specific porfolios. 14 The coverage of he MTDS could be gradually expanded as informaion becomes available and 13 Usually he MTDS excludes cenral bank deb. This is because he anicipaed profi remiances from he cenral bank are already embedded in he fiscal projecions (see Appendix IV), alhough i would be imporan o check ha hese projecions are indeed consisen wih he assumed cos of moneary policy implemenaion. However, he implicaions of he currency composiion of governmen s foreign deb and cenral bank s foreign asses can be separaely reviewed for he scope o mach he exposure and reduce risk in he overall public secor balance shee, i.e., an asse-liabiliy managemen (ALM) approach. 14 For example, if he scope includes he porfolio of governmen guaranees, he DM should be involved in he decision-making process wih respec o he issuance of guaranees.

12 12 where he insiuional arrangemens allow for a broader and more comprehensive sraegy o be implemened. 23. Even wih a relaively narrowly defined scope, he DM should aemp o gaher informaion on he overall balance shee of he governmen, i.e., he main financial asses and liabiliies of he governmen, and main coningen liabiliies. This informaion can inform he assessmen of overall vulnerabiliy of he deb posiion, and srenghen he analysis of he appropriae sraegy by aking ino accoun he ne financial exposures of he governmen. 15 Oupu: - Descripion of he overall objecives for deb managemen. - Descripion of he scope for he MTDS. Sep 2: Idenify he curren deb managemen sraegy and he cos and risk of he exising deb Objecive: Idenify he curren deb managemen sraegy, he ousanding deb and is composiion; calculae basic cos and marke risk indicaors. 24. Idenifying he curren deb managemen sraegy helps provide a basis agains which alernaive sraegies can be esed. Ofen a formal deb managemen sraegy does no exis, or only covers par of he deb porfolio. In such cases, he curren sraegy would be a descripion of exising borrowing pracices. 25. A solid undersanding of he srucure of, and risks o, he ousanding sock of deb is fundamenal in developing an MTDS. The DM should gaher he daa on he deb porfolio as defined under Sep 1. The daa should comprise he oal size of deb, a breakdown by currency, credior ype, insrumen-ype, i.e., fixed, floaing, or indexed, bulle or amorizing (see also Box 7). The DM should organize he daa so ha he deb servicing and deb mauriy profile can be readily deermined and he impac of changing assumpions assessed. 16 Ideally, his informaion will be easily available from he deb recording sysem(s). 26. The DM should analyze he deb sock on he basis of key cos and risk indicaors. This requires he DM o idenify a clear definiion of cos and risk. While his may seem rivial, in pracice, i is an issue ha deb managers sruggle wih. I is imporan ha he DM is clear abou he objecives of deb managemen, and he relevan ime horizon o which hey apply. Typical cos and risk indicaors used by DMs are discussed in Appendix III. Based on an assessmen of hese indicaors, he DM should idenify sources of vulnerabiliy o he 15 This can lead o a more comprehensive ALM approach. 16 For variable rae deb and deb denominaed in foreign currencies, he curren ineres and exchange raes are ypically applied for he iniial calculaion of he deb servicing and mauriy profile of he ousanding deb sock. However, hese would be recalculaed using he projecions underlying any forward-looking quaniaive analysis (see Sep 6).

13 13 exising deb. 17 The exen of he risk will depend on he risk facors, such as he variabiliy and rends in ineres raes, and exchange raes, 18 as well as he risk exposure, such as he share of domesic deb, shor-erm, and variable rae deb. Oupu: - Deailed informaion on ousanding deb. - Deb servicing profile of ousanding deb. - Descripion of main porfolio risks. Sep 3: Idenify and analyze poenial funding sources, including heir cos and risk characerisics. Objecive: Idenify poenial sources of finance, heir financial characerisics, amouns available, and desirabiliy of use. 27. The DM should idenify he characerisics of all exising financing insrumens, and assess he relaive cos and risk of hese In addiion o he sandard characerisics of he ousanding deb ha affec he cos and risk analyzed in sep 2, oher characerisics also affec he desirabiliy of specific ypes of deb insrumens. These include: wheher is use is resriced o cerain purposes, e.g., projec financing or budge suppor; wheher here are oher condiions aached o i, e.g., is co-financing required; and wheher here are any uncerainies associaed wih disbursemen. 29. The DM also needs o consider wheher he use of cerain insrumens (such as inernaional capial marke financing) would enail oher indirec coss such as he legal or financial advisory services necessary o achieve a successful issue. In addiion, he DM should deermine wheher any insrumens come wih added benefis, such as advisory services or projec managemen suppor, which could offse some of he cos facors. Clear 17 This assessmen of vulnerabiliies could also include credior concenraion, which capures an elemen of rollover risk. 18 I is imporan ha variabiliy is assessed over an appropriae ime horizon. For example, using an annual measure of volailiy migh mask a rend in a key variable, ofen apparen when daa are graphed; in hose cases, volailiies should be evaluaed over longer periods. Moreover, i is imporan o evaluae real changes in hese variables. For example, he long-erm deb o GDP raio and oher raios indicaive of he cos of deb depends on developmens in he real ineres and exchange rae. In one counry o which he MTDS was applied, he annual sandard deviaion in he real exchange rae was 2 percen, masking ha he real exchange rae had depreciaed 20 percen over he pas 10 years, adding 2 percen o he real cos of foreign deb annually. 19 Appendix III discusses possible sources and heir cos and risk characerisics. Noe ha he MTDS is focused on deb creaing financing opions; his means ha grans are no covered by he MTDS. However, he projeced availabiliy of grans is an imporan facor in deermining he ne deb creaing financing need, and should be incorporaed ino any quaniaive analysis, as hey will effecively reduce he funding need.

14 14 idenificaion of such facors will help inform he appropriae balance, for example, beween bilaeral and mulilaeral sources. The DM should assess, given informaion abou he poenial sources of funding, if here are any limiaions on he quaniy ha could be borrowed from hese sources going forward, or he condiions under which is availabiliy migh change The DM should consider wha poenial new financing insrumens migh become available wihin he horizon of he MTDS (e.g., access o inernaional capial markes, reail deb, and longer enors). Issues of iming can also be criical in deermining he feasibiliy of specific insrumens. 21 The DM should also consider wheher financial derivaives migh be accessible and clarify how hese migh affec he implemenaion of he MTDS. However, while using swaps o aler he currency composiion of he deb migh be appropriae for LICs, his requires ha he necessary capaciy, sysems and insiuional se-up are in place. Where acions are ouside his scope, he DM should consider raising his wih he relevan policy maker, and more generally working wih oher officials o enhance he counry s access o financing. 22 Oupu: - An assessmen of he characerisics, including he cos and risk, of all available and poenial financing insrumens, and how hey migh miigae he porfolio risks previously idenified. - An idenificaion of consrains, paricularly on issue size, relevan o he deerminaion of he MTDS. - An idenificaion of seps necessary o improve access o, or erms of, hese insrumens. Sep 4: Idenify baseline projecions and risks in key policy areas fiscal, moneary, exernal, and marke Objecive: Idenify he baseline projecions for key fiscal, moneary and exernal policy variables, as well as marke raes, he main risks o hese projecions, and he relevan consrains and implicaions for MTDS formulaion. 20 For example, if a counry decides o access he inernaional capial markes, is access o concessional financing migh change. See IDA Counries and Non-Concessional Deb: Dealing wih he Free Rider Problem in IDA14 Gran Recipien and Pos-MDRI Counries, IDA/R , July Or, currenly, i may only be feasible o access he domesic marke a variable raes or a relaively shor enors, bu if he domesic marke were more developed, i would be feasible o issue longer-erm fixed rae deb. In his case, he DM should acively consider wha policy acions are wihin his purview, ha would be effecive in developing he domesic marke furher. 21 For example, if moneary policy is no ye fully credible, hen he DM may wan o pospone issuance of longer-erm fixed rae insrumens on he grounds of cos. 22 This could involve, for insance, supporing he implemenaion of a program of invesor educaion by he securiies regulaor, or encouraging he ax auhoriies o review he ax reamen on invesmens in governmen securiies, o faciliae domesic marke developmen.

15 The DM should have a clear undersanding of he macroeconomic framework wihin which he MTDS is o be developed, and how i ineracs wih decisions on deb managemen. In paricular, his sep will require ineracion wih he fiscal and moneary policy auhoriies. The baseline projecions for he macro variables will in general be he same as hose used in he auhoriies deb susainabiliy analysis (DSA) (see Box 2). Box 2. MTDS, DSA and he DSF: The linkages MTDS and DSF are boh frameworks ha address deb issues, bu, given heir differen focus, hey are complemens raher han subsiues. The DSF provides he analyical ool o underake deb susainabiliy analysis (DSA). I focuses on he long-erm susainabiliy of deb, which is influenced by boh is level and composiion. To assess deb susainabiliy, he DSF considers a baseline macroeconomic framework ha oulines a counry s fiscal and balance of paymens sance under cerain assumpions and condiions, and hen considers he robusness of key deb burden indicaors usually he raio of he NPV of deb o GDP, expors or ax revenue o various macroeconomic shocks, such as o GDP, he exchange rae, revenues, ec. Overall, is primary objecive is o gauge if he level and erms of curren and expeced fuure borrowing may lead o fuure deb servicing difficulies over he long-erm. However, cerain simplifying assumpions are generally made, e.g., he erm srucure for marke deb is no explicily modeled, which limis is abiliy o provide some of he deailed analysis ha would be of ineres o he deb manager. The MTDS is a more argeed deb managemen framework, focusing on he specifics of how he composiion of deb should be managed over he medium-erm. Deermining an effecive MTDS requires he performance of various financing sraegies o be evaluaed under a given pah for key macroeconomic variables, which should be consisen wih ha used in he DSF. Similarly, i requires he robusness of each alernaive sraegy o be evaluaed under various shocks. Again, he DSF should inform he sress ess o be applied. Here, variables ha capure marke risk, such as he ineres rae sensiiviy of cash flows, oher deerminans of he erm srucure, and he exchange rae, may be explicily modeled. This means ha more deailed informaion on he specifics of he deb porfolio can be assessed more readily. The DM needs o recognize ha MTDS may have imporan consequences for he DSA conduced wihin he DSF. Where esing of he alernaive deb sraegies under he various sress ess suggess ha key deb susainabiliy indicaors may be a risk, his should be discussed wih he fiscal auhoriies. A his poin, he preferred sraegy, and is associaed cos and risk implicaions, could be fed ino an updaed DSA. 32. As regards he fiscal policy seing, he DM should be clear abou he expeced pah of he primary balance, and he key drivers underlying his projecion, including anicipaed governmen revenues and expendiures, and economic growh. An issue ha may be paricularly perinen for LICs is he appropriae reamen of projec loans and associaed spending. The planned spending, as refleced in he fiscal framework, is ypically dependen on he receip of specific projec loans. Thus he DM may wan o ake he pah of expeced disbursemens as a given, as hey will be offse by changes in spending Neverheless, i will be imporan o assess from ime o ime sraegic choices in a more unconsrained manner, which will enable he auhoriies o deermine he relaive coss and benefis of projec-based versus general budge financing.

