Annex XII to OIC/COMCEC-FC/33-17/REP
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Policy Advice 2: Developing/improving domestic debt market
Rationale:
Domestic debt markets are important sources of funding for public budgets. A
well-functioning, liquid domestic market encourages the investments from
domestic creditors due to lower transaction costs and hence provides additional
diversification opportunities for the government. As domestic investors tend to
react less to the global macroeconomic and financial shocks, refinancing risks
may be lowered in addition to a decreased currency risk. However, a number of
domestic public debt markets in the OIC member countries still show potential
for improvements. Most importantly, strengthening the legal accountability and
regulatory frameworks while maintaining political stability is a key aspect for
the member countries faced with some political changes in the past few years.
Moreover, low and stable inflation rates as well as an independent central bank
may help to keep savings in the domestic financial market, which might be
especially relevant for the Sub-Saharan countries group. Additionally,
governments should reduce their reliance on the domestic banking sector by
encouraging institutional investors such as insurance companies or pension
funds to participate in the market. Finally, the introduction or further
development of Islamic finance instruments, especially Islamic sukuk bonds,
can deepen domestic financial markets and mobilize additional financial
resources from both, private and institutional investors. Overall, a high share of
marketable securities in total domestic debt, a broad participation of different
financial agents and a high ratio of fixed versus floating bonds usually describe
a sound domestic bond market.
Policy Advice 3: Broadening and diversifying the creditor base
Rationale:
In many OIC member countries, the limited investor base is perceived to be
one of the most relevant challenges for realizing efficient public debt
operations. Along with an improvement of domestic debt markets, a further
opening towards global markets as well as offering new investment vehicles
may address this problem. Generally, the issuance of Islamic sukuk bonds may
broaden the credit base as new (international) investors, who are specializing in
Sharia-compliant financial instruments, may be attracted. While even non-OIC
member countries experience greater popularity of such Islamic sovereign
bonds, this development is especially relevant for cross-border investments
between OIC countries, particularly through sovereign wealth funds of OIC
member states. Moreover, recent innovation efforts such as state contingent
debt instruments or Master Collateralized Murabahah Agreements (which are