Improving Public Debt Management In the OIC Member Countries

COMCEC COORDINATION OFFICE March 2017

COMCEC COORDINATION OFFICE

February 2017

Improving Public Debt Management in the OIC Member Countries

COMCEC COORDINATION OFFICE March 2017

This report has been commissioned by the COMCEC Coordination Office to the IfoInstitute. The report was prepared by Martin Mosler, Prof. Dr. Niklas Potrafke, Dr. MarkusReischmann (Project Coordinator), Dr. Marina Riem, Prof. Dr. Siegfried Schönherr, Prof. Dr.Günther Schulze, Dr. Andreas Steiner (Co­Project Coordinator) and Prof. Dr. TimoWollmershäuseras well as researchassisstants.Viewsand opinionsexpressed in the reportare solely those of the author(s) and do not represent the official views of the COMCECCoordinationOfficeortheMemberStatesoftheOrganizationofIslamicCooperation.Thefinalversion of the report is available at the COMCEC website.* Excerpts from the report can bemadeaslongasreferencesareprovided.AllintellectualandindustrialpropertyrightsforthereportbelongtotheCOMCECCoordinationOffice.Thisreportisforindividualuseanditshallnotbeusedforcommercialpurposes.Exceptforpurposesof individualuse,thisreportshallnotbereproducedinanyformorbyanymeans,electronicormechanical,includingprinting,photocopying, CD recording, or by any physical or electronic reproduction system, ortranslated and provided to the access of any subscriber through electronic means forcommercialpurposeswithoutthepermissionoftheCOMCECCoordinationOffice.

Forfurtherinformationpleasecontact:COMCECCoordinationOfficeNecatibeyCaddesiNo:110/A06100YücetepeAnkara/TURKEYPhone:903122945710Fax:903122945777Web:www.comcec.org*E­book:http://ebook.comcec.org

i

Table of Contents

List of Figures ......................................................................................................................................................... iii

List of Tables ........................................................................................................................................................... vi

List of Acronyms ................................................................................................................................................... vii

Executive Summary ............................................................................................................................................... 1

1 Introduction ................................................................................................................................................... 9

1.1 DefinitionofPublicDebtManagement........................................................................................................9

1.2 PerformanceIndicatorsandBestPractices...........................................................................................10

2 Global Practices in Public Debt Management .................................................................................. 19

2.1 DescriptiveStatisticsandPerformanceIndicators.............................................................................19

2.1.1 PublicDebtDynamics.........................................................................................................................19

2.1.2 GovernmentBudgets..........................................................................................................................22

2.1.3 DebtStructures......................................................................................................................................24

2.2 InstitutionalFrameworks...............................................................................................................................33

2.3 LessonsLearnedandRelevanceforOICMemberCountries..........................................................37

2.4 SurveyResults.....................................................................................................................................................38

3 Public Debt Management in the OIC Member Countries .............................................................. 44

3.1 DescriptiveStatisticsandPerformanceIndicators.............................................................................44

3.1.1 PublicDebtDynamics.........................................................................................................................44

3.1.2 GovernmentBudgets..........................................................................................................................46

3.1.3 DebtStructures......................................................................................................................................49

3.2 InstitutionalFrameworks...............................................................................................................................56

3.3 IslamicFinanceinPublicDebtManagement.........................................................................................58

3.3.1 IslamicFinance......................................................................................................................................58

3.3.2 IslamicBonds.........................................................................................................................................61

3.4 LessonsLearned.................................................................................................................................................66

4 Public Debt Management in Individual OIC Member Countries................................................ 69

4.1 CaseStudies..........................................................................................................................................................70

4.1.1 IslamicRepublicofTheGambia.....................................................................................................70

4.1.2 RepublicofMozambique...................................................................................................................77

4.1.3 RepublicofTogo...................................................................................................................................84

ii

4.1.4 RepublicofUganda..............................................................................................................................91

4.1.5 ArabRepublicofEgypt......................................................................................................................98

4.1.6 RepublicofIndonesia......................................................................................................................105

4.1.7 TheFederalRepublicofNigeria.................................................................................................113

4.1.8 RepublicoftheSudan......................................................................................................................120

4.1.9 RepublicofAlbania...........................................................................................................................127

4.1.10 IslamicRepublicofIran..................................................................................................................135

4.1.11 RepublicofKazakhstan...................................................................................................................141

4.1.12 LebaneseRepublic............................................................................................................................148

4.1.13 RepublicofTurkey............................................................................................................................154

4.1.14 SultanateofOman.............................................................................................................................161

4.1.15 KingdomofSaudiArabia................................................................................................................166

4.2 ComparisonofPublicDebtManagementPractices.........................................................................172

4.3 ComparisonofIslamicandConventionalFinancePractices.......................................................175

5 Policy Recommendations ..................................................................................................................... 176

5.1 MeasurestoImprovePublicDebtManagement...............................................................................176

5.2 MacroeconomicRiskManagement.........................................................................................................182

References ........................................................................................................................................................... 185

Glossary ................................................................................................................................................................ 208

Appendix A: Surveys ........................................................................................................................................ 211

Appendix B: Country Samples ...................................................................................................................... 213

iii

List of Figures

Figure1­1:PublicDebtManagementGovernanceStructure...............................................................................13

Figure2­1:GrossPublicDebtWorldwide....................................................................................................................20

Figure2­2:GrossPublicDebtWorldwideSince2008............................................................................................21

Figure2­3:DistributionofGrossPublicDebttoGDPRatiosWorldwide.......................................................22

Figure2­4:GovernmentNetLendingWorldwide.....................................................................................................23

Figure2­5:CreditorStructureofPublicDebtWorldwide....................................................................................24

Figure2­6:GrantElementWorldwide...........................................................................................................................25

Figure2­7:ShareofShort­TerminTotalPublicDebtWorldwide....................................................................26

Figure2­8:Long­TermandShort­TermPublicDebtWorldwide......................................................................27

Figure2­9:MaturityofNewExternalPublicDebtCommitmentsWorldwide.............................................28

Figure2­10:InterestRateTypesWorldwide..............................................................................................................29

Figure2­11:InterestRatesonPublicDebtWorldwide..........................................................................................30

Figure2­12:CurrencyCompositionofPublicDebtWorldwide.........................................................................31

Figure2­13:CurrencyCompositionofPublicDebtbyIncomeGroupsWorldwide..................................32

Figure2­14:CurrencyCompositionofPublicDebtbyRegionalGroupsWorldwide...............................32