16 Wih respec o moneary policy and exernal facors, he DM should seek he views of he moneary auhoriies on heir assessmen of he fuure sance of moneary policy, he exchange rae, he anicipaed balance of paymens developmens and he implici deb sraegy incorporaed in he exernal DSA. Given heir assessmen of he oulook, he moneary auhoriies may require a specific arge for reserves accumulaion o be financed; his could be paricularly perinen in he case where counries are par of a moneary union, or where he counry operaes a fixed exchange rae regime. In addiion, he credibiliy of moneary policy should be considered as i may affec he relaive cos consideraions of shor- and long-erm domesic deb and influence he choice of he preferred sraegy. In his case, he MTDS could conribue o coordinaed effors o enhance credibiliy and reduce he inflaion risk premium. 24 More generally, he role of deb managemen policies in reinforcing or hindering hese policies needs o be clearly undersood and may require coordinaion (see also Box 1 and Appendix V) In addiion, he DM needs o deermine a baseline projecion for relevan yield curves, and any oher relevan marke facors, ha will prevail hrough he planning horizon, hereby enabling he assumed cos of conracing new deb or rolling over exising deb o be deermined. Judgmen is required when idenifying he mos suiable mehodology for underaking hese projecions, and esimaing any required risk premia. The DM should draw on marke conacs and marke analysis o help inform hese projecions. 26 As domesic deb markes develop, he qualiy of hese esimaes can be improved and more sophisicaed echniques may become feasible. 35. The DM can also draw on officials involved in oher areas, paricularly banking supervision, o undersand he scale of poenial weaknesses in banks which may affec demand for public deb, and hose involved in capial conrols o undersand he poenial scale of rollover risk in domesic deb. More generally, a broad undersanding of financial secor, regulaory or axaion policies will be useful o assess possible developmens ha could impac he marke environmen for issuing deb. Finally, he DM should review he financial advice and analysis available from oher sources, e.g., invesmen banks, which could provide some useful insigh ino how marke condiions migh evolve. 36. Once a baseline has been deermined, he DM should idenify, in consulaion wih oher officials, relevan risk scenarios, which could poenially impac he quaniy, and cos, of financing required. For example, where counries have increasingly accessed exernal funding sources, including he inernaional capial markes, he DM should consider he risk 24 For example, he inroducion of inflaion-linked insrumens could signal a wider commimen by he auhoriies o mainaining price sabiliy. 25 For example, in relaively underdeveloped markes, any implied volailiy in he supply of domesic deb securiies, and he enor of hose insrumens, could affec he ransmission of moneary policy, and he effeciveness of any moneary policy signals. 26 Sandard opions for deriving a yield curve would include inferring he forward curve from he curren observed curve, or assuming a domesic yield curve based on a benchmark exernal curve (e.g., in US dollar or Euro) and adjusing for expeced inflaion differenials, inflaion risk premium and credi risk premium. This opion is included in he accompanying spreadshee ool.

17 17 of a sudden sop, which could lead o rollover problems. Tha assessmen could influence he preferred sraegy owards lenghening he average mauriy of exernal deb or building a cushion of reserves. 27 A a minimum, hese risk scenarios should reflec hose highlighed by he deb susainabiliy framework (DSF) Noe ha, even in he absence of a subsanive change in he macroeconomic framework, he MTDS may have imporan consequences for he DSA. Where esing of he alernaive deb managemen sraegies being considered (see Sep 6 and Box 2) suggess ha key deb susainabiliy indicaors may be a risk, he DM should inerac closely wih hose involved in he DSA o idenify sraegies ha reduce he risk of deb defaul, or if here are no such sraegies, highligh his, so ha oher measures can be aken. Oupu - Baseline projecions for key fiscal, moneary policy, exernal, and marke variables. - A clear and comprehensive se of counry specific risk scenarios o be esed. Sep 5: Review longer-erm srucural facors Objecive: Review srucural facors ha will poenially influence he desired direcion of he deb composiion over he longer-erm. 38. The DM should idenify, in consulaion wih economic policy-makers, long-erm srucural feaures of he economy ha may influence he desired deb composiion. These facors should also be refleced and discussed in he auhoriies DSA. These could include he following: he economy s dependence on commodiies, and he associaed vulnerabiliy o developmens in commodiy prices; he longer-erm prospecs of coninued access o concessional finance; possible long-erm rends in he real effecive exchange rae; and long-erm inflaionary rends. 39. Such facors could have a significan influence on he desired deb composiion over he long erm. For example, he desirable currency composiion should ake accoun of he long-erm oulook for he real effecive exchange rae and consequen implicaions for an evaluaion of domesic versus foreign real ineres raes. Similarly, he mauriy composiion 27 Where his exernal vulnerabiliy is high and reinforced by he operaion of a fixed or semi-fixed exchange rae regime, coordinaing ha risk miigaion response wih he moneary auhoriies is criical. 28 For example, experience suggess ha he auhoriies should be cauious in heir assessmen of he expeced reurn on public invesmen or aid; consequenly a more pessimisic growh scenario should be considered. The DSA should highligh he key sress ess.

18 18 of he porfolio should ake accoun of he broad macroeconomic policy regime, and wheher ha migh change over he long erm An assessmen of how economic policy makers expec hese facors o develop over ime, will guide which sraegies he DM should focus on (see Box 3). In addiion, a longererm perspecive on he exen, and speed, o which he qualiy of insiuions can be srenghened and credibiliy of macroeconomic policies esablished, would be relevan o consider, as hose developmens will affec he erms on which new borrowing will become available. Box 3. Linkage Beween MTDS and Counry Specific Srucural Economic Facors Depending on he counry specific facors ha are being analyzed, he MTDS should be argeed a miigaing or offseing, as much as possible, undesirable oucomes. For example: Terms of rade developmens: Where counries revenues are significanly exposed o erms of rade developmens, e.g., as a consequence of a dependence on commodiy expors or impors, his is likely o have implicaions for heir real effecive exchange rae. This aggravaes he poenial cos and risk of foreign currency deb. Alernaively, poenial cos and risk is significanly reduced if a counry s real effecive exchange rae is sysemaically appreciaing. So, while many LICs have suffered from he consequences of he prolonged downward rend in commodiy prices in he 1980 s and 1990 s, for he Asian igers, foreign currency deb migh have proved relaively cheap. As commodiy prices and erms of rade can follow very long cycles a long-erm view on he risk is necessary. Access o concessional financing: As counries income levels grow, access o concessional financing may become limied. In his case, he MTDS will be biased o enhancing he access o oher ypes of financing. For example, inroducing a broad range of domesic markeable securiies, or esablishing access o inernaional capial markes. Oupu - Ariculaion of long-run srucural facors ha he MTDS should ake ino accoun. Sep 6: Assess and rank alernaive deb managemen sraegies on he basis of he cosrisk rade-off. Objecive: Idenify and analyze possible deb managemen sraegies, assess heir performance, and choose a small number of candidae deb managemen sraegies. 41. To deermine he preferred MTDS, he DM should assess he performance eiher qualiaively or quaniaively of a range of alernaive sraegies, from a cos and risk 29 For example, if i is envisaged ha, over ime, he exchange rae regime may become more flexible, hen ha migh have implicaions for he longer-erm currency and mauriy composiion of he porfolio. As noed earlier, rollover risk is more pronounced in counries ha follow a fixed exchange rae regime, bu a more flexible exchange rae regime could suppor a greaer proporion of shor-erm deb.

19 19 perspecive. This requires he DM o idenify a se of relevan sraegies, and assess hese under he consrains and fuure scenarios for he primary balance and marke raes previously deermined. Furhermore, he sraegies should hen be evaluaed under he relevan risk/sress scenarios ha have been idenified. 42. In pracice, he DM only needs o analyze in deail a small se of sraegies. To begin, he DM could consider he exising implici or explici deb managemen sraegy (see Sep 2). The DM migh hen idenify alernaive deb composiions and sraegies ha could help miigae he key vulnerabiliies already idenified. Sraegies ha suppor he developmen of domesic markes migh also be considered. 43. In he absence of any specific quaniaive ools o analyze alernaive sraegies, he DM should consider wha characerisics of deb or deb composiion would miigae key sources of volailiy o he budge or provide some buffer o he impac of idenified risks (see Sep 4), and consider he poenial coss of achieving ha deb composiion. For example, if he counry is exposed o exernal shocks and he real exchange rae is volaile or a risk of a downward rend, he DM may wan o avoid aggravaing ha by reducing exernal financing. This would allow he DM o specify he preferred direcion of specific risk indicaors, such as increasing he share of domesic currency deb or lenghening deb mauriy. 44. If he DM has developed, or has access o, relevan ools (such as he accompanying MTDS spreadshee ool, see Box 4 and illusraion in Appendix VI), a quaniaive assessmen of he cos and risk of he alernaive sraegies can be underaken. Typically, such ools compare he cos of deb o he risk (as defined by he change in he cos) over a specific ime horizon under differen scenarios. Such ools allow he DM o simulae he impac of various financing opions, racking he evoluion of he key cos and risk indicaors for each sraegy esed. 45. Scenario analysis allows he impac of specific shocks or risk scenarios o be evaluaed. These should include he alernaive scenarios or sress ess idenified in Sep 4, including any compound shocks considered in he DSA. Similarly, where he DSA analysis suggess ha he baseline macro scenario is opimisic, i is imporan o assess he implicaions of using a more conservaive se of macro assumpions. 30 This risk assessmen becomes criical where deb levels are already high, relaive o he governmen s abiliy o pay. 46. The choice of ime horizon over which he cos and risk are evaluaed should ake accoun of he sabiliy of he economy. For example, if he economy is quie sable, evaluaing he cos and risk over a shorer ime horizon may be fully represenaive; however, if he economy is no sable, i may be necessary o consider a longer ime horizon This migh bias he MTDS owards lower risk, bu possibly more cosly, sraegy. 31 For example, if commodiy expor prices are in a downward rend, a longer ime period may need o chosen so ha he upward rend is also capured.

20 20 Similarly, he shocks considered also need o correspond o he period evaluaed. 32 More generally, when comparing he relaive impac of specific sress ess, he subjecive probabiliy assigned o he realizaion of each specific shock should be aken ino accoun. Box 4. The MTDS Analyical Tool An analyical ool (MTDS AT) complemens he analysis described in his Guidance Noe. The purpose of he ool is o suppor quaniaively he process of decision-making. The oupus are inended o inform and illusrae he consequences of following a paricular deb managemen sraegy under various scenarios or sress ess. The ool can be used o es he consequences of eiher following a specific financing plan or achieving and mainaining a specific deb composiion, wih he associaed series of financing plans deermined by he ool. In his connecion, he ool can be used o highligh he relaion beween, on he one hand, he cos of various financing plans or deb composiions, and, on he oher hand, he associaed risk. The ool is flexible, users can, wihin cerain limis, specify he ime horizon for he projecions, he number of currencies, and he range of insrumens. The ool is Excel-based and comprises four separae spreadshees. A variey of cos and risk indicaors are produced allowing he DM o consider cos-risk rade-offs of each alernaive sraegy. While he resuling cos-risk rade-offs help in he decision-making process by providing quaniaive informaion, he ool is no mean o be he sole focus when making decisions. Wih oupus driven by he inpu assumpions, careful judgmen mus be applied o any inerpreaion of he resuls. 47. The sraegies under consideraion should be reviewed agains he assessmen in Sep 3, o ensure ha hey would be feasible o implemen. This review migh idenify broader policy issues ha effecively consrain he se of feasible sraegies. Even where he range of feasible deb managemen sraegies is limied, as is he case in many LICs, his explici evaluaion of he coss and risks is an imporan elemen of risk managemen. 48. Once he DM has assessed he performance of he key relevan sraegies, core resuls should be summarized (e.g., abular or graph form) and a small number of candidae sraegies should be idenified, presened, and discussed wih oher policy officials. Oupu: - A ranking of a small number of candidae sraegies in erms of cos and risk. 32 For example, is a ypical shock bes represened by he annual sandard deviaion or are shocks correlaed over ime and is he shock bes represened by he sandard deviaion over a 5-year period, measured on a rolling basis, e.g., over a 20-year horizon. Ideally he sandard deviaion would be calculaed over a period ha is equal o or longer han he cycle. See also he discussion under Sep 2.

