Improving Public Debt Management
In the OIC Member Countries
33
2.2 Institutional Frameworks This section focuses on the institutional organization of public debt management, the aims of
public debt management and its relation to other macroeconomic policies. As far as possible
this section follows the structure of the Debt Management Performance Assessment (DeMPA)
methodology as described in Table 11.2
Governance and Strategy Development
Legal frameworkWhile the level of public debt is primarily determined by the decisions at the political executive
level, the structure of debt may be chosen by a Debt Management Office (DMO). With respect
to the institutional characteristics of the DMO, two main areas can be distinguished. First,
policymakers need to decide where the DMO is placed within the institutional landscape of a
country. The DMO might be a department of the Ministry of Finance, an office within the
central bank or an independent agency. Second, the legislator has to endow the DMO with the
legal and organizational structure within which debt is managed.
While the DMO may propose a strategy and targets, these have to be approved at the political
executive or legislative level. The existence of a principal debt management entity with clear
objectives, a mediumterm strategy and the requirement to report to the government is
generally considered as best practice and may be regarded as a hypothetic but sufficient
structure for public debt management. Like Currie et al. (2003, p. 27) put it, “each institutional
choice of location and organization has advantages and disadvantages”. There is no universal
best practice; the appropriate institutional choice rather depends on the characteristics and
preferences of a country. Nevertheless, public debt management in the OECD countries has
followed a common trend since the 1990s: It has become emancipated from fiscal and
monetary policies and is now considered as an activity with its own objectives.
Managerial structureThe typical functions of a DMO can be separated in three areas: (1) The front office is in charge
of funding operations and executes the operations in financial markets. (2) The middle office is
responsible for analyzing and monitoring risks. It assesses the performance of debt managers
on the basis of the benchmarks outlined in the debt management strategy. (3) The back office is responsible for the settlement of transactions and for keeping financial records up to date.
Theoretically, these three offices might be spread between different departments of the
Ministry of Finance or even be located in different organizational units. Separation should not
be a problem given that clearly defined objectives are in place and coordination is effective. In
practice, however, poor coordination, low accountability and rivalries between the different
units led to the consensus “that consolidating debt management functions into one office is one
of the most important steps that can be taken to improve the overall quality of debt
management” (Currie 2003, p. 22).
In the early DMOs, middle offices often were basically absent. DMOs were responsible for debt
issuance and settlement without an explicit debt management strategy. When debt levels rose
and interest payments amounted to substantial shares of government budgets in the 1980s,
2 Given that the DeMPA categories “Borrowing and Related Financial Activities”, “Cash Flow Forecasting and Cash BalanceManagement” and “Debt Recording and Operational Risk Management” refer to tasks of the DMO and not to its
institutional form, these points are not addressed explicitly in this section. They are discussed in Section 1.2.