Improving Public Debt Management
In the OIC Member Countries
34
cost considerations and the management of risks became important components of debt
management though. Consequently, public debt management adopted portfolio management
practices of the private sector.
To implement those practices, trained staff was needed. As it turned out to be difficult to
attract portfolio managers from the private sector given low wages of civil servants, some
countries (e.g. Denmark, Ireland and Sweden) opted to create DMOs as independent agencies
outside of other official institutions, socalled separate debt management offices (SDMOs).
Besides their efficiency and professionalism, SDMOs are less exposed to political pressures.
This is important as politicians may have an interest to lower current budget deficits and
therefore favor cheap, but risky funding, e.g. a higher share of shortterm contracts, more
foreign currency debt or floating interest rates.
Debt management strategyThe rather general objectives of public debt management, which may be derived from
government preferences with respect to costs and risks, have to be translated into a debt
management strategy that is implementable. It should be based on mediumterm targets,
which may be numerically specified. Potential targets are the allocation of public debt in
domestic and external currency debt, the division between fixed and floating interest rate debt
and the percentage of total debt that has to be refinanced within 12 months (see also Table
12).3 Publication of the public debt management strategy is highly recommended, because it
increases transparency and thus accountability of the DMO.
Provided active trading takes place, targets may be complemented by performance
benchmarks. However, for a number of reasons, active trading is rather absent in the global
practice of public debt management. In expected terms, active trading only contributes to
lower costs if debt managers possess superior information compared to other market
participants. While this is likely true on the domestic market, many governments consider it
unethical to benefit from their inside information. Many governments are dominant issuers of
debt on their domestic market and may manipulate market conditions. However, this behavior
would be detrimental to the development of domestic debt markets. Consequently, most
governments abstain from active trading on the domestic market. On the foreign market, in
turn, it is questionable whether governments possess the necessary information and capacity
to beat the benchmark.
Debt reporting and evaluationDMOs are typically responsible for the publication of data on public debt developments,
borrowing amounts and structural changes in public debt. Since these data influence domestic
and foreign investors’ decision whether to provide financial resources to the public entity, it is
in the own interest of the DMO to provide complete, reliable and timely data. These might be
supplemented by a document containing debt forecasts and a risk analysis based on different
stress tests scenarios. Finally, DMOs should make the debt management strategy public and
provide an expost analysis explaining why targets may have been missed or revised. Overall,
transparency is a key element of advanced public debt management.
3 See Currie et al. (2003, p. 34) for a tabular compilation of published strategic targets in selected industrialized countries.