SECTION 5.4 – KEY QUESTIONS FOR CSOS AND PARLIAMENTARIANS ON PUBLIC DEBT MANAGEMENT

Overview:
In this section, we will explore the critical questions that Civil Society Organizations (CSOs) and parliamentarians should consider when evaluating public debt management. The section highlights the importance of moving beyond the commonly referenced Debt-to-GDP ratio to gain a fuller understanding of a country’s debt situation.

• Understanding the full scope of a country’s public debt is crucial for maintaining economic stability and ensuring that borrowing practices align with sustainable development goals. The Debt-to-GDP ratio is often referred to as a headline indicator when assessing public debt, as it provides a snapshot of a country’s debt in relation to its economic output. However, while the Debt-to-GDP ratio is important, it is only one of many indicators that parliamentarians and Civil Society Organizations (CSOs) should examine to gain a comprehensive understanding of the public debt situation.
• Gross Domestic Product (GDP) itself is an aggregate measure of the value of goods and services produced in an economy over a specific period, and the Debt-to-GDP ratio simply measures a country’s national debt relative to its GDP. Many countries set debt rules based on this ratio, with recommended prudential limits typically set at 60% of GDP in advanced economies and 40% in emerging economies. While these benchmarks are useful, some economists argue that there is no universally applicable debt ceiling beyond which debt becomes unsustainable.
• Given these nuances, it’s important for parliamentarians and CSOs to go beyond the Debt-to-GDP ratio and explore other critical indicators of public debt. By doing so, they can obtain a fuller picture of the public debt situation, which is essential for informed decision-making and effective oversight. This section will guide you through the key questions to ask and the indicators to examine to ensure a comprehensive understanding of public debt.

Key Questions for CSOs

1. Is All Public Debt Being Reported?
   • Why It Matters: For CSOs to make informed decisions, they need a complete picture of the country’s financial obligations. Debt reporting can cover the entire public sector, including state-owned enterprises (SOEs), which are often significant contributors to public debt.
   • What’s involved: The completeness of debt coverage is crucial for transparency. For example, if only central government debt is reported, the overall debt figures might be understated, hiding potential risks associated with broader public sector debt, including that of SOEs. CSOs can ensure that debt reporting aligns with international best practices, which call for comprehensive coverage that includes all public sector entities.
   • Questions to Consider:
     • Does the debt report include all relevant sectors, such as state-owned enterprises and other government agencies?
     • Are there any debts that might not be visible in the official reports?

2. Do We Have Enough Cash to Pay Our Debts?
   • Why It Matters: Liquidity—the ability to meet debt payments as they come due—is a critical factor in debt sustainability. A government might have significant debt but still manage it effectively if it has enough cash on hand or easily liquidated assets.
   • What’s involved: Gross debt figures provide a snapshot of what is owed, but they do not indicate whether the government has the resources to repay it. Net debt, which accounts for financial assets that could be used to offset liabilities, offers a clearer picture of liquidity. CSOs can focus on understanding both gross and net debt positions to assess the government’s ability to manage its obligations without resorting to additional borrowing.
   • Questions to Consider:
     • What is the government’s current cash position relative to its debt obligations?
3. What Is the Balance Between External and Internal Debt?
   • Why It Matters: The ratio of external to internal debt affects a country’s financial sovereignty and its exposure to external shocks. External debt, often denominated in foreign currencies, can become more expensive to service if the local currency depreciates.
   • What’s involved: A high level of external debt can limit a country’s policy flexibility, as it may require austerity measures to satisfy foreign creditors. The case of Sri Lanka, where the government had to lease the Hambantota Port to China for 99 years due to its inability to service external debt, underscores the potential consequences of a high external debt burden. CSOs can evaluate the currency composition of debt to understand the risks and ensure that external borrowing is managed prudently.
   • Questions to Consider:
     • How much of our debt is owed to foreign versus domestic lenders?
       • What are the risks associated with this balance, particularly in relation to foreign exchange rates?

4. When Will the Debt Be Due?

• Why It Matters: The maturity structure of debt—whether it is short-term or long-term—can have significant implications for refinancing risk. Short-term debt needs to be rolled over frequently, which can be challenging if market conditions deteriorate.
  • Questions to Consider:
    • What portion of our debt is short-term and could pose rollover risks?
    • Are there any significant repayments due soon that could affect the budget?

