Mike Williams

The Consultancy Requirement - Background

The emerging debt market financial crises of the 1990s were characterised by vulnerabilities arising from poor debt structures and the crystallisation of contingent liabilities. The responses have been two-fold;

  • An increasing policy focus on debt structure and debt strategy
  • Greater professionalism in the management of government debt.

Many countries adopted public debt management objectives in line with guidance from the IMF and World Bank: "...to ensure that the government's financing needs and its payment obligations are met at the lowest possible cost over the medium to long term, consistent with a prudent degree of risk." [IMF/World Bank Guidelines]

This in turn led to more sophistication in the development of strategic objectives for the debt portfolio, and the wider government final balance sheet, including contingent liabilities. There are techniques to consider the trade-off between cost and risk and embed greater resilience to economic shocks. In many countries, development of the domestic bond market is an important parallel objective, to widen financing options, particularly at a time of financial stress, to reduce foreign currency exposure, and for the wider financial sector benefits. The ability of many emerging market economies to manage their way through the financial crisis of 2008-09 is testimony to the success of these policies.

In parallel, an increasing number of countries have established debt management offices (DMOs), with a degree of operational independence from both ministries of finance and central banks. Many offices also have responsibility for government cash management; or other parts of the government's financial balance sheet. One of the lessons of the financial crisis was the need to put in place a more pro-active approach to the management of the government's cash, and integrated offices are well placed to do this.

This trend reflects:

  • The need for sufficient autonomy from the political sphere.
  • Making clear the separation between debt management and monetary policy (in particular avoiding any risk that the debt managers might be thought to have inside information on monetary policy changes).
  • The importance of greater transparency - between different government functions as well as between central government and the monetary authority.
  • The ability to concentrate expertise, not least to employ the more sophisticated tools of financial management.
  • The problems of recruiting and retaining staff with finance expertise, given the constraint of government salary scales and limited budgets.

The formation of an office has tended to be associated with a more transparent and accountable framework generally; and also with the strengthening of resources devoted to debt management. Indeed, it makes little sense to establish a semi-autonomous agency, with influence over substantial government financial resources, without confidence in its accountability; which in turn must be supported by a governance framework that sets out relevant delegations and authorities, as necessary with legal validation, and by developed reporting and auditing capabilities.

An independent office does not remove the need for some capability within the core part of the ministry of finance, not least to set the office's strategic objectives and manage the high level governance framework.

For these reasons, many countries, particularly emerging market and transition countries have kept their offices institutionally close to or within the ministry of finance. But it is still possible to set up governance, delegation and management arrangements that secure many of benefits that flow from a fuller separation.