21 21 Sep 7: Review implicaions of candidae deb managemen sraegies wih fiscal and moneary policy auhoriies, and for marke condiions Objecive: Ensure ha relevan feedback from he sraegies idenified is provided o he fiscal and moneary policy auhoriies. Review he poenial deb marke implicaions of he sraegies. 49. The candidae sraegies, and heir associaed cos and risk implicaions, should be reviewed wih he fiscal policy auhoriies, and heir implicaions for deb susainabiliy assessed. If he review of he sraegies idenified under Sep 6 wih he fiscal auhoriies suggess poenial risks o he budge, or ha deb susainabiliy or exernal viabiliy appears o be a risk, he poenial sraegies may have o be adjused. Alernaively, a review of he baseline fiscal projecions may be required so ha more fiscal space can be creaed. 50. Similarly, he poenial implicaions of he candidae sraegies for moneary condiions should be discussed wih he cenral bank, including heir poenial o suppor moneary policy objecives. The anicipaed amoun of foreign currency, and oher nonresiden financing, and he likely enor, may have implicaions for inervenion, he exchange rae and crowding ou of he privae secor. Also, he implicaions for he balance of paymens and he level of rollover risk relaive o he anicipaed level of inernaional reserves should be discussed. In case exernal deb susainabiliy appears a risk, or financing sraegies creae or conribue o excessive liquidiy risk, he implicaions for he exchange rae regime should be discussed. The oucome of such discussions may also affec he choice of sraegy, or migh require he DM o idenify an alernaive sraegy. 51. The implicaions of he DM s preferred MTDS, including he implied financing from domesic and inernaional markes, should be reviewed wih he moneary and financial marke auhoriies o assess he impac of he implied invesmen assumed from key invesor groups. The poenial implicaions for capial marke developmen and financial sabiliy should also be assessed. 33 These implicaions migh be posiive for example, a sraegy under consideraion ha would help provide an effecive benchmark for he privae secor or negaive for example, he quaniy of proposed financing hrough one insrumen would effecively absorb all available capaciy and may crowd ou he privae secor. Similarly, regulaory concerns abou, for example, he exposure of he banking sysem, could be brough o bear, helping deermine wheher he proposed MTDS is appropriae. 52. In general, if he deb managemen sraegy has significan implicaions for he underlying macroeconomic assumpions, an ineracive approach may be needed where deb and macroeconomic sraegies are joinly discussed, and revised using a process of ieraions. A significan revision o he baseline projecions (Sep 4) will require he DM o repea he sraegy analysis exercise (Sep 6), ec. 33 This could arise as a consequence of a concenraion of he invesor base, e.g., an increase in he vulnerabiliy of he banking sysem, migh lead o an increased deb burden in he even ha he banking sysem collapses.

22 22 Oupu: - A clear assessmen ha he candidae sraegies are consisen wih fiscal and moneary policies, mainaining deb susainabiliy, and are in line wih plans for marke developmen. Sep 8: Submi and secure agreemen on he MTDS Objecive: Idenify he preferred MTDS, and send proposal, along wih ranked alernaive candidae sraegies, o he highes auhoriy responsible for deb managemen for approval. 53. Based on Seps 1 hrough 7, he DM should presen he preferred MTDS o he highes auhoriy responsible for deb managemen for approval. The presenaion should include alernaives o he preferred MTDS. 54. The MTDS should be approved by he highes auhoriy of he Minisry of Finance as i should embody he governmen s preferred risk olerance, which involves a poliical judgmen on he cos and risk radeoff. Once approved, he deb managemen sraegy should be formalized and an explici mandae given o he DM o implemen he sraegy. Oupu: - An approved MTDS. III. DISSEMINATION 55. Once he MTDS has been agreed and formalized, i is recommended ha he MTDS be disseminaed hrough he release of a public deb managemen sraegy documen. 34 Disseminaion of he MTDS will help he DM srenghen he relaionship wih crediors, invesors and oher key sakeholders (e.g., credi raing agencies), and faciliae an open dialogue on key facors influencing he choice and implemenaion of he MTDS. This could help secure suppor for he chosen MTDS and reduce invesor uncerainy. 56. A ypical published documen describing he MTDS would highligh he following: he objecive and scope of he MTDS; a descripion of he curren and expeced macroeconomic environmen; an evaluaion of he exising sock of deb; and an ouline of he agreed MTDS, wih a discussion of facors ha influenced he choice of sraegy, including he key risk facors ha he MTDS is focused on managing The MTDS could be expressed hrough arges for a specific insrumen composiion or specific indicaors of cos or risk. A he iniial sages, he indicaors could be more descripive, e.g., he desired MTDS is o increase he share of domesic currency deb or 34 The DM should use all readily available avenues for publicaion, including websies. 35 See Appendix VII on Templae for a deb managemen sraegy documen. I is generally no necessary o disclose he full exen of he analysis underaken; in paricular, some of he sress scenarios considered may be sensiive.

23 23 gradually exend mauriies. Over ime, he arges could become more specific and precise, e.g., seing a porfolio arge of 60 percen domesic currency deb. 58. Where an MTDS is developed for he firs ime, i migh be paricularly useful o reach ou o a broad audience including parliamenarians, domesic and foreign invesors, inermediaries, raing agencies, by organizing workshops, seminars or roadshows. More generally, he MTDS can provide a srong basis for building an effecive invesor relaions program, 36 which can faciliae domesic deb marke developmen and impac he cos of fuure marke-based deb. IV. IMPLEMENTATION AND FOLLOW-UP 59. Once he MTDS has been decided, he DM should develop an inernal annual financing plan oulining how he sraegy will be implemened over he coming budgeary period. The annual funding need will be deermined hrough he budge process, while disribuion of he funding need inra-year will depend on he governmen s cash flows. In general, he cos-effeciveness wih which a financing plan can be implemened will reflec he auhoriies capaciy o develop meaningful governmen cash forecass. 37 A he aggregae level he oal amouns o be raised hrough each of he available insrumens can be deermined based on he sraegy. This hen needs o be broken down ino more specific arges based on he DM s knowledge of he sources of financing. 60. When he aggregae arges are idenified, he likely iming of flows should be planned and checked o ensure ha i delivers sufficien financing o mee he anicipaed inra-year flows. Typically, separae plans will be formulaed for domesic and exernal marke borrowing. 61. Deermining he annual financing plan generally begins wih an analysis of he anicipaed budge (cash) flows, including expeced deb servicing flows. Taking accoun of he saring balance on he Treasury Single Accoun (TSA), or he ne balances across governmen accouns (and he planned profile of reserves financing for he cenral bank) will enable he DM o map ou he profile of financing requiremens hrough he year. Supplemening his wih he anicipaed disbursemens of official loans would idenify where he anicipaed balance on he TSA will be relaive o is arge balance, and, consequenly, he preferred size and iming of financing operaions. 38 On he domesic side, his analysis allows he DM o develop an issuance schedule consisen wih any sraegic goals, such as 36 See IMF (2004) for a discussion of issues relaing o he design of an effecive invesors relaions program. 37 Efficien and effecive governmen cash managemen will suppor he developmen of a more commied and ransparen financing plan, and overall conribue o reducing he cos of deb. Where here are significan weaknesses in cash managemen, he iming of financing operaions may be more ad hoc, and consequenly less conducive o marke developmen, and, so, more cosly. 38 I may be an agreed policy objecive o mainain a posiive TSA balance o absorb volailiy in key in-flows. In general, o reduce poenial carry cos, he deb manager will ry o ime financing operaions o keep accoun balances as close as possible o heir arge levels, alhough ha needs o be balanced agains he desirabiliy of following a regular issuance paern o suppor marke developmen.

24 24 following a regular issuance paern o suppor marke developmen (see Appendix VIII for an illusraion). On he exernal side, while he DM may have less discreion o choose he precise iming of operaions, he analysis would highligh he laes poin a which borrowing will need o have been secured, for example, from apping inernaional markes or sourcing oher exernal privae secor loans Ofen he annual financing plan, or a leas he domesic componen, is communicaed o he marke. 40 As he year progresses, and he budge is implemened, he financing plans will need o be updaed depending on he realized flows. 63. In addiion, i is imporan o periodically review he MTDS, ideally on an annual basis, and confirm is coninued validiy. Also, if here are fundamenal shifs in macroeconomic or marke condiions, he MTDS should be updaed. A new analysis should be underaken, and a new proposal should be submied along wih a clear explanaion of why a revision and updae of he sraegy is recommended. 64. Progress on he implemenaion of he MTDS should also be regularly communicaed o he miniser of finance, or any oher relevan commiee, e.g., hrough regular managemen reporing. This reporing should provide informaion on he evoluion of he porfolio, and he key cos and risk facors. Such regular reporing plays a key role in an effecive risk managemen framework. 39 Where counries have no already esablished a presence in he inernaional capial markes or relaionship wih specific crediors, hen hese plans should ake accoun of he poenially significan lead imes involved. 40 Such communicaion can faciliae he deepening of he governmen bond marke and conribue o boh cos and risk reducion by enabling greaer volumes, and a broader range of insrumens, o be issued, and reducing he risk premium arising from marke uncerainy. In addiion, he more regulariy and commimen ha can be facored ino he aucion schedule, he more likely ha operaions will be successfully received by he marke, helping miigae he risk of under-subscripion.

25 25 Useful References Arnone, Marco and George Iden, 2003, Primary Dealers in Governmen Securiies: Policy Issues and Seleced Counries Experience, Inernaional Moneary Fund Working Paper No. 03/45, (Washingon), (March). Árvai, Zsóvia and Geoffery Heenan, 2008, A Framework for Developing Secondary Markes for Governmen Securiies, Inernaional Moneary Fund Working Paper No. 08/174, (Washingon), (July). Currie, Elizabeh, Jean-Jacques Dehier and Eriko Togo, 2003, Insiuional Arrangemens for Public Deb Managemen, World Bank Policy Research Working Paper No. 3021, (Washingon), (April). Inernaional Moneary Fund, 2004, Invesor Relaions Programs Recen Developmens and Issues, (Washingon) (Ocober). Inernaional Moneary Fund, and World Bank, 2003a, Guidelines for Public Deb Managemen, (Washingon, revised ed.)., 2003b, Guidelines for Public Deb Managemen: Accompanying Documen, (Washingon) (Augus)., 2001, Developing Governmen Bond Markes: A Handbook," (Washingon)., 2007, Srenghening Deb Managemen Pracices: Lessons from Counry Experience and Issues Going Forward, Execuive Board Documen, (Washingon) (May)., 2009, Managing Public Deb: Formulaing Sraegies and Srenghening Insiuional Capaciy, Execuive Board Documen, (Washingon) (March). Organizaion for Economic Cooperaion and Developmen, 2002, "Deb Managemen and Governmen Securiies Markes in he 21s Cenury," Sepember (Paris). Wheeler, Graeme, 2004, "Sound Pracice in Governmen Deb Managemen," (Washingon: World Bank). World Bank, 2007a, Managing Public Deb: From Diagnosics o Reform Implemenaion, (Washingon)., 2007b, Developing he Domesic Governmen Deb Marke: From Diagnosics o Reform Implemenaion, (Washingon)., 2008, Guide To The Deb Managemen Performance Assessmen Tool (DEMPA), (Washingon).