Figure2­15:UseofStrategicTargetsbyTypeofRiskWorldwide....................................................................38

Figure2­16:AssessmentofPublicDebtManagement............................................................................................40

Figure2­17:ImportanceofRiskCategoriesinPublicDebtManagement.....................................................41

Figure2­18:FunctioningofDomesticPublicDebtMarket...................................................................................42

Figure2­19:ProblemsFacedbytheDomesticPublicDebtMarket..................................................................43

Figure3­1:GrossPublicDebtinOICMemberCountries.......................................................................................45

Figure3­2:GrossPublicDebtinOICMemberCountries(2015).......................................................................46

Figure3­3:GovernmentNetLendinginOICMemberCountries.......................................................................47

Figure3­4:OilPriceDevelopmentsandNetLending.............................................................................................48

Figure3­5:NetDebtinOICMemberCountries.........................................................................................................49

Figure3­6:CreditorStructureofPublicDebtinOICMemberCountries.......................................................50

Figure3­7:CreditorStructureofPublicDebtbyCountry(2015).....................................................................51

Figure3­8:GrantElementinOICMemberCountries..............................................................................................52

Figure3­9:MaturityofNewExternalDebtCommitmentsinOICMemberCountries.............................53

Figure3­10:InterestRatesonPublicDebtinOICMemberCountries............................................................54

Figure3­11:CurrencyCompositionofExternalPublicDebtinOICMemberCountries.........................55

Figure3­12:CurrencyCompositionofExternalPublicDebtbyCountry(2014).......................................56

Figure3­13:DeMStrategiesinOICMemberCountries..........................................................................................57

iv

Figure3­14:UseofStrategicTargetsbyTypeofRisk............................................................................................58

Figure3­15:GlobalAssetsofIslamicFinance............................................................................................................59

Figure3­16:IslamicBankingShareinTotalBankingAssetsbyCountry(2015H1).................................60

Figure3­17:SharesofGlobalIslamicBankingAssetsbyCountry(2015).....................................................61

Figure3­18:GlobalSukukIssuancesandOutstanding...........................................................................................63

Figure3­19:SovereignSukukIssuancebyCountry(11M2015).......................................................................64

Figure3­20:SukukOutstandingbyCountry(2015)...............................................................................................64

Figure3­21:SelectedUSDSukukYieldsvs.U.S.GovernmentSecuritiesYield............................................66

Figure4­1:Gambia–PublicDebtDynamics................................................................................................................71

Figure4­2:Gambia­YieldCurvesofT­BillsandSukuk(2016).........................................................................75

Figure4­3:Mozambique–PublicDebtDynamics....................................................................................................78

Figure4­4:Mozambique­CreditorStructureofPublicDebt(2014)..............................................................81

Figure4­5:Mozambique­AverageMaturityofPublicDebt................................................................................82

Figure4­6:Mozambique­InterestRatesandInflation..........................................................................................83

Figure4­7:Togo–PublicDebtDynamics.....................................................................................................................85

Figure4­8:Togo­InterestRatesandInflation..........................................................................................................88

Figure4­9:Togo­CreditorStructureofExternalPublicDebt............................................................................89

Figure4­10:Uganda–PublicDebtDynamics.............................................................................................................92

Figure4­11:Uganda­YieldsonT­BondsandT­Bills..............................................................................................96

Figure4­12:Uganda­YieldCurvesofT­BondsandT­Bills(2016)..................................................................96

Figure4­13:Egypt–PublicDebtDynamics.................................................................................................................99

Figure4­14:Egypt­InterestRatesonGovernmentSecurities........................................................................102

Figure4­15:Egypt­CredittotheEconomy.............................................................................................................103

Figure4­16:Indonesia–PublicDebtDynamics.....................................................................................................106

Figure4­17:Indonesia­StructureofCentralGovernmentDebtbyInstrument.....................................110

Figure4­18:Indonesia­CurrencyCompositionofCentralGovernmentDebt.........................................111

Figure4­19:Nigeria­PublicDebtDynamics...........................................................................................................114

Figure4­20:Nigeria­PublicDebtCompositionbyInstruments(June2016)..........................................117

Figure4­21:Nigeria­YieldCurveofFGNs................................................................................................................118

Figure4­22:Nigeria–CreditorStructureofExternalPublicDebt(2015).................................................119

Figure4­23:Sudan–PublicDebtDynamics.............................................................................................................121

Figure4­24:Sudan­RatesofReturnandInflation...............................................................................................124

Figure4­25:Sudan–CreditorStructureofExternalPublicDebt(2013)...................................................125

Figure4­26:Albania–PublicDebtDynamics..........................................................................................................128

v

Figure4­27:Albania–PublicDebtCompositionbyInstrumentMaturity.................................................132

Figure4­28:Albania–CreditorStructureofDomesticPublicDebt..............................................................133

Figure4­29:Iran–PublicDebtDynamics.................................................................................................................136

Figure4­30:Kazakhstan–PublicDebtDynamics.................................................................................................142

Figure4­31:Kazakhstan­YieldsonGovernmentSecurities............................................................................145

Figure4­32:Kazakhstan–CreditorStructureofExternalPublicDebt(2016)........................................146

Figure4­33:Lebanon–PublicDebtDynamics.......................................................................................................149

Figure4­34:Lebanon­YieldsonT­Bills....................................................................................................................151

Figure4­35:Turkey–GeneralGovernmentDebtDynamics............................................................................155

Figure4­36:Turkey­OrganizationofPublicDebtManagement...................................................................156

Figure4­37:Turkey­DomesticBorrowingbyInstruments(2015).............................................................158

Figure4­38:Turkey­10­yearBondsYields.............................................................................................................159

Figure4­39:Oman­PublicDebtDynamics..............................................................................................................162

Figure4­40:Oman­OutstandingPublicDebtbyInstruments........................................................................164

Figure4­41:SaudiArabia–PublicDebtDynamics...............................................................................................166

Figure4­42:SaudiArabia­YieldCurveofGDBs(2007)andGovernmentBonds(2015)..................168

Figure4­43:SaudiArabia­YieldsonSAMABills...................................................................................................169

Figure4­44:SaudArabia­YieldCurvesofSAMABills........................................................................................169

FigureA­0­1:CESifoWorldEconomicSurveyOctober2016...........................................................................211

FigureA­0­2:IfoPublicDebtManagementSurvey2016...................................................................................212

vi

List of Tables

Table1­1:WorldBankDeMPAPerformanceIndicators.......................................................................................10

Table1­2:RisksRelevantforPublicDebtManagement........................................................................................14

