Improving Public Debt Management
In the OIC Member Countries
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2010). Pension funds with maturity matching needs (given longterm domestic currency
liabilities) and foreign investors seeking higher returns are likely to demand for longterm
local currency bonds therefore lengthening the maturity structure of public debt and reducing
the refinancing risk. Foreign investors are also expected to foster an improvement and
innovation in financial technology via spillover effects as well as to promote competition and
thus increase efficiency in the market (Christensen 2005, Maana et al. 2008).
OIC member countries are advised to achieve a balance between domestic and foreign
borrowing, where the specific optimal share depends on the exposure of a country to global
markets and macroeconomic conditions. To mitigate risks, it is generally recommended that
countries do not depend fully or to a large extent on either borrowing strategy. Some OIC
member countries have already successfully issued Eurobonds and public debt management
may try to turn this instrument of financing into a standard procedure. Countries with a high
share of domestic debt may potentially use swaps of domestic currency debt to foreign
currency debt, which generally has lower yields and higher maturities.
OIC member countries can use sukuk in addition to conventional bonds to diversify the
government’s debt portfolio and attract new investors, domestically and from other (Islamic)
countries. In particular, countries that rely to a great extent on the domestic banking sector
can benefit from these instruments. Countries that mainly rely on concessional lending may
also use Islamic finance products to attract private investors.
(4) Maturity structureThe average maturity for private credit in OIC member countries is shorter than the worldwide
average. Furthermore, many OIC member countries benefit from concessional lending with
favorable borrowing conditions such as long maturities. When these countries increase their
share of private lending, they might face refinancing problems.
Governments often issue shortterm bonds rather than longterm bonds. Interest rates of
shortterm bonds are usually lower than longterm ones when the markets have concerns
about political and macroeconomic risks, but are subject to a greater refinancing risk.
Moreover, it may prevent the establishment and development of a domestic debt market which
is supposed to satisfy the investors’ and government’s financing needs in the longrun
(Christensen 2005, Maana et al. 2008, Panizza 2010). Hence, governments are encouraged to
expand the maturity mix of their public debt portfolio and consider issuing bonds with greater
time horizons.
Countries with high refinancing risk may lengthen maturities of public debt by preferring
longerterm TBonds over shortterm TBills. In countries with low shares of foreign currency
debt, this objective could be achieved, for example, through swaps of domestic currency debt
to foreign currency debt with generally longer maturity. Public budget management might also
benefit from the current low interest rate environment to lengthen the average maturity of
debt to reduce refinancing risk and reduce the number of bonds issued annually. An important
indicator for the quality of the domestic debt market is how much the bond maturity structure
mirrors the government expenditure structure (Abbas and Christensen 2007). This asks for
institutionalized information flow between the DMO and those offices responsible for
government expenditures, while respecting the organizational independence of public debt
management actors, especially for the DMO.