Improving Public Debt Management
In the OIC Member Countries
7
OIC member countries that already have established professional public debt management
practices might advise other countries in establishing institutional frameworks for public debt
management. Existing institutional settings and public debt management documents might be
taken as models by countries that take the first steps in implementing formal public debt
management. Often countries have gained various experiences regarding public debt
management such as longterm strategy development, risk management, monitoring or
institutional coordination. Countries may be able to offer good examples within one area of
debt management and/or negative experience from which lessons can be learned. OIC member
countries are also advised to cooperate. Tasks such as the training of specialized staff, the
development of capacities of the middle office and the creation of risk quantification models
might be centralized. Given their commonalities, this opens the room for cooperation among
the OIC member countries. Therefore, it might be useful to bring OIC member countries
together for developing solutions of public debt management problems. It is recommended to
coordinate cooperation within COMCEC for instance by setting up workshops or joint
training courses on public debt management.
Central bank independence might be strengthened in the OIC member countries. In some
countries, the central bank has purchased substantial amounts of sovereign bonds. This poses
the risk that monetary and financial policies are not clearly separated and that the central bank
cannot implement an independent monetary policy. Public debt management is well advised to
further diversify the investor base.
Islamic sovereign bonds (sukuk) are likely to gain popularity in OIC and nonOIC countries.
An important factor is growing preference for sharia compliant finance products. Moreover,
the issuance of sukuk bonds might serve market development purposes by diversifying
domestic capital markets and attracting new investors from Islamic countries. Investors can
benefit from new sovereign sukuk issuances because of the opportunity to diversify their
portfolios. Several OIC member countries are planning on issuing sovereign sukuk or have
already done so. Infrastructure projects are especially suitable as underlying structure for
sovereign sukuk given the assetbacked nature of these bonds. In several Islamic markets
funding gaps and infrastructure requirements exist. As investments in infrastructure are
expected to increase in developing and emerging countries with Islamic banking playing an
important role in many of these markets, sukuk issuance related to infrastructure is expected
to increase.
However, Islamic finance instruments do not always minimize financing costs as they may
entail additional administrative expenses and greater legal and accounting challenges. The
prohibition of interest and the limited primary and secondary market for sukuk may give rise
to concerns regarding an efficient price system and tradability. The limited tradability, the
comparatively high issuance costs, and the rather limited volume of sukuk constrain market
liquidity and hence a government’s flexibility in fiscal policy and a central bank’s flexibility in
monetary policy.
As a result of underdeveloped domestic debt markets, several low and lowermiddle
income OIC member countries strongly depend on external borrowing. Domestic debt markets
are potentially an important source of financial funding for governments. A wellfunctioning
domestic market for public debt helps to reduce the risks linked to public debt because it
provides additional diversification opportunities and reduces the exchange rate risk. For
domestic creditors it is easier and less expensive to buy sovereign bonds if they are traded on
the domestic rather than on the international market. Domestic creditors, in turn, are a source
of funds that reacts less to global market conditions and as a result is less volatile and instable