Table1­3:InterdependenciesofPublicDebtManagement,FiscalPolicyandMonetaryPolicy..........16

Table4­1:Gambia–CostandRiskIndicatorsfortheGovernment'sDebtPortfolio(2014).................73

Table4­2:Mozambique­CostandRiskIndicatorsfortheGovt.'sDebtPortfolio(2014)......................80

Table4­3:Togo­CostandRiskIndicatorsfortheGovernment’sDebtPortfolio(2015).......................87

Table4­4:Uganda­CostandRiskIndicatorsoftheGovernment’sDebtPortfolio...................................94

Table4­5:Egypt–CostandRiskIndicatorsfortheGovernment'sDebtPortfolio(Mid2015)........101

Table4­6:Indonesia­Targetindicatorsfordebtportfoliorisk......................................................................108

Table4­7:Indonesia­CostandRiskIndicatorsoftheGovernment’sDebtPortfolio............................109

Table4­8:Indonesia­OutstandingCentralGovernmentDebt2011­2016(intrillionIDR)..............110

Table4­9:Nigeria­RiskIndicatorsfortheGovernment'sDebtPortfolio(2015)..................................116

Table4­10:Albania–CostandRiskIndicatorsfortheGovernment’sDebtPortfolio(2015)...........131

Table4­11:Lebanon–CostandRiskindicatorsfortheGovernment'sDebtPortfolio(2013).........150

Table4­12:ComparisonofDebtLevelsandStructuresinCaseStudyCountries(2015)....................173

Table4­13:ComparisonofDebtManagementObjectivesinCaseStudyCountries...............................174

Table5­1:ChallengesandObstaclestoPublicDebtManagement.................................................................177

Table5­2:SummaryofPolicyRecommendations.................................................................................................183

TableG­0­1:GeneralPublicDebtTerms....................................................................................................................208

TableG­0­2:GeneralIslamicFinanceTerms............................................................................................................209

TableG­0­3:TypesofSukuk............................................................................................................................................210

vii

List of Acronyms

$ U.S.Dollar

AAOIFI AccountingandAuditingOrganizationforIslamicFinancialInstitutions

ADF AfricanDevelopmentFund

AfDB AfricanDevelopmentBank

ATM AverageTimetoMaturity

ATR AverageTimetoRefixing

BADEA ArabBankforEconomicDevelopmentinAfrica

BCEAO BanqueCentraledesEtatsdel'Afriquedel'Ouest

BIS BankforInternationalSettlements

BOAD BanqueOuestAfricainedeDeveloppement

BoU BankofUganda

BRVM BourseRégionaledesValeursMobilières

CBI CentralBankofIran

CBE CentralBankofEgypt

CBG CentralBankofGambia

CBoS CentralBankofSudan

CCA CaucasianandCentralAsian

CESEE Central,EasternandSoutheasternEurope

CFA­Franc FrancdelaCommunautéFinancièred’Afrique

CHF SwissFranc

CMA CapitalMarketAuthority

CNDP ComitéNationaldelaDettePublique

COMCEC StandingCommitteeforEconomicandCommercialCooperationoftheOIC

DDP DirectiondelaDettePublique

DeM DebtManagement

DeMPA DebtManagementPerformanceAssessment

DLDM DirectorateofLoansandDebtManagement

DMO DebtManagementOffice

DMU DebtManagementUnit

DVP DeliveryVersusPayment

EFF ExtendedFundFacility

EIB EuropeanInvestmentBank

viii

EPG EgyptianPound

EUR Euro

FRN FloatingRateNotes

FX ForeignExchange

GBP UnitedKingdomPound

GDB GovernmentDevelopmentBond

GDP GrossDomesticProduct

GCC GulfCooperationCouncil

GMD GambianDalasi

GNI GrossNationalIncome

HIPC HeavilyIndebtedPoorCountries

IBRD InternationalBankforReconstructionandDevelopment

IDA InternationalDevelopmentAssociation

IDB IslamicDevelopmentBank

IIFM InternationalIslamicFinancialMarket

IFAD InternationalFundforAgriculturalDevelopment

IFSB IslamicFinancialServicesBoard

IMF InternationalMonetaryFund

ITB IslamicTreasuryBill

JPY JapaneseYen

MDRI MultilateralDebtReliefInitiative

MDTS MediumTermDebtManagementStrategy

MEAF MinistryofEconomicAffairsandFinance

MEFMI Macroeconomic and Financial Management Institute of Eastern and SouthernAfrica

MENA MiddleEastandNorthAfrica

MIFC MalaysiaInternationalIslamicFinanceCentre

MoEF Ministèredel’ÉconomieetdesFinances

MoF MinistryofFinance

MoFEA MinistryofFinanceandEconomicAffairs

MoFNE MinistryofFinanceandNationalEconomy

MoFPED MinistryofFinance,PlanningandEconomicDevelopment

NDB NetDomesticBorrowing

ix

NDT NationalDirectorateofTreasury

NPV NetPresentValue

OECD OrganisationforEconomicCo­operationandDevelopment

OFID OPECFundforInternationalDevelopment

OIC OrganizationofIslamicCooperation

OPEC OrganizationofthePetroleumExportingCountries

OTC Overthecounter

OTR OfficeofTogoleseRevenue

PDMS PublicDebtManagementStrategy

PDU PublicDebtUnit

PPP PublicPrivatePartnership

RO OmaniRial

SAI SupremeAuditInstitution

SAMA SaudiArabianMonetaryAgency

SAS Sukuk­al­salam

SDR SpecialDrawingRight

SDMO SeparateDebtManagementOffice

SOE StateOwnedEnterprise

ST Short­Term

T­Bill TreasuryBill

T­Bond TreasuryBond

TL TurkishLira

UAE UnitedArabEmirates

UK UnitedKingdom

UN UnitedNations

US UnitedStates

USD U.S.Dollar

VAT ValueAddedTax

WAEMU WestAfricanEconomicandMonetaryUnion

WAIR WeightedAverageInterestRate

WEO WorldEconomicOutlook

WES CESifoWorldEconomicSurvey

ImprovingPublicDebtManagementIntheOICMemberCountries

1

Executive Summary

1 Definition and Performance Indicators of Public Debt Management

Public debt managementisintendedtodesignthegovernment’sdebtportfolioinatargetedand efficient way. Public debt management strategies aim at raising the required amount offunding at the lowest possible costs, consistent with a prudent degree of risk. Additionalobjectivesincludedevelopingandmaintaininganefficientmarketforgovernmentsecurities.

