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 response has been:

  • 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]

Greater sophistication has followed in developing strategic objectives for the debt portfolio and the wider government financial balance sheet, including contingent liabilities. Techniques have been designed to consider the trade-off between cost and risk and embed greater resilience to economic shocks. The development of the domestic bond market is frequently an important secondary 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. Sometimes they have been established within the ministry, sometimes as an agency of the ministry, or sometimes as a separate governmental organisation or company.

This trend reflects:

  • The need for sufficient autonomy from the political sphere.
  • Making clear the separation between debt management and monetary policy operations,in particular avoiding any risk that the debt managers might be thought to have inside information on monetary policy changes. The need for high-level coherence of debt management and monetary policy - especially important under quantitative easing - does not undermine the need for operational separation.
  • 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; 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.

Many emerging market and middle and lower income countries have therefore 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.

These debt management reforms have prompted focus on parallel improvements in cash management. That means consolidating cash resources in a Treasury Single Account, building cash flow forecasting capacity, identifying the required cash buffer, and developing the use of short-term borrowing (and lending) instruments to manage the timing mismatch between inflows and outflows, smoothing the fluctuations in the TSA. One of the lessons of the financial crisis, and of the Covid pandemic of 2020-21 was the need to put in place a more pro-active and efficient approach to the management of the government's cash. Integrated offices are well placed to do this, and many DMOs also have responsibility for government cash management, or other parts of the government's financial balance sheet.