About the Author: Marcello Estevão is the Global Director of the World Bank Group Macroeconomics, Trade and Investment Global Practice.
In 2016, the discovery of two previously unrecorded large loans sparked an economic crisis in Mozambique. Donor support for the country has frozen. The government was forced to make deep cuts in public spending.
More recently, when Chad and Zambia asked to restructure their debt as part of the G-20 Common Framework for Debt Treatments, they ran into an obstacle. Their respective debt offices did not have complete and up-to-date accounts of what exactly was owed to whom. Lack of information delayed restructuring negotiations. It took more than six months for country financial advisers to gather the necessary information.
These episodes expose the dangers to creditors and borrowers of undisclosed debt and have sparked urgent calls for greater debt transparency. Yet these warnings have so far gone unheeded. The public debt of low-income economies remains elusive, either because data continues to be incompletely reported in official statistics or because it is obscured by confidentiality clauses.
Three facts in particular should make us all sit back and pay attention. First of all, 40% of low income countries have not published any sovereign debt data for more than two years; and many of those who have released data tend to limit the information to central government debt and standard debt instruments such as loans and securities. Second, there are huge gaps today in publicly available debt estimates 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 30% of GDP in some cases. Third, 15 low-income countries now have debt guaranteed by natural resources, but none provide details of guarantee agreements.
Uncertainty on this scale should not be acceptable in today’s environment. More than half of all low-income countries are already over-indebted 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 reduces its cost in the long run. Accurate and complete debt records also benefit creditors. This allows them to fully assess whether a country’s debt is sustainable. This allows them to more accurately assess debt securities. This facilitates faster and more efficient debt restructuring. 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 in borrowing operations: data may exist, but it may reflect opaque, illegitimate, or excessively expensive borrowing practices. New World Bank to research identifies three main areas of concern:
- Domestic debt. Budget arrears are usually not reported because accrual accounting is not applied in low income developed countries. What’s more, only 41% of these countries use market-based auctions as the primary vehicle for issuing domestic debt – and those that use auctions only disclose uneven 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 are contracted off budget. In addition, they often carry higher interest rates than comparable unsecured funding sources.
- Non-negotiable external debt. Information on the negotiation and restructuring of commercial loans is limited. Certain central bank instruments can also generate “debt surprises” or dilute the rights of creditors, as in the case of undeclared foreign currency deposits or oversized repos with own securities.
Developing economies have a lot to gain from improving debt transparency. They should:
- Make the necessary investments in the capacities and systems to produce accurate debt data. Countries should address operational constraints limiting the regular publication of comprehensive debt reports. An annual debt publication should include basic statistics on public and state guaranteed debt at the government level, including information on individual debt instruments contracted. The publication is expected to 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 debt authorization provisions and require disclosure of information on public debt, regulating its content and frequency. It must also provide a list of authorized debt instruments, transactions or sources of funding; 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 for monitoring the transparency of national government security broadcasts.
- Develop and adopt a strict monitoring and analysis process for the approval and implementation of asset-backed loans. This should include the following steps: First, a careful assessment of how sustainability might be affected; second, verification that the proposed terms and conditions fairly reflect the value of the security given; third, a verification of the full consideration of the legal and technical dimensions of the proposed work; and fourth, a careful assessment of how the provision of guarantees might impact other financing, in the context of the country’s debt management strategy.
Yet greater transparency should not be the responsibility of the governments of borrowing countries alone. 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 about their loan portfolio, as the G-20 Operational Guidelines for Sustainable Funding recommend.
International financial institutions are also crucial for achieving good results in terms of transparency and debt sustainability. We believe that global debt data collection practices should be standardized and consolidated. Through a variety of tools, the World Bank encourages reforms 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 in the face of the challenges of debt transparency in developing countries. It’s time to act.
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