26 26 Appendix I. The Enabling Insiuional Framework 65. A clear insiuional framework faciliaes effecive deb managemen. Key elemens of such a framework include: (i) an adequae legal framework; (ii) effecive insiuional arrangemens including he organizaional se-up of he DM funcion; and (iii) comprehensive and efficien deb recording. While counries ake differen approaches o each of hese, some key underlying principles generally hold rue. 41 Specifically, he legal framework should clarify he auhoriy o borrow and o issue new deb, inves, and underake ransacions on he governmen s behalf (see Box 5). Ofen, he legal framework ses ou he overall objecives for deb managemen, clarifies he accounabiliy and oulines he desired reporing and audi requiremens. I can also address he specific modaliies of coordinaion among he agens involved in deb managemen, e.g., a fiscal agency role of he cenral bank. 66. The supporing governance srucure should clearly ouline and describe he roles and responsibiliies of all relevan insiuions involved in deb managemen aciviies. In paricular, i should be clear which agen is responsible for deb managemen decisions. Typically his would be he miniser of finance, possibly suppored by an advisory commiee. Regardless of he specific se-up, he arrangemens needs o be srucured, and lines of responsibiliy and accounabiliy should be clear and consisen. 67. The agen responsible for deb managemen policies and implemenaion should make sure ha here is sufficien informaion o discharge his responsibiliy effecively. Typically his is done hrough periodic reporing by he DM on progress on he implemenaion of he deb managemen sraegy and associaed borrowing plan. This reporing should provide informaion on he evoluion of he porfolio and he key cos and risk indicaors, so ha hose accounable for decisions are able o adequaely monior developmens vis-à-vis he expeced evoluion of hese indicaors. 41 See IMF and World Bank, 2003, Guidelines for Public Deb Managemen for a fuller discussion.

27 27 Box 5. Elemens of a Sound Legal Framework for Public Deb Managemen The legal framework for public deb managemen ideally conains he following key elemens: Clear auhorizaion by Parliamen/Congress o he execuive branch of governmen o approve borrowings and loan guaranees on behalf of he governmen. Clear auhorizaion by he execuive branch of governmen o he deb managemen eniies o underake borrowing and deb-relaed ransacions and o issue loan guaranees. Clear deb managemen objecives. Common deb managemen objecives found in modern legislaion are ha cenral governmen s funding needs are always me, he cos of he deb is minimized from a medium/long-erm perspecive, he risks in he deb porfolio are kep a accepable levels, and ha developmen of he domesic deb marke is promoed. A requiremen o develop a deb managemen sraegy. Once he deb managemen objecives are se, hese objecives mus be ranslaed ino an operaional sraegy ha will provide a framework for how he governmen will achieve is deb managemen objecives. Mandaory reporing on an annual basis covering an evaluaion of oucomes agains saed objecives and he deermined sraegy. Such accounabiliy is he counerpar o he delegaion by Parliamen/Congress of borrowing power o he execuive. A requiremen for an exernal audi. Such a requiremen for exernal audi is normally found in he general Public Audi Ac, raher han in specific deb managemen legislaion. 68. Where differen eniies are involved in conracing direc liabiliies of he cenral governmen, here needs o be effecive insiuional arrangemens o ensure coordinaion and effecive implemenaion of he MTDS. In paricular, here needs o be mechanisms in place o share informaion on developmens in hese sub-porfolios and coordinae acions. Counries ake differen approaches o addressing his coordinaion challenge, ranging from cenralizing all deb managemen funcions in one uni, o creaing a cenral uni responsible for developing and monioring he MTDS, wih oher eniies reaining responsibiliy for implemenaion. In addiion, given he imporan linkages beween he effecive implemenaion of he MTDS and governmen cash managemen and moneary policy implemenaion, insiuional arrangemens need o recognize he need o esablish effecive coordinaion mechanisms beween hese funcions.

28 28 Box 6. Organizaional Arrangemens Sound public deb managemen requires an insiuional srucure ha clearly delineaes roles, responsibiliies, and reporing channels for he relevan insiuions. Consolidaing deb managemen funcions ino one deparmen or direcorae can avoid duplicaion of funcions, srenghen accounabiliy, and reduces he requiremens for coordinaion and informaion sharing. I also faciliaes he analysis and developmen of a sraegy for he aggregae deb porfolio, because one eniy is clearly mandaed o perform his role and mainains he full se of informaion required o underake i. Experience in he developing counry conex suggess ha ha insiuional arrangemens surrounding deb managemen operaions remain fragmened across a number of governmen agencies, especially since projec managemen end o require a heavy involvemen of he planning or economy minisries. Srong coordinaion among he various agencies is hen called for o be effecive a carrying ou DM funcions. In his regard, i is generally recognized ha a consolidaed deb managemen funcion is no a precondiion for sound public deb managemen. When consolidaing deb managemen responsibiliies ino one eniy, clear inernal divisions of responsibiliies are needed o reduce operaional risk. In paricular, separaion beween fron- and backoffice aciviies is criical for reducing he risk of fraud in any organizaion underaking financial ransacions. In urn, in more advanced operaions, he separaion of fron- and middle-office aciviies ensures he independence of hose seing and monioring he risk managemen framework from hose responsible for execuing marke ransacions. In addiion, i is imporan ha saff are subjec o a clear code of conduc and conflic of ineres rules o ensure he inegriy of he deb managemen operaions. Based on World Bank (2007a) chaper Ofen, esablishing an effecive daabase which covers all ypes of deb, and ha can provide necessary inpu for he developmen of he MTDS presens a significan challenge. A precondiion for high-qualiy and comprehensive deb daa is efficien deb recording. While a good IT sysem conribues o esablishing sound deb recording, experience show ha he esablishmen of clear processes and procedures around he deb recording sysem(s) is criical. Wih respec o IT sysems, counries ake a variey of approaches including developing sysems in-house, use of a hird-pary sysem, or some combinaion of boh. To ensure he inegriy of any daa enered ino a sysem, adequae operaional procedures should be in place o ensure accuracy Counry experience in esablishing an effecive enabling framework are discussed more expansively in IMF and World Bank (2007) and World Bank (2007a). 42 In general, counries should srive o achieve he four eyes principal, wih daa enered and verified by separae people.

29 29 Box 7. Desirable Elemens of a Deb Recording Sysem A robus deb recording sysem should provide for an accurae, consisen and comprehensive daabase of domesic, exernal and governmen-guaraneed deb. A good deb recording sysem would readily provide he following: An accurae breakdown of he ousanding deb by various characerisics, including currency composiion, credior composiion, concessionaliy, and insrumen composiion (including by ineres rae ype). Aggregae deb servicing schedules across various caegories of deb. Some basic porfolio indicaors, such as average mauriy, proporion of foreign currency deb, ec. Paymen schedules for ineres and amorizaion of individual loans and securiies, along wih he associaed paymen noices. This can be decenralized if managemen is spread across differen conracing eniies. Ideally, he sysem would also inerface wih oher key sysems including (i) he paymens sysem used o make deb servicing paymens; (ii) he ransacion managemen sysem (where relevan); 43 (iii) he aucion sysem (if separae from he ransacion managemen sysem), and (iv) he governmen s financial managemen informaion and accouning sysem(s). In addiion, i should be possible o ensure he inegriy of he sysem by imposing appropriae securiy conrols. 43 For example, if he deb managemen uni engages direcly in financial marke ransacions.

30 30 Appendix II. Designing an MTDS: Checklis for Deb Managers The key elemens of he seps involved in formulaing an MTDS are summarized below: Sep 1. Idenify he objecives for public deb managemen and he scope of he MTDS Purpose is o help clarify wha objecives he MTDS should seek o achieve. This will also help clarify he asks and responsibiliies for which he DM is accounable. Idenify he main objecives for public deb managemen o For example Mee he financing need Minimize cos Mainain risk a a pruden level Develop he domesic deb marke Esablish a reference or benchmark for privae secor issuance Ensure objecives (where hey are no se down in law) are properly documened Define scope of MTDS o Cenral governmen; general governmen; or wider public secor o Coningen liabiliies o Ineracion wih privae secor exernal deb Sep 2. Idenify he curren deb managemen sraegy and cos and risk of exising deb Purpose is o clearly deermine he saring posiion for he analysis; his will help idenify wheher he MTDS should seek o change he characerisics of he exising deb porfolio in any specific way, e.g., reduce a specific risk. Explicily idenify he curren sraegy o Provides a benchmark agains which alernaives can be evaluaed Idenify ousanding deb and is composiion o Deermine deb servicing profile of ousanding deb Calculae basic cos and risk indicaors for he porfolio o Idenify sources of vulnerabiliy o he exising deb sock Sep 3. Idenify and analyze poenial funding sources, including cos and risk characerisics Purpose is o deermine he range of possible sraegies ha migh be feasible and desirable o implemen. This will also help idenify any poenial consrains ha migh impede he implemenaion of a chosen sraegy. This may require ineracion wih financial marke supervisors, or oher agencies (e.g., minisry of planning). Idenify poenial sources of finance, heir financial characerisics, including cos and risk parameers, and poenial amouns available

31 31 o Lis exising and poenial insrumens, domesic and exernal, and describe heir financial characerisics o Evaluae he poenial quanum of borrowing available hrough each insrumen o Idenify any consrains ha migh impede he availabiliy of funding o Discuss/rank he insrumens based on heir cos/risk characerisics (and wihin he conex of he vulnerabiliies in he deb porfolio previously idenified) Sep 4. Idenify baseline projecions and risk in key policy areas fiscal, moneary, exernal and marke Purpose is o deermine he baseline scenario for he analysis of he performance of alernaive sraegies and idenify specific risk scenarios o be evaluaed. Requires ineracion wih fiscal, moneary policy and financial marke auhoriies, and (where relevan) marke paricipans. Idenify he baseline medium-erm projecions for key fiscal and moneary policy variables o Use projecions from he DSF Idenify wheher here are any exernal consrains relevan for MTDS formulaion o Discuss any anicipaed change in exchange rae or capial accoun regime o Discuss any required financing of inernaional reserves Idenify he baseline medium-erm projecions for marke raes Clarify assumpions abou likely pricing of non-marke insrumens o Based on credior informaion and oher sources Deermine specific risk scenarios o Those idenified in DSF o Oher specific changes o marke condiions and demand (e.g., shock o global liquidiy condiions) Sep 5. Review longer-erm srucural facors Purpose is o ake a longer-erm perspecive and idenify any facors ha could influence how he deb composiion should ideally change over he longer-erm. Requires ineracion wih fiscal and moneary policy auhoriies. Se ou long-run srucural feaures of he economy ha he MTDS should ry o ake ino accoun, e.g., o Commodiy price vulnerabiliy o Access o concessional financing o Trends in real effecive exchange rae o Inflaion rends

32 32 Sep 6. Assess and rank alernaive deb managemen sraegies on he basis of he cosrisk rade-off Purpose is o analyze a number of alernaive deb managemen sraegies, assess heir performance, and idenify a small number of candidae sraegies, including a preferred sraegy. For a range of alernaive sraegies o Assess how coss could change under he various risk scenarios o Assess how well each sraegy helps miigae he idenified porfolio vulnerabiliies o Assess how well each sraegy mees he deb managemen objecives, boh primary and secondary o Assess wheher each sraegy would be feasible o implemen given assumpions abou poenial sources of financing Sep 7. Review implicaions of candidae sraegies wih fiscal and moneary policy auhoriies, and for marke developmen Purpose is o clearly deermine ha he preferred, and oher candidae, sraegies are consisen wih fiscal and moneary policies, mainaining deb susainabiliy, and in line wih plans for marke developmen. Ouline he preferred, and oher candidae, sraegies o he fiscal and moneary policy auhoriies o Discuss any poins of ineracion o Confirm ha deb susainabiliy indicaors are in line wih DSA Review he poenial deb marke implicaions of he candidae sraegies, including where relevan wih financial marke auhoriies Sep 8. Propose and Approve he MTDS Purpose is o propose he preferred sraegy o he decision maker, and secure his / her agreemen. Documen he preferred and a small number (e.g., one or wo) alernaive sraegies o Ouline why he preferred sraegy is superior o he ohers o Clearly describe he key associaed coss and risks, and relaionship wih he broad objecives Presen he proposal o he highes responsible auhoriy Agree he MTDS Once deermined, he agreed MTDS should be disseminaed.

