Improving Public Debt Management
In the OIC Member Countries
9
1 Introduction
1.1 Definition of Public Debt Management Public debt management is intended to design the government’s debt portfolio in a targeted
and efficient way. The IMF (2014, p. 5) describes public debt management as “the process of
establishing a strategy for managing the government’s debt in order to raise the required
amount of funding at the lowest possible cover cost over the mediumto longrun, consistent
with a prudent degree of risk.” Public debt management is an everyday business that is not
only relevant when a budget deficit has to be financed or maturing debt has to be repaid. Debt
management relates to the total stock of outstanding debt, whose structure (e.g. currency
denomination, creditor base, maturity structure and interest rates) can be changed through
operations on the money and capital markets. While debt management in the private sector
primarily aims to minimize costs and risks, debt management in the public sector (DeM) can
pursue additional goals, such as macroeconomic stabilization (Tobin 1963), tax burden
smoothing (Barro 1995) or a stabilization of the public budget (Missale 2000).
Historical experiences with sovereign debt crises (e.g. Mexico in 1994, Turkey in 1994, Russia
in 1998 and Argentina in 2001) and the recent sovereign debt crisis in Europe, triggered by the
U.S. financial crisis starting in 2007, have shown that public debt management is relevant for
both highand lowerincome countries. As the IMF (2014, p. 6) pointed out, public debt
management is closely linked with a country's financial stability and crisis vulnerability:
“Sound risk management practices are essential given that a government’s debt portfolio is
usually the largest financial portfolio in the country and can contain complex and risky
financial structures, which have the potential to generate substantial risks to the government’s
balance sheet and overall financial stability. Sound risk management by the public sector is
also essential for risk management by the private sector.“
Governments regularly borrow to finance public expenditures. Overall, the decision on the
amount to be borrowed should be based on a sustainability analysis of public debt. Such fiscal
sustainability typically relates to the solvency of the government, i.e. the ability to continue
servicing its debt without an unrealistically large future correction of the budget balance or an
explicit default (see, e.g., Burnside 2005, IMF 2007). To raise the intended funds, public debt
managers have to choose suitable finance instruments and seek for the best borrowing
conditions, i.e. to raise the funds at the lowest cost. Additionally, they have to structure the
debt portfolio in a way such that negative effects of economic or financial shocks on the public
budget are minimized (see, e.g., Melecky 2007). Thus, financing public debt in an efficient
manner requires a complex multiperspective approach.
Generally, public debt management describes the process of establishing and implementing a
prudent strategy for raising the required amount of funding, while considering the
government’s cost and risk preferences. In any event, the government may set additional goals,
such as developing and maintaining an efficient market for government securities. In practice,
public debt management usually involves the following tasks (Wheeler 2004):
 Establishing clear public debt management objectives within a sound governance
framework, including a prudent cost and risk management strategy and accompanying
portfolio management policies;
 Establishing an efficient organizational structure and appropriate management
information systems;
 Ensuring that all portfoliorelated transactions are consistent with the government’s debt
management strategy while being efficiently executed;