5. How Much Debt Do We Have in Foreign Currencies?

• Why It Matters: Debt denominated in foreign currencies exposes the government to exchange rate risk. If the local currency depreciates, the cost of servicing this debt can increase dramatically, potentially leading to financial instability.
• The “Tuna Bond” scandal in Mozambique, where secret loans from Credit Suisse and VTB bypassed parliamentary approval and ultimately defaulted, highlights the importance of both debt transparency and careful currency management. Mozambique’s economic crisis worsened when its currency, the metical, lost half its value against the US dollar in 2015-2016, significantly increasing the cost of servicing its dollar-denominated debt. This case underscores the need for Civil Society Organizations (CSOs) to monitor foreign currency exposure in debt portfolios and advocate for strategies to reduce exchange rate risks, while also pushing for greater transparency in line with World Bank and IMF reforms.
  • Questions to Consider:
    • What percentage of our debt is in foreign currencies?
    • How vulnerable is our debt portfolio to exchange rate fluctuations?

6. Are We Borrowing on Non-Concessional Terms?

Video/Example on Non-Concessional Borrowing Terms:

06:15 – 9:09

Here is a video from the Human Coined Podcast Ep. 11 “Debt Justice: The Role of Civil Society” introducing Tim Jones, Head of Policy for Debt Justice UK who speaks on the intensity of the private sector debt risk.

• Why It Matters: Non-concessional loans often have higher interest rates and shorter repayment periods, which can increase the cost of borrowing and strain government finances.
• What’s involved: As countries like Kenya have found, a shift towards more expensive borrowing options can increase financial pressure. Between 2016 and 2019, Kenya saw a rise in its stock of non-concessional loans, which grew from 24% to 36% of total debt, while the share of cheaper, concessional loans from multilateral institutions declined. CSOs can scrutinize the terms of new borrowing and ensure that the long-term financial impacts are carefully considered.
• Questions to Consider:
  • What portion of our external debt is non-concessional?
  • Why are we taking on more expensive debt, and what impact could this have?

7. Are There Any Hidden Debts?

• Why It Matters: Hidden debts, such as contingent liabilities, represent potential obligations that do not appear on the balance sheet but could become significant if triggered by certain events.
• What’s involved: Contingent liabilities, including guarantees and loan commitments, are “off-balance sheet” items that can suddenly become real financial burdens if triggered by certain events. Most governments include a line item for contingencies in their budgets, but the full extent of these liabilities is often not transparent. CSOs can ensure that all potential liabilities are disclosed and accounted for in public debt reports to avoid unpleasant surprises.
• Questions to Consider:
  • What are the government’s contingent liabilities?
  • Are these potential debts being disclosed transparently?

8. How Much of Our Debt Is Not Performing?

• Why It Matters: Non-performing debt refers to loans that are not generating the expected economic returns, which could lead to financial strain and impact the government’s ability to service its debt.
• What’s involved: In the Philippines, there has been a long-standing campaign to audit “useless” debt—debt that has not yielded the expected benefits. Identifying and addressing such non-performing debt is essential for maintaining fiscal health. CSOs can advocate for regular audits of public debt to identify and mitigate the impact of non-performing loans.
• Questions to Consider:
  • What portion of our debt is non-performing?
  • What measures are being taken to address non-performing debts?

9. What Are the Terms and Conditions of Our Debt?

• Why It Matters: Understanding the specific terms and conditions of debt agreements is essential for assessing the long-term implications of borrowing. These terms include interest rates, grace periods, and repayment schedules, which can significantly affect the cost and sustainability of debt.
• What’s involved: Debt agreements can contain complex terms that may have long-term financial implications. For example, loans with variable interest rates can become more expensive if interest rates rise. CSOs can ensure that they fully understand the terms of all major debt agreements and consider their potential impact on future budgets.
• Questions to Consider:
  • What are the interest rates and repayment terms for our major loans?
  • Are there any clauses that could affect our ability to repay, such as variable interest rates or penalties for early repayment?