33 33 Appendix III. Cos and Risk, and Deb Indicaors This appendix discusses a variey of measures of cos and risk, and oher useful deb indicaors ha he deb manager may need in he course of effecively managing he deb porfolio. Appendix VI oulines how some of hese could be used in specific counry applicaion of he framework. 71. A precondiion for developing a sound deb managemen sraegy is a clear definiion of cos and risk. While his may seem rivial, in pracice, his is an issue ha deb managers have been and are sruggling wih. I is imporan ha deb managers are clear abou wha exacly is capured by specific cos and risk measures so ha he mos appropriae measures are seleced for a given objecive. 72. For immediae budge purposes he focus is ypically on absolue nominal measures, i.e., nominal ineres paymens a curren exchange raes. While nominal measures are useful for budgeing purposes hey fail o inform he decision makers of he rue cos of deb as hey ignore he implicaions of inflaion on he real value of deb or he gains or losses on indexed deb or deb denominaed in foreign currency. They also do no reflec how he repaymen capaciy is influenced by growh in GDP or ax revenues. Consequenly, i may be useful o consider he raio of ineres paymens o nominal GDP or nominal ax revenues boh effecively real measures ha beer capure he rue burden of deb. Oher imporan real cos measures discussed below are he raio of he NPV of deb o GDP and he raio of ineres paymens adjused for capial gains/losses o GDP. The NPV measure is useful because i capures he concessionaliy of deb. The adjused ineres cos measure capures concessional ineres raes direcly, bu i also adjuss he ypically lower foreign currency ineres paymens for he expeced depreciaion of he exchange rae, which adds o he principal and consequenly o he rue burden of ha deb. 73. In he conex of wha follows, and in he MTDS analyical ool accompanying his guidance noe, risk is defined as a change in one of hese cos measures afer a shock is applied. However, his appendix also discusses some oher useful porfolio saisics ha capure direcly he inheren exposure of he deb porfolio o such risks as ineres and exchange rae changes. In using hese porfolio saisics, i is imporan o undersand how hey relae o he more fundamenal risk measures. Cos measures 74. Examples of commonly used cos indicaors for a deb porfolio include:

34 34 Ineres cos Nominal ineres cos capures he direc nominal impac of ineres paymens, or coupon paymens in he case of bonded deb, bu ignores any realized capial gains/losses on indexed deb, such as foreign currency denominaed or inflaionlinked deb. Algebraically, his measure can be expressed as: 44 m * FX I = e j I j + I j=1 DX (1) * where I = oal ineres paymens expressed in local currency a ime, e j = j h FX exchange rae beween he domesic currency and foreign currency j, I j = DX ineres paymens denominaed in foreign currency j, and I = local currency ineres paymens. The absolue nominal ineres cos does no give a good indicaion of he rue cos or burden of he deb. Thus, i is beer o normalize nominal ineres cos in real erms, or in erms of unis of nominal GDP or governmen revenues. The laer wo normalizaions reflec he capaciy of he governmen o mee he ineres paymens. Such normalizaions would imply ha we could define: (a) real ineres cos; (b) nominal ineres cos as a proporion of nominal GDP; and (c) nominal ineres cos as a proporion of revenues. The real ineres cos may capure beer he economic cos of deb associaed only wih ineres paymens. I measures he nominal ineres cos of deb adjused for prices, and can be expressed as: I P * I = (2) P P where I = real oal ineres paymens, P = domesic prices and previously. * I is as defined The nominal ineres cos-o-nominal GDP raio is a widely used measure of cos and is calculaed as: I Y * I = (3) Y Y where I = nominal ineres cos-o-nominal GDP raio, Y = nominal GDP and * I is as defined previously. 44 For simpliciy, we assume ha here are only domesic currency nominal deb and foreign currency denominaed nominal deb. The equaion (and all subsequen ones) could be easily expanded o accommodae deb wih differen characerisics, such as inflaion-linked deb. We also ignore oher coss, such as commissions, legal fees and oher adminisraive oulays, ha are ypically associaed wih incurring deb.

35 35 The nominal ineres cos-o-nominal governmen revenues raio is calculaed as: I Τ = I Τ * (4) Τ where i = nominal ineres cos-o-nominal governmen revenues raio, Τ = * nominal governmen revenues and I is as defined previously. I may be also useful o measure he ineres paymens per uni of deb, i.e., he average ineres rae. The (unweighed) average ineres rae is he nominal ineres paymen relaive o he ousanding sock of deb and is compued as: i m m FX DX FX e j I j + I e j I *,,, j, I j= 1 j= 1 = = = DX FX m D D + D DX D + j= 1 e + I, j DX D FX, j (5) DX FX where i = he unweighed average ineres rae, D = D + D m DX FX = D + e, j D, j = he ousanding oal deb sock in period, and D FX = DX D and j= 1 m FX e, j D, j are he ousanding domesic currency and foreign currency j= 1 deb respecively. The real unweighed average ineres rae is he unweighed average ineres rae adjused for domesic inflaion: π = i i π (6) where π i = he real unweighed average ineres rae, and π = domesic inflaion. Ineres cos adjused for capial gains/losses on indexed deb As described previously, he nominal ineres cos ignores any coss associaed wih capial gains/losses. These capial gains/losses arise from he exchange rae effecs on foreign currency denominaed deb as he deb is effecively indexed in currencies oher han he domesic one. The nominal adjused ineres cos can be measured as: C * = I * + m FX ( D 1, j Δe, j ) j= 1. (7)

36 36 where m * FX C = adjused nominal ineres cos, ( D, j Δe, j ) j= 1 1. = he capial gains/loss arising from he change in he exchange raes associaed wih ousanding FX deb a 1, and I is as defined previously. * The real adjused ineres cos is calculaed as: C P * C = (8) P P where C = real adjused ineres cos, and all oher erms are as defined previously. The capial gain/loss adjused nominal ineres cos-o-nominal GDP raio is calculaed as: C y * C = (9) Y y where C = adjused nominal ineres cos-o-nominal GDP raio, and all oher erms are as defined previously. The capial gain/loss adjused nominal ineres cos-o-revenues raio is calculaed as: C Τ C = Τ * (10) Risk measures Τ where C = adjused nominal ineres cos-o-revenues raio, and all oher erms are as defined previously. 75. Risk is generally a funcion of he exposure of he governmen deb porfolio and he specific risk facor. While he exposure ends o be endogenous o managemen decisions, he risk facor is exogenous as i is driven by forces beyond he conrol of he deb manager, including macroeconomic developmens in a counry and he res of he world, changes in marke senimen, and oher facors ha give rise o unanicipaed changes in marke prices. 76. Deb managers can help reduce he vulnerabiliy of he governmen deb porfolios o changes in marke prices by reducing he porfolio exposure. To his end, appropriae indicaors ha gauge he exen o which he deb porfolio, and deb cos, are exposed o various ypes of risks can be measured and moniored over ime.

37 Risk measures esimae he poenial unexpeced increase in deb service paymens produced by a surprising shif in marke variables such as ineres or exchange raes. 78. As noed above, in a deerminisic seing, as used in he MTDS analyical ool, risk is measured as he difference beween he cos in a given period under a scenario incorporaing a specific shock and he cos under a pre-deermined baseline scenario. 45 This difference is represened by: risk k = I I or k, s k, b risk k = C C, k = *, P, Y or Τ. (11) k, s k, b where b I, and k k s I, k b C, k s and C, are respecively he coss under he scenario wih an expeced shock and are he coss under a baseline scenario. 79. In addiion o ineres and exchange rae risks, deb managers are also exposed o refinancing (or roll-over) risk i.e., he risk ha deb will have o be rolled over a unusually high cos, or, in exreme cases, canno be rolled over a all. Alhough refinancing risk may be considered a ype of ineres rae risk, is maerializaion can lead o excepionally large increases in governmen funding coss, or o he inabiliy o refinance he governmen loans coming due. Since such an impac can lead o, or exacerbae, a deb crisis and hereby cause severe economic losses in addiion o he purely financial effecs of higher ineres raes, i is imporan o rea refinancing risk separaely. Below we discuss vulnerabiliies o ineres rae, refinancing, and foreign currency risks and some saisics ha can be used o gauge heir severiy. Indicaors of Exposure o Marke Risk Facors Ineres rae risk 80. Ineres rae risk refers o he vulnerabiliy of he deb porfolio, and he cos of governmen deb, o higher marke ineres raes a he poin a which he ineres rae on variable rae deb and fixed rae deb ha is mauring is being re-priced. The following indicaors provide measures of he exposure o his risk: Amoun of he deb sock refixing he ineres rae in a paricular period : D refix = D + A = D + D + A + A (13) v f v, FX v v, DX v f, DX f, FX 45 In a sochasic seing, risk is ypically quanified by some measure of dispersion (e.g., he sandard deviaion) or exreme or ail area of a given disribuion (e.g., he 95 h percenile of he empirical cos disribuion or he upper ail area of he empirical cos disribuion beyond he 95 h percenile).

38 38 where v D = D v, FX v variable rae deb; and + D = oal variable rae deb; v, DX v v FX D, v m v DX D, v = domesic currency v, FX = e, j D = foreign currency denominaed, j j= 1 f f, DX f, FX f variable rae deb (convered o domesic currency); A = A + A ; A = principal or amorizaion repaymens of fixed-rae deb falling due in period, DX A, = principal repaymens on domesic fixed-rae deb falling due in period, f and f FX A, m f, FX = ( A j e, j ) j= 1 v,. = principal repaymens on foreign currency denominaed fixed-rae deb falling due in period. Share of deb in he deb porfolio refixing he ineres rae in a paricular period : refix refix D d = (14) D Average ime o refixing of he deb porfolio. This indicaor is a measure of he weighed average ime unil all principal paymens in he deb porfolio become subjec o a new ineres rae. ATR where D, T S f v v ( A. ) +. ( D, s. s) f ω. ω = D = 1 s= 1 (15) ATR = he average ineres rae re-fixing period of he deb porfolio, f A are as defined above, s = ime o he nex ineres rae rese for he v D, j variable rae deb, and ω, j= v and f, are he respecive shares of he variable rae deb ousanding and fixed rae principal falling due. ATR shows on average he ime i akes for principal paymens o be subjec o a new ineres rae. As an average measure, his indicaor gives informaion over ime of he changes in he porfolio s average ime o refixing. A shorening of his indicaor suggess ha he porfolio is, on average, facing a new ineres rae more frequenly and herefore is more exposed o refixing shocks. Refinancing (roll-over) risk 81. Refinancing risk capures he exposure of he deb porfolio o unusually higher ineres raes a he poin a which deb is being refinanced; in he exreme, when his risk is oo high deb managers are unable o roll over mauring obligaions. The following indicaors measure he exposure o his risk 46 : 46 Noe ha he indicaors discussed here can also be used o assess he exposure o ineres rae risk arising only from mauring deb.