Performance indicators for public debt management are grouped into the categories (1)governance and strategy development (e.g. the legal or managerial framework); (2)coordinationwithmacroeconomicpolicies(e.g.coordinationwithfiscalormonetarypolicies);(3)borrowingandrelated financialactivities (e.g.domesticorexternal borrowing); (4)cashflowforecastingandcashbalancemanagement(e.g.effectivenessofcashflowforecasts);and(5)debtrecordingandoperationalriskmanagement(e.g.debtadministrationandsecurity).

Apublic debt management strategyhelps(1)makingprudentborrowingdecisionsbasedonan analysis of cost and risks; (2) facilitating intra­governmental and creditor­addressedcommunication and coordination to reduce uncertainty; (3) giving debt managers a clearmandate, thereby ensuring good governance and accountability; and (4) fostering thedevelopmentofadomesticdebtmarketbymakingthegovernment’sdebtgoalstransparenttomarketparticipants.

Risks for the government’s debt portfolio arise from the structure of outstanding debt,includingbutnotlimitedtorefinancing risk,interest rate riskandexchange rate risk.

2 Global Practices in Public Debt Management

Inaglobalsampleovertheperiod1980­2015,theaverage public debt levelassumedvaluesbetween40%and80%ofGDPwithatendencytoincrease.Inmostyears,averagepublicdebtrelativetoGDPinthegroupofhigh­incomecountriesislargerthaninmiddle­incomeandlow­incomecountries.

Theaverage public budget deficitwas7.2%ofGDPduringtheperiod1980­1995.Since1995budgetdeficitshavedecreasedto2.0%onaverage(1.4%ofGDPfortheperiod1996­2006).Theglobalfinancialcrisis,however,marksastructuralbreakandpushedbalancesdeeperintodeficit, where they will remain in coming years according to projections. Compared to the1980sand1990s,publicbudgetbalancesoflow­incomecountrieshaveimprovedremarkably.

Theshorterthematurity of debt,thehighertheamountofdebttoberolled­overinagivenyearandthehighertherefinancing risk.Theaverageshareofshort­termintotalpublicdebtinaglobalsampledecreasedfrom24%in1995to11%in2015.Whileprivatecreditorsextendtheircreditforanaverageperiodofapproximatelyfiveyears,officialcreditorssigncontractswithmaturitiesexceeding20yearsonaverage.

Debtdenotedinforeign currency issubjecttoexchange rate riskbecauseadevaluationofthedomesticcurrencyincreasesthevalueofforeigncurrencydenominateddebtexpressedindomestic currency. Public debt denominated in foreign currency has increased slightly overthe past 20 years. Itmakes up about 36%of total public debt across all income groups; theshareishighestinlow­incomecountriesandlowestinhigh­incomecountries.

Foreign­denominated public debt is mostly contracted in U.S. Dollars, whoseshare has beenrisingovertimeandequaled59%in2014.OtherdominantcurrenciesaretheEuro(13%)andSpecialDrawingRights(SDRs)withtheIMF(6%).Whilehigh­incomecountriesmostlyrelyon

ImprovingPublicDebtManagementIntheOICMemberCountries

2

domestic creditors (76.2% in 2015), middle­income countries divide their financing needsalmostequallybetweenbothtypesofinvestorsandlow­incomecountries’debtismostlyheldbyexternalcreditors.

Interest rate riskarises forcontractswithshortmaturitiesorvariable interestrates.Whilehighestinhigh­incomecountries,theshareofvariableratecontractsisgenerallysmall.

Governmentsmayreceivecredits on concessional terms,inparticularfromofficialcreditorsasaformofdevelopmentaidorinsupportoflocalreforms.Thisgrantelementinpublicdebthasbeenrisingovertimeandamountedto50%in2014.Theaverageinterestrateofpublicdebtisoftenlowerthanthelendingratetotheprivatesector,whichmightbeexplainedbytheimportanceofconcessionallendingtogovernments.

Debt Management Offices (DMOs) are typically responsible for funding operations, foranalyzing and monitoring risks, for the settlement of transactions and for keeping financialrecordsuptodate.Theexistenceofaprincipaldebtmanagemententitywithclearobjectives,amedium­termstrategyandtherequirementtoreporttoparliamentorgovernmentisgenerallyconsideredasbestpracticeinpublicdebtmanagement.

TheDMOaspartoftheoverallinstitutional structuremaybeadepartmentoftheMinistryofFinance, an office within the central bank or an independent agency. A clear separation ofassignedresponsibilities formonetarypolicyandfordebtmanagement isapreconditionforaccountable institutions; this suggests separating the DMO from the central bank. If therecruitment of trained portfolio managers from the private sector has priority, independentagencies outside of other official institutions, so­called separate debt management offices(SDMOs),mightbeestablished.

If public debt management is located within the central bank, it faces conflicts of interest between monetary policy and public debt management. A clear allocation of theresponsibilities for monetary policy and debt management, which is a precondition foraccountableinstitutions,thereforesuggestsdividingthesepoliciesbetweentwoinstitutions.

An efficient governance structure requires that DMOs follow a clear mandate with well­definedobjectives.Potentialtargetsaretheallocationofpublicdebtindomesticandexternalcurrencydebt,thedivisionbetweenfixedandfloatinginterestratedebtandthepercentageoftotaldebtthathastoberefinancedwithintwelvemonths.Thishelpstoimproveaccountabilityandtolimitprincipal­agentproblems.Activetradingbasedonbenchmarksisratherabsentinglobalbestpractices.

Therearecompetingviewsontheaims of public debt management:asaformofportfoliomanagement, costs are minimized for given risks (narrow view). Alternatively, when takingrevenues into account, public budget management has to prevent mismatches betweenrevenuesanddebtpayments(broadview).Thisstrategyfocusesonbudgetaryrisksandaimsat reducing financial risks by guaranteeing that government can meet its obligations at anypointintime.Assuch,itcoordinatespublicdebtmanagementwith otherpublic policies.

AWorldBanksurveyconducted in2013showsthat60%of therespondingcountrieshadaformal debt management strategy in place. 77% of those with formal strategy published it,76%aimedatstrategictargets,71%usedquantitativeanalysisandonlyaminoritygroundedthestrategyonalegalframework.

ImprovingPublicDebtManagementIntheOICMemberCountries

3

ResultsfromtheCESifoWorld Economic Survey(WES)suggestthattheefficiency of public debt management is highest in high­income countries and lowest in low­income countries.While foreign currency risk is least important in high­income countries, it is the mostimportantriskcategoryforpublicdebtmanagementintheotherincomegroupsandintheOICcountries.

