Debt in developing economies
WASHINGTON: In 2016, the discovery of two large, previously unreported loans sparked an economic crisis in Mozambique. Donor support to the country froze. The government was forced to make drastic cuts in public spending.
More recently, when Chad and Zambia applied to restructure their debt under the G-20 Common Debt Framework, they hit a snag. Their respective debt offices lacked complete and up-to-date accounting of exactly what was owed to whom. Lack of information delayed restructuring negotiations. It took more than six months for the countries’ financial advisers to gather the necessary information.
These episodes expose the dangers for creditors and borrowers of undisclosed debt, and they have prompted urgent calls for greater debt transparency. Yet these warnings have so far gone unheeded. Public debt in low-income economies remains elusive, either because data continues to be incompletely reported in official statistics or is obscured by confidentiality clauses.
Three facts in particular should make us all sit up and pay attention. First, 40% of low-income countries have not published sovereign debt data for more than two years; and many of those who have published data tend to limit the information to central government debt and standard debt instruments such as loans and securities.
Second, huge gaps exist today in public estimates of debt in low-income economies: the difference between what is reported by national debt authorities on their websites and what is reported by multilateral development banks can reach up to 30% of GDP in some cases. .
Third, 15 low-income countries now have resource-backed debt, but none provide details of collateral arrangements.
Uncertainty on this scale should not be acceptable in the current environment. More than half of all low-income countries are already in debt distress or at high risk. Debt in low- and middle-income economies has reached levels unprecedented in modern times. Significant investments will be needed to support economic growth in the aftermath of Covid-19.
The evidence is clear: greater debt transparency enables governments to make informed decisions about future borrowing and lowers its long-term cost. Accurate and complete debt records also benefit creditors. It allows them to fully assess whether a country’s debt is sustainable. This allows them to price debt instruments more accurately. It facilitates faster and more efficient debt restructurings. Debt transparency also makes it easier for citizens to hold governments accountable for the debt they incur.
Debt transparency, however, is not just about data. It also implies transparency of borrowing operations: data may exist, but it may reflect opaque, illegitimate or unreasonably costly borrowing practices. A new World Bank study identifies three main areas of concern:
Budget arrears are usually not reported because accrual accounting is not implemented in low-income developed countries. Furthermore, only 41% of these countries use market-based auctions as their primary means of issuing domestic debt, and those that do use auctions disclose only sketchy information to investors.
Resource-backed loans, which use future income streams as collateral. Most of these loans are excluded from the statistics because they are not recognized by the debtor country or contracted outside the budget. In addition, they often come with higher interest rates than comparable unsecured funding sources.
Non-negotiable external debt
Information on the negotiation and restructuring of commercial loans is limited. Some central bank instruments can also generate “debt surprises” or dilute creditor rights, as in the case of unreported foreign currency deposits or over-collateralized repos with own securities.
Developing economies have much to gain from improving debt transparency. They should:
Make the necessary investments in capacity and systems to produce accurate debt data. Countries need to address operational constraints limiting the regular publication of comprehensive debt reports. An annual debt publication should include basic statistics on public and publicly guaranteed debt at the general government level, including information on the different debt instruments contracted. The publication should provide a definition of public debt in line with international standards.
Make the legal framework more conducive to transparency. The legal framework for public debt management should establish clear provisions for debt authorization and require the disclosure of information on public debt, regulating its content and frequency. It must also provide a list of authorized debt instruments, transactions or funding sources; and require regular audits of outstanding debt.
Adopt market-based issuance mechanisms for domestic debt. To promote reforms in this area, the World Bank recently launched a tool to monitor the transparency of domestic government securities issues.
Develop and adopt a strict analysis and monitoring process for the approval and implementation of resource-backed loans. This should include the following steps: first, a careful assessment of how sustainability might be affected; second, a verification that the proposed terms and conditions take into account the fair value of the guarantee given; third, a check that the legal and technical dimensions of the proposed structure are fully taken into account; and fourth, a careful assessment of how the granting of guarantees might impact other financing, in the context of the country’s debt management strategy.
Yet greater transparency should not be the sole responsibility of borrowing country governments. Creditors can also encourage transparent financing practices by providing detailed information about their own loan portfolio. They should limit the use of confidentiality clauses and refrain from those requiring secrecy. They should also publish detailed information on their loan portfolio, as recommended in the G-20 Operational Guidelines for Sustainable Finance.
International financial institutions are also key to achieving good results on transparency and debt sustainability. We believe that global debt data collection practices need to be standardized and consolidated. Through a variety of tools, the World Bank encourages reform by providing regular assessments of countries’ adherence to international statistical and accounting standards.
In the aftermath of Covid-19, we cannot afford to remain complacent about the challenges of debt transparency in developing countries. It’s time to act.