39 39 The redempion profile of he ousanding deb. The redempion profile of he deb is he sequence of principal or amorizaion paymens ha he ousanding sock of deb gives rise o. I is represened as: m T T DX FX DX FX [ A ] = [ A + A ] = A + ( A e ) { A, A A } RP = = =, j., j = = 1 = 2, = T (16) 1 1 j= 1 = 1 where RP = he redempion profile of he ousanding oal deb sock ha spans he enire expeced sequence of principal or amorizaion paymens beginning in period and ending in fuure period T in which he final ousanding principal falls due for repaymen; all oher erms are as defined previously. Proporion of he deb sock falling due wihin a paricular period. The raio of he deb falling due in a given period o he oal ousanding deb can be expressed D A as:. D Proporion of he deb sock falling due wihin a paricular period adjused by D A liquid asses. While provides he gross exposure o refinancing risk, D counries may have liquid cushions in he form of FX reserves, or cash balances, ha reduce he governmen s vulnerabiliy o refinancing risk. These asses should be need ou from he gross exposure. Consequenly, [ he ] adjused D A R CB raio of deb falling due a ime can be expressed as:, D T where CB = cash balances, and R = inernaional reserves. Separae esimaes of he proporion of he deb exposed o refinancing risk can be done for exernal and domesic porions as follows: DX A CB D DX FX A R, and FX D Finally, he raio of deb falling due o ax revenues, Τ size of he rollover relaive o he governmen abiliy o raise revenues. D A, provides an idea of he

40 40 Average ime o mauriy. This indicaor measures he weighed average ime o mauriy of all he principal paymens in he deb porfolio. I is compued as: ATM T ( A. ) = 1 = T = 1 A (17) where principal paymen in he porfolio. ATM shows how long i akes on average o rollover he deb porfolio. A shorening of his indicaor suggess ha he porfolio is being rolled over more frequenly and herefore is more exposed o refinancing shocks. Foreign exchange rae risk ATM = he average ime o mauriy of deb porfolio, A = h period 82. FX risk relaes o he vulnerabiliy of he deb porfolio, and he governmen s deb cos, o a depreciaion/devaluaion in he exernal value of he domesic currency. The following indicaors provide a measure o he exposure o his risk: Raio of foreign currency deb o oal deb: d fx fx FX, j D D j= 1 = = = DX FX m D D + D DX D + j= 1 m e D e FX, j, j D FX, j (18) where fx d is he share of foreign currency deb in he deb porfolio. Mismach in he level of foreign currency liabiliies in relaion o foreign currency reserves: d fxr D D m fx FX j= 1 = = = n R R e h= 1, j e h D R FX, j h (19) fxr where d = he raio of foreign currency deb o foreign currency reserves; R = foreign currency reserves; h = 1,..., n denoes differen currencies held by he Cenral Bank in inernaional reserves.

41 41 Mismach in he composiion of foreign currency liabiliies in relaion o foreign currency reserves d c = W j= 1 j ω D R where, j /, j c d indicaes he degree of currency mismach FX j deb and FX reserves a ime, ω is he share of FX deb denominaed in currency j and D, j and R, j are he absolue values of he FX deb and FX reserves denominaed in currency j. When deb and reserve levels are oo far apar, D, j and R, j could be measured as shares raher han absolue values. The farher he indicaor depars from 1 he greaer he degree of currency mismach. Oher useful deb indicaors The ne presen value (NPV) of he oal deb: The presen value of he ousanding deb sock is he discouned sream of all is fuure cash flow paymens. I is compued as: T D ( ) D NPV = CF = 0.δ (20) where NPV is he presen value of he deb sock, CF he cash flow paymens in period, and δ = is he discoun facor. Fuure foreign currency paymens are o be firs ranslaed o domesic currency using he expeced exchange rae. LICs have access o concessional sources of financing, which reduces he cos considerably. This is no capured in a normal sock measure of he deb, bu can be capured by examining he ne presen value of deb (NPV) which discouns fuure (low) deb servicing paymens o he presen. The drawback of he NPV measure is ha i does no assume ha a concessional loan is rolled over. Thus if a concessional loan falls due he nex day, he NPV is in essence he same as he face value. In a ypical counry case, concessional loans are ofen replaced wih new loans. In a full-fledged sraegy evaluaion see he MTDS spreadshee ool his is overcome by assuming rollover sraegies for such loans for a very long ime horizon. As he disan fuure is heavily discouned, his problem is reduced.

42 42 Appendix IV. Poenial Sources of Financing This appendix provides a brief overview of he main classes of financing sources available o he sovereign. When evaluaing alernaive funding sources, i is imporan o ake ino consideraion he all-in-cos of borrowing as here may be fees and hidden coss associaed wih he borrowing. Exernal sources 83. There are wo main sources of exernal deb official and privae. Official deb is ypically conraced in he form of non-markeable loans. Privae secor exernal deb can be eiher non-markeable loans or markeable deb securiies). Official sources Official sources include mulilaeral insiuions and bilaeral loans from sovereigns. 84. Concessional loans ypically have long mauriies (e.g., 40 years) and long grace period (e.g., 10 years). In he case of IDA (LICs), hey are fixed rae deb denominaed in SDR (composie of US dollars, Euro and he Japanese Yen). In he case of IBRD (MICs) hey can be fixed or variable, and wih he currency chosen by he borrower. Ineres raes are ypically very close o or below Libor. Bilaeral loan erms vary, and may be a a discoun o marke erms, bu heir disincive characerisic is ha hey end o be denominaed in he currency of he lending counry. 85. Ofen such crediors se specific condiions before loans are disbursed. Mulilaeral crediors may eiher consrain he use of funds o specific purposes or se oher policy-relaed condiions. In erms of bilaeral loans, hese condiions could include requiring recipiens o use or procure goods and services expored by he credior counry have o be me. In he specific case of projec loans, here is ypically a co-financing elemen where recipiens need o parially mach he funding provided by he credior. All of hese facors can indirecly add o he cos of he loan, including hrough a delay in disbursemens. 86. In many counries, he auhoriies organize a donor conference o coordinae he financial commimen of each donor. This allows he auhoriies o assess he amoun of concessional financing available, o idenify he profile of any pre-commied financing ha hey may wan o consrain (i.e., by assuming i is fixed) in he MTDS analysis, and o deermine he financing gap afer he commied concessional financing, o be accessed hrough non-concessional borrowing. Privae sources 87. Privae sources include borrowing from he inernaional capial markes, or from commercial banks. 88. Wih MDRI, counries access o inernaional capial markes is increasing. However, access can be uncerain and is subjec o sudden shifs in marke senimen and appeie. Consequenly, o enhance analysis, i is imporan o consanly collec marke inelligence

43 43 and o monior issuances by sovereigns wih similar credi raings. Developing an advisory relaionship wih an invesmen bank may be one way o improve he qualiy of his informaion collecion. Counries can furher miigae his risk by esablishing a srong rack record in meeing heir deb obligaions and by esablishing an effecive invesor relaions program. In addiion, counries should be aware of any likely consrains on he erms of an issue, such as wheher a minimum issue size or currency choice is likely o be required. In addiion, he srucure of he securiy i.e., bulle or amorizing will also be imporan. Such facors will affec any analysis of cos and risk of his financing opion, and is relaive araciveness. 89. In addiion, i may be possible o negoiae bank loans wih commercial banks. Credi and marke senimen is likely o influence he quanum available from hese sources. Such loans will ypically be on a floaing ineres rae basis, for shorer mauriies han are available in he capial markes. Domesic sources 90. Domesic sources of financing will ake he form of eiher non-markeable insrumens or markeable deb securiies. 91. The sources of non-marke domesic financing will include bank loans, suppliers, and ofen he cenral bank. Relying on cenral bank financing, e.g., hrough requiring direc paricipaion in he primary marke or hrough an overdraf faciliy, is no desirable, as i can conflic wih he moneary auhoriies achievemen of is objecives and disor he marke. 47 Such financing is inflaionary, and will ypically lead o a higher general level of ineres raes. In addiion, depending on he erms agreed on cenral bank financing, i can impede he price discovery process, hindering he developmen of an efficien governmen bond marke. Capive invesors, such as he public secor insiuions, may also be an imporan source of financing; bu reliance on hese invesors will be couner-producive as regards developing an efficien bond marke. 48 As wih exernal bank loans, domesic bank loans are likely o be shor-erm and on variable raes. Shor-erm credi from suppliers may also be available in he form of accouns payable. 92. In erms of markeable insrumens, he range of available deb securiies will be limied by he level of marke developmen. As markes develop, he choice of financing insrumens (mauriy, insrumen ype, and so on) expands o include insrumens wih poenially more desirable risk properies. This creaes a role for he DM in encouraging he developmen of domesic deb markes. For insance, i is necessary for he DM o move from 47 In mos counries, moneary financing of he governmen is explicily prohibied by law. 48 While heir presence migh appear o be beneficial and help keep ineres coss conained, over he long-erm, heir presence will impede marke developmen and ulimaely limi he amoun and qualiy of financing available in domesic markes. Where possible, he DM should seek o minimize, subjec o appropriae prudenial sandards being mainained, he impac of capive invesors on he marke (e.g., by allowing heir paricipaion in aucions on a non-compeiive basis o mee regulaory relaed demands, ensuring ha securiies are allocaed o hem on marke erms).

44 44 a regime of adminisered raes o fully marke deermined raes before he marke will develop effecively; and he DM may need o commi o a benchmark issuance program in order o develop an effecive yield curve. 93. The naure of he invesor base, comprising some combinaion of banks, pension and insurance companies, oher domesic insiuional invesors, foreign invesors and reail invesors, will deermine he capaciy of he domesic marke o absorb he quanum and he desired range of deb insrumens. Marke paricipans end o have segmened preference for differen deb insrumens, paricularly wih respec o mauriy, based on heir own balance shee needs. 49 Consequenly, he relaive composiion of he invesor base will be a key facor in deermining he relaive cos of exending he yield curve or inroducing differen insrumen ypes. Developing hese sources of savings will require a long-erm effor on a range of frons, including regulaory, axaion, legal, marke infrasrucure and financial lieracy. Building he foreign invesor base will also have consequences for he capial accoun and he funcioning of he foreign exchange marke, and will need careful consideraion and coordinaion wih he moneary auhoriies. As wih exernal markes, i is imporan o gaher marke inelligence on a regular basis o monior he marke appeie for cerain mauriies and insrumen ypes (fixed versus floaing or oher indexaion); esablishing effecive relaions wih he invesor base will faciliae ha. Cos and risk characerisics 94. The cos and risk characerisics of differen insrumen ypes can be broadly characerized as in Table For example, pension funds end o require long-erm inflaion-proeced asses, while banks end o have a preference for shor-erm asses o mach shor-erm deposis.

45 45 Table 1. Cos and Risk Facors of Differen Financing Insrumens Insrumen Type Exernal Insrumens Mulilaeral concessional loan (e.g., IDA, AfDF, ADF) Mulilaeral nonconcessional loan (e.g., IBRD, AfDB, ADB) Bilaeral loan (including projec loans) Commercial bank loan (including syndicaed loans) Sovereign Bonds Cos characerisics Highly concessional Some concessionaliy. Typically some concessionaliy Marke raes Marke raes (depending on liquidiy condiions and counry credi raing) Risk characerisics Fixed rae; denominaed in foreign currency; ulra-long enor; amorizing srucure; long grace period. Boh fixed and variable rae; denominaed in foreign currency Boh fixed and variable rae; denominaed in foreign currency Can be fixed or variable rae; can be shor-, medium- or long-erm; ypically denominaed in foreign currency. Can be fixed or variable rae; ypically denominaed in foreign currency; ypically bulle srucure. Oher commens Access will decline and erms will harden as income level increases. Limied flexibiliy o negoiae erms. Typically involves a commimen fee. Disbursemen can be dependen on cerain condiions being me. Flexibiliy o ailor erms (e.g., currency and ineres rae srucure) o sui recipien risk preferences. Tenor and grace period linked o counry caegory. Involves a commimen fee. No available o IDA-only counries Limied flexibiliy on choice of erms. Various ransacion charges involved. Projec loans ied o specific projec use; consequenly disbursemen highly dependen on progress of projec. Flexibiliy o influence erms will depend on relaive negoiaing power. Can involve significan ransacion fees. Auhoriies choose key feaures (e.g., ineres rae srucure, currency and mauriy). Significan ransacion fees involved. Resource inensive o launch.