Publicdebtmarketsinhigh­incomecountriesreceivedthebestassessmentfromWESexperts,inlow­incomecountriestheworst.PublicdebtmarketsinthegroupofOICcountriesperformonaveragerelativelyunsatisfactoryininternationalcomparison.Accordingtotheexperts,themostimportantproblems faced bydomesticpublicdebtmarketsinOICcountriesareapoor market infrastructure,thelimited size of the economiesandamissing investor base.

Global best practiceinOECDcountriesrevealsfourimportantissuesforthesuccessofpublicdebt management. First, public debt management needs to be based on a sound long­termstrategy.Second,itisimportantthatthisstrategyisimplementedbyaninstitutioncapabletodealwithpublicportfoliomanagement.Third,moderninstrumentsandtechniqueshavetobeused in public debt management. Finally, suitable mechanisms to ensure accountability andsuccessfuldelegationhavetobedesigned.Appliedtoemerginganddevelopingcountries,theircharacteristics (e.g. limited access to financial resources, less developed institutions, largervulnerability)havetobetakenintoaccount.

3 Public Debt Management Practices in the OIC Member Countries

Average public debt relative to GDPintheOICmembercountrieshasincreasedfrom36.7%in2012to46.1%in2015andisexpectedtoriseto51.1%in2017.Theamountofoutstandinggross public debt relative to GDP is, however, very heterogeneous among OIC membercountries,rangingbetween3%and139%.

Thehighestaveragedebt­to­GDPratiosareexpectedinlow­incomeOICcountriesinthenextyears. High­income OIC countries are expected to experience the largest increases in theaveragedebt­to­GDPratios.Differentdebtdynamicsalsoariseamongregionalgroups.SeveralAfrican countries have been granted debt relief or restructuring in the last decade.Consequently,debtratioshavesubstantiallydecreasedbetween2006and2009intheAfricangroupbuthaveslightlyrisenafterwards.Theaveragedebt­to­GDPratiointheAsiangrouphasbeenonarelativestablepath.Theaveragedebt­to­GDPratiointheArabgrouphasincreasedsince2014asthedeclineinoilpriceshadnegativeeffectsontheeconomiesofoil­producingcountries.WhilethefiscalbuffersofsomeOICmembercountriesareexpectedtobecapableofabsorbingthepredictedbudgetdeficitsfollowingloweroilrevenuesforsomeyears,otherOICmembercountrieshavetoissuesubstantialamountsofdebt.

The averagegrant element inOIC countrieshas beenabout50%since2006, similar to theworldwide average. Grants are primarily extended by official creditors, i.e. internationalorganizations and governments, while private credit contracts rarely have a grant element.Grantstolowincomecountriesaremoregenerousthantomiddle­incomecountries.ThegrantelementisparticularlyhighintheAfricangroup.

Theshareofshort-term debtintotalpublicdebtintheOICmembercountrieshasdecreasedfrom68.1%in2006to54.5%in2015(slightlyabovetheworldwideaverageof52%).Officialcreditorssigncontractswithmaturitiessimilartotheworldwideaverageataround21yearson average. Private creditors extend their credit for an average period of approximately 4years (below the worldwide average of 5 years). The maturity of new debt contracts issignificantlylargerinlow­incomecountriesthaninmiddle­incomecountries,whichmightbe

ImprovingPublicDebtManagementIntheOICMemberCountries

4

explainedbythe largershareofofficialcreditors inlow­incomecountries.Consequently, theaveragematurityofnewcontractsislargestintheAfricangroup.

The average share of domestic debt in total public debt in OIC member states has slightlyincreased since 2006 and stands at around 41.5% in 2015 (a share above the worldwideaverage).Low­incomecountrieshavealowershareofdomesticdebt(31%)thanmiddle­andhigh­incomecountries(41.9%).Inhigh­incomecountries,theshareofdomesticcreditorshasincreased since 2008 and stands at about 77.7% in 2015. However, OIC member countriesdifferconsiderablyintheirsharesofexternaldebt.

The largest share of external public debt inOIC countries was denominated inU.S. Dollars(51.3%),followedbyEuro(15.4%),SpecialDrawingRights(6.6%)andJapaneseYen(3.2%)in2014.TheshareofexternalpublicdebtdenominatedinU.S.DollarandSpecialDrawingRights(SDR) has increased between 2006 and 2014 while the share of external public debtdenominated in Euro has been relatively constant. The share of external public debtdenominatedinJapaneseYenhasdecreased.

Theaverageinterest rate on public debthasbeenrelativelystableandlowinOICmembercountriesoverthelastdecade(theaverageinterestratewasabout1.9%in2014).ManyOICmembercountriesborrowfromofficialcreditorsatpreferentialrates(onaverageabout1.2%in2014). The average interest rate forprivatecredits was about3.9% in2014,a ratebeinghigher than the worldwide average. Low­income countries face lower interest rates thanmiddle­income ones presumably because they have access to concessional lending. Averageinterestrates intheArabandAsiangrouphavedecreasedoverthe lastyears,whileaverageinterestratesintheAfricangrouphaveincreasedsince2006.

IslamicfinancehasbecomeanimportantpartofthefinancialsystemsinseveralOICmembercountries.GovernmentsinOICcountriesuseIslamic sovereign bonds (sukuk)inpublicdebtmanagement. Sukuk are financial certificates commonly referred to as "sharia compliant"bonds, which do not pay interest. The investor rather acquires a share of the underlyingproject that the sukuk bond is linked to. Several OIC member countries plan to increase theshareofIslamicfinanceinstrumentsinthenextfewyears.

InmostOICmembercountriesaPublic Debt Management Office (DMO)at theMinistryofFinance is responsible for public debt management. In some countries, a department at thecentral bank also carries out debt management operations. Only few OIC member countrieshaveestablishedindependentdebtmanagementoffices.Inseveralcountries,thereisnotonesingleentityresponsibleforpublicdebtmanagementbutseveraldepartmentsattheMinistryofFinanceandthecentralbankandinsomecasesalsoinotherinstitutions.

Among the OIC member countries, 62% countries have established a formal debt management strategy (similar to the worldwide average of60%).Among the OIC membercountrieswithaformalpublicdebtmanagementstrategy,78%havepublishedthisdocument.AmongtheOIC membercountries with a formalpublicdebt managementstrategy,68%usestrategictargetsandbenchmarks(asharebeinglowerthantheworldwideaverageof77%).

