Improving Public Debt Management
In the OIC Member Countries
8
than external sources. The domestic debt market can be strengthened by a variety of measures
such as improving legal and regulatory frameworks, market infrastructure, political stability
and developing a reliable public debt management. Weak public debt management capacities
decrease the government’s credibility resulting in higher risk premiums especially with regard
to longterm bonds. Disseminating information on debt operations, adopting transparency in
primary auctions and developing secondary markets strengthen the functioning of domestic
debt markets.
Some OIC member countries are heavily indebted to the domestic banking sector. High
interest rates on government debt and preferences for safe lending reduce the incentives of
banks to provide credit to the private sector in these countries, leading to a crowding-out of
bank loans to the private sector. Banks tend to invest in shorter term instruments to avoid
asset and liability mismatches with shortterm bank deposits giving rise to interest rate risk
and refinancing risk for the government’s debt portfolio. When a substantial part of public debt
is held by domestic banks, a potentially dangerous link between public finances and the
banking sector exists: public default would damage the banking sector and difficulties in the
banking sector endanger government’s ability in placing its bonds on the domestic market. A
diversified domestic creditor base with a large share of nonbanking investors is favorable.
The investors’ base can be broadened by reforming the legal framework to grant pension
funds, insurance companies and foreign investors’ access to the domestic debt market.
OIC member countries may well use sukuk in public debt management 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 heavily on
the domestic banking sector may benefit from these instruments, including retail sukuk.
Countries that mainly rely on concessional lending may also use Islamic finance products to
attract private investors.
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. This also prevents the establishment and
development of a domestic debt market which is supposed to satisfy the investors’ and
governments’ financing needs in the long run. Countries with short average maturity of public
debt are exposed to refinancing risk and may lengthen maturities of public debt by
preferring longerterm TBonds over shortterm TBills. In countries with low shares of
foreign currency debt, this objective might be achieved, for example, by using swaps of
domestic currency debt to foreign currency debt which 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 in
how much the bond maturity structure mirrors the government expenditure structure.
Macroeconomic risk management is an important complement to public debt management.
The main tools in macroeconomic risk management are information and analytical systems
based on adequate frequency data providing early warning indicators. These indicators enable
policy makers to react to crises with adequate control measures. Several best practices are
used internationally that OIC member countries are recommended to consider.