46 46 Domesic Insrumens Treasury bills Marke raes Shor-erm; denominaed in domesic currency Marke raes Medium- o long-erm; ypically denominaed Treasury bonds in domesic currency. Can be fixed or variable rae. Can be indexed. Reail insrumens Commercial bank loan Adminisraive or marke raes Marke raes Can be fixed or variable rae; denominaed in domesic currency; can be indexed. Typically shor- o medium-erm. Can be fixed or variable rae; generally shorerm; ypically denominaed in domesic currency. Typically he firs insrumen inroduced in he domesic marke. Srucure of invesor base will be deerminan of relaive cos of differen ypes and mauriies. Developing reail invesor base can provide some suppor in face of rollover risk. Can be relaively cosly depending on he disribuion arrangemens. Flexibiliy o influence erms will depend on relaive negoiaing power. Some ransacion fees involved.

47 47 Appendix V. Formulaing he MTDS: Taking Accoun of he Coss of Moneary Policy Implemenaion 95. This appendix discusses how he coss of moneary policy implemenaion can be aken ino accoun when formulaing he MTDS. These issues would be auomaically resolved where he MTDS is formulaed on he basis of a fully consolidaed public secor including he cenral bank; however, i is no ypical o formulae an MTDS in ha way. 96. In pursui of is moneary policy objecives, he cenral bank migh need o eliminae excess liquidiy in he sysem, using a variey of insrumens o including (i) reserves requiremens; (ii) deposi aucions; (iii) cenral bank bills; (iv) governmen securiies, or (v) liberalizing capial ouflows. Using insrumens ha imply coss ha are direcly borne by he cenral bank should be refleced in he projeced profi remiances of he cenral bank. When governmen securiies are issued in he primary marke o serilize excess liquidiy, his has direc budge implicaions as he ineres is direcly borne by he governmen even hough he receips canno be used for governmen funding as hey are parked in blocked deposis a he cenral bank oherwise hey would no have a serilizaion effec. These coss are normally already aken ino accoun in he baseline macroeconomic projecions and can be ignored. 97. However, here are some insances where he choice of MTDS will significanly affec hose coss; consequenly, he relaive difference in coss should be recognized and considered when making he rade-off beween alernaive deb managemen sraegies. For example, where he exchange rae is pegged or managed, and he capial accoun de faco no very open, exernal borrowing o fund he budge in excess of ha needed for balance of paymens purposes, will resul in large inernaional reserves accumulaion. This may be a paricular issue where counries are very dependen on concessional foreign currency loans o fund he budge, as is he case wih many LICs. Any addiional domesic liquidiy injeced as a consequence may hen need o be emporarily serilized unil i can be absorbed. Where he counry has limied capaciy o absorb his liquidiy, e.g., where opporuniies o exend credi o he privae secor are poor, his could ake a considerable period of ime. This ne serilizaion cos should in principle be facored ino he cos of any exernal financing where ha exceeds anicipaed balance of paymens needs. 98. For scenario analysis, he deb manager should facor he exra cos associaed wih such exernal borrowing ino he ne profi remiances and ineres paymens of he cenral bank, as i is no refleced in he baseline macro framework. Alernaively, if he governmen relies on direc cenral bank financing as par of is MTDS, hen his is likely o need serilizaion o avoid inflaionary pressures. The DM can usually make he simplifying assumpion ha all cenral bank serilizaion is a shor-erm ineres raes. Anoher relevan operaion migh be where he governmen receives surplus exernal resources which i decides o use o repay deb early. Where his deb is held by domesic invesors, he cenral bank may need o serilize he liquidiy injeced in he marke unil i can be absorbed elsewhere. The cos of his serilizaion, eiher direc or indirec, would sill be borne by public finances.

48 48 Appendix VI. Developing a Medium-Term Deb Managemen Sraegy in Pracice: An Illusraion This Appendix illusraes he applicaion of he MTDS framework in he conex of wo differen counry cases. Counry A Exising deb managemen sraegy (Sep 1) 99. Unil early 2008, Counry A s implici deb managemen sraegy had focused almos exclusively on cos reducion. However, having secured exernal deb relief and recognizing he imporance of developing he domesic deb marke, he auhoriies published for he firs ime a naional public deb managemen sraegy documen in April Tha sraegy documen chared a new course for developing he domesic deb marke, and sough o insiuionalize a closer consideraion of he cos and risk rade-offs of new borrowing opions going forward, while mainaining long-erm deb susainabiliy. The MTDS exercise was o help provide a framework o quaniaively evaluae hese opions, by providing he cos and risk rade-offs involved in alernaive deb managemen sraegies. Characerisics of he exising deb porfolio (Sep 2) 100. The exising deb porfolio is composed of 63 percen exernal and 37 percen domesic deb; however, all domesic deb is denominaed in foreign currency. Overall he porfolio is relaively low cos. Almos all exernal deb is conraced a concessional raes, while he presence of capive invesors, and pracice of forced placemens, has kep he cos of domesic deb below a rue marke rae. Wih regard o key vulnerabiliies, foreign exchange risk is he dominan risk as here is no domesic currency deb. Refinancing risk and ineres rae risk represens moderae risk as only 6 percen of he oal deb maures wihin he nex five years, and over 80 percen of he oal porfolio is fixed rae. A reducion in foreign exchange risk would be desirable, bu ha would require he inroducion of domesic currency deb insrumens. Going forward, he combinaion of he auhoriies saed sraegy of developing he domesic deb marke, and heir percepion ha heir access o concessional financing will decline, is likely o change he cos and risk profile of he porfolio significanly. Poenial funding sources (Sep 3) 101. As an IDA-only counry, Counry A relies heavily on gran and concessional financing. Neverheless, as he counry moves owards graduaion from IDA, i is expeced ha he erms a which hese funds are available will become less concessional. In he domesic marke, a feaure of he counry s financial marke is ha more han 70 percen of financial insiuions deposis and more han 95 percen of he invesmens are in foreign currency, limiing he demand for domesic currency asses. The insiuion ha manages he public pension is he mos imporan insiuional invesor in governmen bonds, absorbing beween 60 and 65 percen of all new issuances.

49 49 Figure 3. Characerisics of he Curren Deb Porfolio: Counry A Currency Composiion (end 2007) Ineres Rae Type (end 2007) EUR, 13% DX, 0% 18% USD, 87% 82% USD EUR DX Fixed Variable Source of Financing (end 2007) Average Time o Mauriy (years) (end 2007) % % Years Domesic Foreign 0 Foreign Domesic Curren macroeconomic challenges and srucural feaures (Seps 4 and 5) 102. Despie subsanial deb relief and recen fiscal consolidaion, he counry remains a a modes risk of deb disress, underlining he imporance of coninuing o conain deb ineres coss. A key facor affecing he risk of deb disress is he counry s vulnerabiliy o exchange rae movemens, paricularly given is dependence on commodiy expors and high oil impors. Given persisenly high curren accoun deficis, and he limied availabiliy of concessional loans and volailiy of aid, he auhoriies have someimes fel he need o rely on domesic issuance or exernal borrowing from nonradiional sources o mee expendiure needs. Weaher relaed evens regularly impac he fiscal and balance of paymens posiion, again poenially resuling in unanicipaed financing needs. However, he domesic financial marke is highly dollarized and shallow wih limied insiuional invesors, limiing is abiliy o smooh he impac of hese emporary budgeary shocks. In addiion, he impac of rising food and fuel prices poses an addiional challenge wih respec o conaining domesic financing coss, and pressure on he real exchange rae. Overall, his suggess a need o develop access o a diverse range of financing sources o help miigae poenial expendiure volailiy.

50 50 Assessing he alernaive deb sraegies (Sep 6) 103. Taking hese facors ino accoun, he relaive performance over he medium-erm of four alernaive deb managemen sraegies was considered. The sraegies esed were based on discussion wih he auhoriies wih respec o heir goal of developing he domesic deb marke and heir perspecive on heir opions for securing concessional financing going forward. This analysis was underaken on he basis of a specified se of macroeconomic projecions, and a specific se of pricing assumpions. A number of risk scenarios were also specified reflecing some of he vulnerabiliies idenified above. The four sraegies considered were: S1: A saus quo sraegy ha (largely) covers he financing need wih exernal concessional deb, while coninuing o refinance a small proporion of nonsandardized domesic deb wih sandardized insrumens; S2: A more aggressive domesic marke developmen sraegy ha rolls over a greaer proporion of non-sandardized deb using sandardized deb, consequenly reducing he recourse o concessional exernal deb. This is he sraegy se ou by he auhoriies going forward; S3: A sraegy ha aims o address he exchange rae risk in he porfolio by considering he inroducion of sandardized domesic currency denominaed deb, a he same pace as domesic deb issued under S2; and S4: A sraegy ha considers a change in he composiion of exernal deb by inroducing a decline in he degree of concessionaliy of exernal financing Figure 4 illusraes he relaive performance of hese sraegies on he basis of wo key indicaors he end period ineres paymens/ GDP and deb / GDP. Risk is defined as he maximum increase in hese wo indicaors under sress. 50 Figure 4. Sraegy Trade-offs: Counry A Deb / GDP Ineres Paymens / GDP 57.4% 1.6% 57.3% 1.5% Cos (Deb / GDP) 57.2% 57.1% 57.0% 56.9% 56.8% 56.7% S1 S2 S3 S4 Cos (Ineres / GDP) 1.5% 1.5% 1.5% 1.5% 1.4% S1 S2 S3 S4 56.6% 1.4% 56.5% 1.4% 18.0% 18.2% 18.4% 18.6% 18.8% 19.0% 19.2% 0.30% 0.40% 0.50% 0.60% 0.70% 0.80% Risk (Maximum change relaive o Baseline Cos) Risk (Maximum change relaive o Baseline Cos) 50 These are calculaed using he analyical ool ha accompanies he Guidance Noe.

51 For a similar level of risk, Sraegy 1 is he leas cosly compared o sraegies 2 and 4. This sraegy implicily maximizes concessional borrowing o help mainain deb susainabiliy. Sraegies 2 and 3 are illusraive scenarios ha highligh he poenial increase in coss associaed wih he auhoriies saed objecive of building he domesic deb marke. Similarly, hese sraegies capure he impac of using domesic sources of financing in he even ha he oal amoun of concessional funding is no forhcoming and exernal nonconcessional sources are limied. In addiion, Sraegy 3 highlighs he poenial cos of reducing exchange rae exposure in he porfolio. The primary benefi of presening he cos and risk of each sraegy in his conex is o highligh he esimaed cos o he governmen budge of pursuing a domesic deb marke developmen sraegy. In order o conain hese coss, and o ensure ha risks of deb disress are no excessively aggravaed, his marke developmen sraegy would need o be suppored by pruden macro policies ha would help reduce he cos by reducing credi and inflaion risk premia, while creaing sufficien budge space o accommodae hese coss. I would also need o be accompanied by a clear sraegy o develop he marke infrasrucure, including adoping an effecive communicaion plan, o ensure ha i could be successfully implemened. Counry B Exising deb managemen sraegy (Sep 1) 106. Counry B had in place a formal deb sraegy of maximizing concessional deb, wih a secondary deb managemen objecive of developing he domesic deb marke. Neverheless, afer securing deb relief and in ligh of he exen of is infrasrucure invesmen needs, i was acively developing alernaive sources of quasi-concessional and marke based financing. The counry had recenly successfully apped inernaional capial markes. Characerisics of exising deb porfolio and funding sources (Seps 2 and 3) 107. The exising deb porfolio consiss of a relaively wide range of insrumens including concessional financing from mulilaeral crediors, quasi-concessional financing from bilaeral crediors, exernal commercial loans, a US$ denominaed Eurobond, Treasury bills, floaing rae Treasury noes (issued wih 2- and 3-year mauriies), and fixed rae Treasury bonds (issued a 2-, 3- and 5-year mauriies) The porfolio broadly consiss of 46 percen domesic and 54 percen exernal deb (Figure 5), suggesing a relaively significan exposure o movemens in he exchange rae. While he majoriy of deb is a fixed raes, he shor average mauriy of domesic deb almos of he porfolio will maure in he nex 2 years and he average mauriy is 1.6 years means ha ineres rae risk is no inconsequenial. The exen of he refinancing risk in he domesic deb porfolio is furher aggravaed by he auhoriies assessmen ha he marke is relaively underdeveloped, wih low capaciy o absorb significan quaniies of deb a any one ime In summary, his suggess ha sraegies which lead o a reducion in foreign exchange or refinancing risk would be desirable. Neverheless, conaining he cos will be

