Improving Public Debt Management

In the OIC Member Countries

Audit, transparency and accountability

Once decisions with respect to the institutional form and strategy of the DMO have been taken,

its success depends – among other factors – on its accountability, governance and monitoring

by the political entity in charge of public debt management, in most cases the Ministry of

Finance or Parliament. An efficient governance structure of DMOs depends on a number of

considerations. DMOs have to be institutionalized with a clear mandate. Clearly defined

objectives such as strategic targets and performance benchmarks help to improve

accountability and limit principalagent problems. The Ministry of Finance, parliament or the

respective supervising authority should be endowed with the necessary resources to carry out

their monitoring function.

Both DMOs within the ministry and separate Debt Management Offices (SDMOs) imply that

authority is delegated. In such situations a classical principalagent problem arises: while the

Minister of Finance is responsible for the debt management strategy, its execution is delegated

to the DMO. Due to asymmetric information the Minister of Finance cannot distinguish

whether targets have been missed because of developments outside the control of the debt

manager, or because of insufficient effort or skill of the agent. Agency risk increases with the

degree of separation and autonomy of public debt management from the ministry. To limit

agency problems, it is important to clearly specify the objectives of the DMO such that the

agent’s performance can be measured and to formulate an incentivecompatible contract for

the agent. In addition, to facilitate delegation, public debt management functions should be

consolidated in a single office with a clearly designated head who is directly answerable for the

monitoring entity. If a SDMO is established, a board of directors might bridge the gap between

SDMO and Ministry of Finance. The board might monitor the SDMO, evaluate its performance

visàvis the targets and ultimately sanction its decisions.

Coordination with Macroeconomic Policies

Coordination with fiscal and other public policies

When public debt management is implemented as portfolio management, the DMO follows a

narrow objective function according to which costs are minimized for given risks. Another

view argues that this strategy is inefficient and the objective function should also include the

interplay of public debt management with other public policies. On one hand, the

independence from the political process allows efficiency gains, because debt is managed by

purely economic considerations. On the other hand, if other public policies are not taken into

account, this might not be optimal because the coordination of different public policies might

prove to be beneficial.

The view that debt management is a component of public policy argues that the analysis of

risks and costs should focus on the entire public balance sheet instead of being restricted to its

liability side. This strategy acknowledges currency and interest rate risks and, hence, focuses

on budgetary risks. This form of public debt management aims at reducing financial risks by

guaranteeing that the government can meet its obligations at any point in time. Therefore,

public budget management has to examine the nature of government revenues and cash flows

and try to prevent mismatches between revenues and debt payments. The structure of

revenues and spending – maturity and currency denomination – should be as similar as

possible. Given that tax revenues are usually in domestic currency, this approach implies that

countries should primarily use debt instruments denominated in domestic currency. Examples

of countries following this broader framework for debt management are Australia and New