AmongtheOICmembercountrieswithaformalpublicdebtmanagementstrategy,63%haveset strategic targets for currency risk, 58% have set targets for refinancing risk, and 53%haveset targets for interestraterisk.Incontrast,onaglobalview, it ismostcommontosetstrategictargetsforrefinancingrisk(66%),followedbyinterestraterisk(56%)andcurrencyrisk(50%).Targetsusedforcurrencyriskincludetheshareofforeigncurrencydebtintotaldebt;targetsusedforinterestrateriskincludetheshareoffixedinterestdebtintotaldebtand

ImprovingPublicDebtManagementIntheOICMemberCountries

5

theaveragetimetorefixing;andtargetsusedforrefinancingriskincludeaceilingonmaturingdebtwithinoneyear(in%oftotaloutstandingdebt)andtheaveragetimetomaturity.

4 Public Debt Management Practices in Individual OIC Member Countries

The low and lower­middle income African countries Gambia,Mozambique, Togo, Uganda,aswell asSudanhave sharesofexternal publicdebt in total publicdebtofaboutorover50%.These figures indicate an underdeveloped domestic debt market. The high share of debtdenominatedinforeigncurrenciesexposesthesecountriestoexchangeraterisk.NigeriaisanexceptionamongtheAfricancountrieswithexternalpublicdebtamountingtoonlyabout18%oftotalpublicdebt.

The external public debt of low and lower­middle income countries with high shares ofexternalpublicdebtislargelyheldbyofficialcreditorssuchasinternationalorganizationsandgovernments. Low and lower­middle income countries often face difficulties in financingthemselves on international capital markets. Official creditors lend at preferential interestratesandat longermaturities thanprivatecreditors.Consequently, thecasestudycountrieswith a high share of external public debt have lower interest rates and longer averagematuritiesintheirgovernmentdebtportfolio.

Other case study countries such as Egypt and Lebanon strongly rely on the domestic debt market.Highinterestratesongovernmentdebtandpreferencesforsafe lendingreducetheincentives of banks to provide credit to the private sector in these countries, leading to acrowding-out of bank loans to the private sector. Banks tend to invest in short­terminstruments toavoidassetand liabilitymismatcheswithshort­termbankdeposits. Lebanonhas recently made progress in reducing the reliance on the domestic debt market especiallythroughaswapofdomesticcurrencydebttoEurobonds.

Giventhedifferentdebtlevelsandstructures,debt management strategiesvaryamongthecasestudycountries.Outof the15 case studycountries, elevenhave developed formal debtmanagement strategies. Uganda, Egypt, Indonesia, Nigeria, Albania and Lebanon havepublished numerical targets for risks in the public debt portfolio. Turkey has set numericaltargetsbutdoesnotdisclosethesenumbers.Gambia,MozambiqueandTogohavesetgeneralobjectivesbutdonotformulatespecifictargets.SaudiArabia,Sudan,KazakhstanandOmandonothaveordonotdisclosetargets.

Iran and Sudan all local banks operate under Islamic finance rules, while in Saudi­Arabiaone­third of all local banks can beconsidered as fully Islamic.Consequently, Islamic financeinstrumentsalsoplayanimportantroleforpublicdebtmanagementinthesecountries.Debt­to­GDPratios in IranandSaudiArabiaarevery low,amountingto17.1%and5.8%in2015.PublicdebtinSaudiArabiaiscompletelydomestic,whiletheshareofdomesticpublicdebtinIran accounts for more than 90%. Declining oil revenues give rise to additional borrowingneeds and these countries plan to also tap international debt markets. To prepareinternational bond issuances, legal and organizational structures for debt management arebeing established at the moment. In contrast, Sudan has a relatively high public debt ratio(68.9%)andabout90%ofpublicdebtisexternal.

The central bank of Saudi Arabia (SAMA) issues SAMA Bills and the government has issuedGovernment Development Bonds (GDBs). Although GDBs are not defined as Islamic bonds,they are “zakah (compulsory alms) deductible” for domestic investors. The general rise inpopularity of corporate and quasi­sovereign sukuk and other Islamic finance instruments inSaudi Arabia indicate that Islamic bonds will play also a bigger role in the future of thecountry’spublicdebtmanagement.

ImprovingPublicDebtManagementIntheOICMemberCountries

6

The government of Iran has mainly borrowed from domestic Islamic banks by taking loanswith fixed rates of return in the past. In 2015, Iran has started to expand its Islamic bondmarket. There are various types of instruments such as murabaha, musharakah, ijarah, anddifferent types of sukuk. Sovereign sukuk, ijarah, and Sovereign Settlement Bills were issuedforthefirsttimein2016.IslamicTreasuryBills(ITBs)werealso introduceddescribingzerocouponbondssoldatadiscounttotheirfacevalues.

The government and the central bank of Sudan use various short­ and long­term Islamicfinance instruments for debt and liquidity management. The central bank uses Central BankijarahCertificates(shihab)foropenmarketoperationswhosereturnsarefixedanddistributedmonthly. The central bank also uses sukuk bonds for the management of liquidity. Thegovernment employs two types of sukuk: short­term Government Musharaka Certificates(GMCs),whicharemainlyusedforliquidityandcashmanagement,andlong­termGovernmentInvestment Certificates (GIC). The nominal value of the instrument is distributed in profitsquarterlyorbi­annually.ComparedtothemarketforGMCs,whichhasbeengrowingsteadilysince 1999 because of the specific characteristics of these instruments such as highprofitability, low risk, short­term maturity and high liquidity, the market for GICs has beenstagnatingsinceitsintroductionin2003.

Some case study countries with conventional finance systems have also introduced Islamicfinance instruments in public debt management. Countries such as Gambia, Togo and Omanhave already issued sukuk. Indonesia has established a rapidly growing market for publicsukukandhasalsoissuedGlobal Sukuk denominatedinforeigncurrency.OthercountriessuchasEgypt,Kazakhstan,Mozambique,NigeriaandUgandahavecreatedlegalprerequisitestouseIslamicfinanceinstrumentsand/orareplanningtoissuesukukinthenextyears.

5 Policy Recommendations

Most OIC countries have established legal and organizational public debt managementframeworksandhavecreatedDebt Management Officesorareintheprocessofdoingso.Insome countries, the delineation of responsibilities for public debt management remains,however,vague.Publicdebtmanagementfunctionsoftenarenotfullycentralizedatthedebtmanagement office but additional ministerial departments, the central bank and committeespursue debt management functions. A large number of institutions involved in public debtmanagement hampers coordination and makes it difficult to evaluate the degree ofaccountability of the individual institutions. As long as all debt management responsibilitiesare not centralized at a debt management unit, adequate and systematic communicationbetween the various embedded institutions is important. All OIC member countries areadvised to setup DebtManagementOffices if theyhavenot doneso,and to give theseDMOclearlydefinedauthoritytomanagepublicdebt.

