Improving Public Debt Management
In the OIC Member Countries
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domestic creditors (76.2% in 2015), middleincome countries divide their financing needs
almost equally between both types of investors and lowincome countries’ debt is mostly held
by external creditors.
Interest rate risk arises for contracts with short maturities or variable interest rates. While
highest in highincome countries, the share of variable rate contracts is generally small.
Governments may receive credits on concessional terms, in particular from official creditors
as a form of development aid or in support of local reforms. This grant element in public debt
has been rising over time and amounted to 50% in 2014. The average interest rate of public
debt is often lower than the lending rate to the private sector, which might be explained by the
importance of concessional lending to governments.
Debt Management Offices (DMOs) are typically responsible for funding operations, for
analyzing and monitoring risks, for the settlement of transactions and for keeping financial
records up to date. The existence of a principal debt management entity with clear objectives, a
mediumterm strategy and the requirement to report to parliament or government is generally
considered as best practice in public debt management.
The DMO as part of the overall institutional structure may be a department of the Ministry of
Finance, an office within the central bank or an independent agency. A clear separation of
assigned responsibilities for monetary policy and for debt management is a precondition for
accountable institutions; this suggests separating the DMO from the central bank. If the
recruitment of trained portfolio managers from the private sector has priority, independent
agencies outside of other official institutions, socalled separate debt management offices
(SDMOs), might be established.
If public debt management is located within the central bank, it faces conflicts of interest
between monetary policy and public debt management. A clear allocation of the
responsibilities for monetary policy and debt management, which is a precondition for
accountable institutions, therefore suggests dividing these policies between two institutions.
An efficient governance structure requires that DMOs follow a clear mandate with welldefined objectives. Potential targets are the allocation of public debt in domestic and external
currency debt, the division between fixed and floating interest rate debt and the percentage of
total debt that has to be refinanced within twelve months. This helps to improve accountability
and to limit principalagent problems. Active trading based on benchmarks is rather absent in
global best practices.
There are competing views on the aims of public debt management: as a form of portfolio
management, costs are minimized for given risks (narrow view). Alternatively, when taking
revenues into account, public budget management has to prevent mismatches between
revenues and debt payments (broad view). This strategy focuses on budgetary risks and aims
at reducing financial risks by guaranteeing that government can meet its obligations at any
point in time. As such, it coordinates public debt management with other public policies.
A World Bank survey conducted in 2013 shows that 60% of the responding countries had a
formal debt management strategy in place. 77% of those with formal strategy published it,
76% aimed at strategic targets, 71% used quantitative analysis and only a minority grounded
the strategy on a legal framework.