52 52 imperaive given ha he underlying fiscal defici, i.e., excluding grans, is 7 percen of GDP, so fiscal space is severely limied. Figure 5. Characerisics of he Curren Deb Porfolio: Counry B Currency Composiion Ineres rae ype USD 23% EUR 8% Oher 1% DX 46% Floaing 5% SDR 22% Fixed 95% DX SDR USD EUR Oher Fixed Floaing Percenage of porfolio mauring in years 1 and 2 (cumulaive) Average ime o mauriy (years) 80% 60% 40% 20% 0% 5% 8% 43% 62% 33% 23% Exernal Domesic Toal 1 year 2 year Exernal concessional 8.1 Exernal nonconcessional 15.2 Toal Exernal 1.6 Toal Domesic 8.8 Toal Macroeconomic facors influencing choice of sraegy (Seps 4 and 5) 110. The deb manager has reviewed he DSA and more generally discussed macroeconomic policy challenges wih officials involved in fiscal, moneary and exchange rae issues Overall, he fiscal posiion is relaively weak and expecaions have ofen urned ou o be over-opimisic; he counry is relaively aid dependen, wih grans ypically accouning for up o 3 4 percen of GDP his has lead o volailiy in receips wih a consequen impac on he implemenaion of budgeed expendiure plans; he counry is also exposed o significan erms of rade shocks and has a large curren accoun defici, mainly financed by official flows. Neverheless, incomes have risen sharply in he las few years and are projeced o coninue doing so; his iself raises he prospec ha access o grans and concessional financing may become more limied going forward. On he moneary side, he counry has recenly adoped an inflaion argeing regime, wih a floaing exchange rae, and does no facor any specific exchange rae arge, or relaed balance of paymens needs, ino he choice of domesic versus exernal borrowing. The foreign exchange marke and he money markes are relaively shallow. The inflaion rae is several percenage poins above he cenral bank s arge level and has recenly spiked as a consequence of a significan increase in he price of impored commodiies (e.g., oil). Furhermore, he capial accoun regime is relaively liberalized and non-residen invesors can paricipae in boh he equiy and fixed income markes, poenially adding furher volailiy o he capial accoun.

53 53 In summary, he key srucural macroeconomic facors ha would influence he direcion of he deb managemen sraegy are se ou in Table 2. Table 2. Srucural Macroeconomic Facors and Link o Choice of MTDS Naure of exposure Aid volailiy Terms of rade Credibiliy of moneary policy Capial accoun Fiscal (e.g., revenue shorfall) Rising income levels Shallow markes Macroeconomic variables affeced Governmen expendiure, level of inernaional reserves Balance of paymens, exchange rae Ineres raes Level of inernaional reserves Budge defici, governmen expendiure, growh, exchange rae Exchange rae, credi premium Exchange rae, ineres raes Implicaion for choice of MTDS Build cash / reserves buffer; diversify financing sources Bias owards domesic currency insrumens o limi exposure o exchange rae movemens Consider domesic currency insrumens ha are insulaed agains shocks o inflaion expecaions (e.g., inflaion-linked, variable rae, shor-erm deb); bias owards foreign currency denominaed insrumens Ensure sufficien reserves o cover poenial scale of non-residen ouflows; limi rollover risk; diversify financing sources Build cash buffers; diversify financing sources; limi rollover risk; limi currency exposure Diversify financing sources; access o concessional sources may become more limied. Limi rollover risk; diversify financing sources Overall, highlighed macroeconomic risks, as well as hose idenified in he exising deb porfolio, poin o he need o miigae foreign exchange and rollover risks, while ensuring sufficien buffers or oher means (such as diversifying financing sources) o miigae he risk of a shorfall or volailiy in receips. Assessing he alernaive deb sraegies (Sep 6) 113. Taking hese facors ino accoun, he DM considers he relaive performance of four alernaive deb managemen sraegies. 51 A number of risk scenarios were also specified The four sraegies under consideraion are broadly as follows: S1: Reain he exising porfolio composiion S2: Increase he proporion of domesic currency deb, bu mainain exising mauriy srucure S3: Increase he proporion of domesic currency deb, bu lenghen mauriy of domesic currency deb 51 Using in his case he analyical ool ha accompanies he Guidance Noe.

54 54 S4: Increase he proporion of foreign currency deb; increase he proporion of foreign currency commercial deb; lenghen mauriy of domesic currency deb 115. Boh S3 and S4 are consisen wih diversifying financing sources, and so are broadly consisen wih helping o miigae rollover risk; hey would also miigae some of he volailiy in budge execuion associaed wih uncerainy in he iming of disbursemen of concessional loans. S2 and S3 are boh consisen wih he overall objecive of reducing he foreign currency exposure of he deb, bu rollover risk migh be a concern given he associaed shorening of he mauriy of he porfolio Figure 6 illusraes he performance of hese sraegies on he basis of wo key cos indicaors, and under a specific se of macroeconomic and pricing assumpions used in he exercise. Figure 6. Sraegy Trade-offs: Counry B Deb / GDP Ineres Paymens / GDP 4.6% 4.4% Cos (Deb / GDP) S1 S2 S3 S4 Cos (Ineres / GDP) 4.2% 4.0% 3.8% 3.6% 3.4% S1 S2 S3 S4 3.2% 63.0% 62.5% 62.0% 61.5% 61.0% 60.5% 60.0% 59.5% 59.0% 58.5% 0.0% 2.0% 4.0% 6.0% Risk (Maximum change relaive o Baseline Cos) 3.0% 1.55% 1.60% 1.65% 1.70% 1.75% 1.80% Risk (Maximum change relaive o Baseline Cos) 117. From Figure 6 i is clear ha S1 is he leas cos of all 4 sraegies, while risk is relaively low. This suggess i is a conender for preferred MTDS. Neverheless, if incomes rise as expeced, he implied quanum of concessional financing migh no be feasible o achieve. S2 and S3 are boh higher cos given ha weak moneary policy credibiliy and he consequen inflaion risk premium keeps domesic ineres raes high; his is a significan facor given he relaively weak fiscal posiion. In addiion, he implied increase in paricipaion by non-residen invesors in he domesic marke migh sugges ha an increase in reserve buffers is needed o miigae associaed rollover risk. Also, if S3 requires banks o hold a significanly greaer proporion of longer-daed deb, hen a judgmen is required as o wheher he associaed mauriy mismach migh add significanly o risk in he banking secor. Finally, while S4 is relaively low cos, especially in erms of ineres cos, i aggravaes he currency exposure of he porfolio, and so carries he mos risk Overall, i appears ha S1, which maximizes he recourse o concessional deb, should be he preferred sraegy as long as i is available. Over ime, as access o exernal concessional loans becomes more limied, and as moneary policy becomes more credible, S2 and S3 could be re-evaluaed, paricularly if he fiscal posiion srenghens, providing some scope o absorb he higher cos.

55 55 Appendix VII. Templae for a Published Deb Managemen Sraegy Documen 119. This appendix ses ou he ypical componens of a deb managemen sraegy documen o illusrae he minimum conen of such a documen. In general such a publicaion would have a secion discussing he following secions: Objecives and Scope Descripion of objecives for deb managemen, he scope of he MTDS, and he ypes of risks being managed under he MTDS. Exising Deb Porfolio Provide he hisorical conex for he deb porfolio, describing changes in is size (including relaive o GDP) and composiion hrough ime. Changes in relevan marke variables should be included, along wih commenary of significan evens in he evoluion of he deb. The environmen for deb managemen going forward Describe he environmen for deb managemen in he fuure, including fiscal and deb projecions, assumpions abou exchange and ineres raes and consrains on porfolio choice, including hose relaing o marke developmen and he implemenaion of moneary policy. The MTDS Describe he analysis ha has been underaken o suppor he recommended deb managemen sraegy. The assumpions used and limiaions of he analysis should be made clear. Se ou he recommended sraegy and is raionale. Describe he desired deb composiion and he core argumens for such composiion. This should include a discussion of he key risk facors ha influenced he choice of sraegy. Describe he progress o be made oward he desired composiion over he planning horizon (3 5 years). Specify ranges for he key risk indicaors of he porfolio and he financing program. The documened sraegy should also ouline any specific measures or projecs ha are planned o manage non-quanifiable risks and/or in suppor of deb marke developmen, such as plans o inroduce new deb recording sysems, or a primary dealer framework. The documened sraegy should also ouline he periodic review process ha will apply o check wheher key assumpions coninue o hold and ha he MTDS remains

56 56 appropriae. The documen should also highligh he process ha would be followed if circumsances were o change significanly ouside ha regular review cycle.

57 57 Appendix VIII. Developing a Shor-erm Borrowing Plan: An Example 120. The following provides an illusraion of how a shor-erm borrowing plan migh be derived, given an agreed MTDS Assume ha he agreed MTDS is o finance 60 percen (of he governmen s cash requiremen) hrough concessional deb, 20 percen hrough official quasi-concessional financing and 20 percen hrough medium-erm domesic bonds Assume ha in his paricular year he oal financing requiremen is 100. Of he 20 quasi-concessional financing required under he sraegy, 5 has already been commied from a developmen bank for a specific projec, wih anoher 10 available from he IBRD, so he DM needs o idenify who migh provide he final 5. Similarly, while he arge is o raise 20 hrough medium-erm bonds, he DM may deermine ha he marke will absorb only 5 in 5- year bonds, so ha he remaining 15 will need o come from 3-year bonds (see Table 3) In erms of ranslaing hose arges ino an acual issuance plan, hen assuming he ypical size of an aucion of 3-year bonds is 2, hen he DM needs o plan 7-8 such aucions across he year o mee he oal financing arge. Similarly, if he anicipaed maximum size of a 5-year aucion is 1.5, hen may need o plan for 3-4 such aucions, giving an overall arge of aucions. Then he DM needs o consider wheher here are any seasonal facors such as ypical holiday periods when i may be more difficul o ap he marke. 52 These periods should be avoided if possible. So, if Augus and December is a ypically slow ime in he domesic marke, may wan o avoid hese monhs; his would leave 10 monhs in he year o schedule an aucion. Finally, he DM should ake ino accoun he needs of he marke and wheher here is any benefi in following a regular schedule of aucions. So, 3- year aucions may generally be held in he firs week of he monh, while 5-year aucions may be mos successful a he beginning of a quarer. Noe, where markes are relaively underdeveloped, and access o very shor-erm financing is limied or is use migh conflic wih he achievemen of he moneary policy objecive, i may be desirable o fron-load he financing so ha gaps are covered early and cash raioning can be avoided. 52 The underlying seasonaliy of governmen cash flows also needs o be aken ino accoun when deermining he pace a which new borrowing is underaken.

58 58 Table 3. Sample Borrowing Plan Toal borrowing requiremen 100 Sraegy Exernal financing Official concessional IDA 60 Sub-oal official concessional 60 Provisional aucion schedule Official non-concessional AfDB 5 IBRD 10 Bilaeral credior 5 Sub-oal official non-concessional 20 Domesic financing Marke 3-year bonds 15 5-year bonds 5 Sub-oal domesic marke-based 20 Monh Insrumen Targe size Cumulaive financing January 5-year February 3-year March 3-year April 5-year May 3-year 2 11 June 3-year 2 13 July 5-year 2 15 Augus Only if needed 15 Sepember 3-year 2 17 Ocober 3-year. 5-year only if needed o reach arge financing November 3-year December Only if needed 20