About 38% of the OIC member countries have not yet developed a medium-term debt management strategy (MTDS) following international standards. Among the OIC membercountries with formal public debt management strategies, 32% have not yet set numericalstrategic targets. All OIC countries are recommended to create MTDS including numericalstrategic targets.Aclearcommitment to thepublicdebtmanagementstrategy is likely tobehelpful in attracting foreign investors and improving domestic debt markets. Countries thathave not yet published their debt management strategies are advised to do so to facilitatecommunicationwithinternationalinvestors.Itisimportanttostrengthenpublicdisclosureoflegal and organizational structures of public debt management, operations and strategies intheOICmembercountries.

ImprovingPublicDebtManagementIntheOICMemberCountries

7

OIC member countries that already have established professional public debt managementpracticesmightadviseothercountriesinestablishinginstitutionalframeworksforpublicdebtmanagement.Existinginstitutionalsettingsandpublicdebtmanagementdocumentsmightbetaken as models by countries that take the first steps in implementing formal public debtmanagement. Often countries have gained various experiences regarding public debtmanagement such as long­term strategy development, risk management, monitoring orinstitutional coordination. Countries may be able to offer good examples within one area ofdebtmanagementand/ornegativeexperiencefromwhichlessonscanbelearned.OICmembercountries are also advised to cooperate. Tasks such as the training of specialized staff, thedevelopmentofcapacitiesof themiddleofficeandthecreationofriskquantificationmodelsmightbecentralized.Giventheircommonalities,thisopenstheroomforcooperationamongthe OIC member countries. Therefore, it might be useful to bring OIC member countriestogetherfordevelopingsolutionsofpublicdebtmanagementproblems.Itisrecommendedtocoordinate cooperation within COMCEC for instance by setting up workshops or jointtrainingcoursesonpublicdebtmanagement.

Central bank independence might be strengthened in the OIC member countries. In somecountries,thecentralbankhaspurchasedsubstantialamountsofsovereignbonds.Thisposestheriskthatmonetaryandfinancialpoliciesarenotclearlyseparatedandthatthecentralbankcannotimplementanindependentmonetarypolicy.Publicdebtmanagementiswelladvisedtofurtherdiversifytheinvestorbase.

Islamic sovereign bonds (sukuk)arelikelytogainpopularityinOICandnon­OICcountries.An important factor is growing preference for sharia compliant finance products. Moreover,the issuance of sukuk bonds might serve market development purposes by diversifyingdomestic capital markets and attracting new investors from Islamic countries. Investors canbenefit from new sovereign sukuk issuances because of the opportunity to diversify theirportfolios. Several OIC member countries are planning on issuing sovereign sukuk or havealready done so. Infrastructure projects are especially suitable as underlying structure forsovereign sukuk given the asset­backed nature of these bonds. In several Islamic marketsfunding gaps and infrastructure requirements exist. As investments in infrastructure areexpected to increase in developing and emerging countries with Islamic banking playing animportantroleinmanyofthesemarkets,sukuk issuancerelatedtoinfrastructureisexpectedtoincrease.

However, Islamic finance instruments do not always minimize financing costs as they mayentail additional administrative expenses and greater legal and accounting challenges. Theprohibitionofinterestandthelimitedprimaryandsecondarymarketforsukukmaygiveriseto concerns regarding an efficient price system and tradability. The limited tradability, thecomparativelyhigh issuance costs, and the rather limited volume ofsukuk constrain marketliquidityandhenceagovernment’sflexibilityinfiscalpolicyandacentralbank’sflexibilityinmonetarypolicy.

As a result of underdeveloped domestic debt markets, several low and lower­middleincomeOICmembercountriesstronglydependonexternalborrowing.Domesticdebtmarketsare potentially an important source of financial funding for governments. A well­functioningdomestic market for public debt helps to reduce the risks linked to public debt because itprovides additional diversification opportunities and reduces the exchange rate risk. Fordomesticcreditorsitiseasierandlessexpensivetobuysovereignbondsiftheyaretradedonthedomesticratherthanontheinternationalmarket.Domesticcreditors,inturn,areasourceoffundsthatreactslesstoglobalmarketconditionsandasaresultislessvolatileandinstable

ImprovingPublicDebtManagementIntheOICMemberCountries

8

thanexternalsources.Thedomesticdebtmarketcanbestrengthenedbyavarietyofmeasuressuch as improving legal and regulatory frameworks, market infrastructure, political stabilityanddevelopingareliablepublicdebtmanagement.Weakpublicdebtmanagementcapacitiesdecreasethegovernment’scredibilityresultinginhigherriskpremiumsespeciallywithregardto long­termbonds.Disseminating informationondebtoperations,adoptingtransparency inprimary auctions and developing secondary markets strengthen the functioning of domesticdebtmarkets.

Some OIC member countries are heavily indebted to the domestic banking sector. Highinterest rates on government debt and preferences for safe lending reduce the incentivesofbankstoprovidecredittotheprivatesectorinthesecountries,leadingtoacrowding-out of bank loans to the private sector.Bankstendtoinvestinshorterterminstrumentstoavoidassetand liabilitymismatcheswithshort­termbankdeposits givingrise to interest rateriskandrefinancingriskforthegovernment’sdebtportfolio.Whenasubstantialpartofpublicdebtis held by domestic banks, a potentially dangerous link between public finances and thebankingsectorexists:publicdefaultwoulddamagethebankingsectoranddifficulties inthebankingsectorendangergovernment’sabilityinplacingitsbondsonthedomesticmarket.Adiversified domestic creditor base with a large share of non­banking investors is favorable.The investors’ base can be broadened by reforming the legal framework to grant pensionfunds,insurancecompaniesandforeigninvestors’accesstothedomesticdebtmarket.

OIC member countries may well use sukuk in public debt management in addition toconventional bonds to diversify the government’s debt portfolio and attract new investors,domesticallyand from other (Islamic) countries. In particular, countries that rely heavilyonthe domestic banking sector may benefit from these instruments, including retail sukuk.Countries that mainly rely on concessional lending may also use Islamic finance products toattractprivateinvestors.

Governments often issue short­term bonds rather than long­term bonds. Interest rates ofshort­term bonds are usually lower than long­term ones when the markets have concernsabout political and macroeconomic risks. This also prevents the establishment anddevelopment of a domestic debt market which is supposed to satisfy the investors’ andgovernments’financingneedsinthelongrun.Countrieswithshortaveragematurityofpublicdebt are exposed to refinancing risk and may lengthen maturities of public debt bypreferring longer­term T­Bonds over short­term T­Bills. In countries with low shares offoreign currency debt, this objective might be achieved, for example, by using swaps ofdomestic currency debt to foreign currency debt which generally longer maturity. Publicbudget management might also benefit from the current low interest rate environment tolengthen the average maturity of debt to reduce refinancing risk and reduce the number ofbondsissuedannually.Animportantindicatorforthequalityofthedomesticdebtmarketisinhowmuchthebondmaturitystructuremirrorsthegovernmentexpenditurestructure.

Macroeconomic risk managementisanimportantcomplementtopublicdebtmanagement.The main tools in macroeconomic risk management are information and analytical systemsbasedonadequatefrequencydataprovidingearlywarningindicators.Theseindicatorsenablepolicy makers to react to crises with adequate control measures. Several best practices areusedinternationallythatOICmembercountriesarerecommendedtoconsider.

ImprovingPublicDebtManagementIntheOICMemberCountries

9

1 Introduction

1.1 Definition of Public Debt Management

Publicdebt management is intendedtodesign thegovernment’sdebt portfolio ina targetedandefficientway.TheIMF(2014,p.5)describespublicdebtmanagementas“theprocessofestablishing a strategy for managing the government’s debt in order to raise the requiredamountoffundingatthelowestpossiblecovercostoverthemedium­tolong­run,consistentwith a prudent degree of risk.” Public debt management is an everyday business that is notonlyrelevantwhenabudgetdeficithastobefinancedormaturingdebthastoberepaid.Debtmanagement relates to the total stock of outstanding debt, whose structure (e.g. currencydenomination, creditor base, maturity structure and interest rates) can be changed throughoperations on the moneyand capital markets. While debt management in the privatesectorprimarilyaimstominimizecostsandrisks,debtmanagementinthepublicsector(DeM)canpursue additional goals, such as macroeconomic stabilization (Tobin 1963), tax burdensmoothing(Barro1995)orastabilizationofthepublicbudget(Missale2000).

Historicalexperienceswithsovereigndebtcrises(e.g.Mexicoin1994,Turkeyin1994,Russiain1998andArgentinain2001)andtherecentsovereigndebtcrisisinEurope,triggeredbytheU.S.financialcrisisstartingin2007,haveshownthatpublicdebtmanagementisrelevantforboth high­ and lower­income countries. As the IMF (2014, p. 6) pointed out, public debtmanagement 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 isusually the largest financial portfolio in the country and can contain complex and riskyfinancialstructures,whichhavethepotentialtogeneratesubstantialriskstothegovernment’sbalance sheet and overall financial stability. Sound risk management by the public sector isalsoessentialforriskmanagementbytheprivatesector.“

Governments regularly borrow to finance public expenditures. Overall, the decision on theamounttobeborrowedshouldbebasedonasustainabilityanalysisofpublicdebt.Suchfiscalsustainability typically relates to the solvency of the government, i.e. the ability to continueservicingitsdebtwithoutanunrealisticallylargefuturecorrectionofthebudgetbalanceoranexplicitdefault(see,e.g.,Burnside2005, IMF2007).Toraisethe intendedfunds,publicdebtmanagers have to choose suitable finance instruments and seek for the best borrowingconditions, i.e. to raise the funds at the lowest cost. Additionally, they have to structure thedebtportfolioinawaysuchthatnegativeeffectsofeconomicorfinancialshocksonthepublicbudget are minimized (see, e.g., Melecky 2007). Thus, financing public debt in an efficientmannerrequiresacomplexmulti­perspectiveapproach.

Generally,publicdebtmanagementdescribestheprocessofestablishingandimplementingaprudent strategy for raising the required amount of funding, while considering thegovernment’scostandriskpreferences.Inanyevent,thegovernmentmaysetadditionalgoals,suchasdevelopingandmaintaininganefficientmarketforgovernmentsecurities.Inpractice,publicdebtmanagementusuallyinvolvesthefollowingtasks(Wheeler2004):

Establishingclearpublicdebtmanagementobjectiveswithinasoundgovernanceframework,includingaprudentcostandriskmanagementstrategyandaccompanyingportfoliomanagementpolicies;

Establishinganefficientorganizationalstructureandappropriatemanagementinformationsystems;

Ensuringthatallportfolio­relatedtransactionsareconsistentwiththegovernment’sdebtmanagementstrategywhilebeingefficientlyexecuted;

ImprovingPublicDebtManagementIntheOICMemberCountries

10

Establishingreportingprocedurestoensurethatthegovernment’sdebtmanagersareaccountablefortheirassigneddebtmanagementresponsibilitiesandassignments.

Themainpurposeofthisstudyistoexaminepublicdebtmanagementpracticesinthemembercountriesof theOrganizationofIslamicCooperation(OIC)andtoproposerecommendationsfor improving public debt management in the OIC member countries. The study explicitlyconsiders the institutional framework of public debt management and the debt structure.Otherimportantissuesregardingthesustainabilityofpublicdebt,suchasthelevelsofpublicbudgetdeficitsanddebt,andwhetherdebtisissuedforfinancinginvestmentorconsumptionarebeyondthescopeofthisstudy.Thedecisionontheamounttobeborrowedismadebythegovernmentbeforetheprocessofpublicdebtmanagementsetsin.

1.2 Performance Indicators and Best Practices

The World Bank (2015) has developed the Debt Management Performance Assessment(DeMPA) methodology to assist countries in improving their public debt management. TheDeMPAperformanceindicatorscoverfivedimensionsofpublicdebtmanagement,namely:(1)governance and strategy development, (2) coordination with macroeconomic policies, (3)borrowing and related financial activities, (4) cash flow forecasting and cash balancemanagement, and (5) debt recording and operational risk management (see Table 1­1 forfurtherdetails).

Table 1-1: World Bank DeMPA Performance Indicators

Performance Indicator Description

1. Governance and Strategy Development

LegalFramework The existence, coverage and content of the legal framework onauthorization to borrow (in both domestic and foreign markets),undertake debt­related transactions (e.g. debt exchanges as well ascurrencyandinterestswaps)andissueloanguarantees

ManagerialStructure (1)Managerialstructureforcentralgovernmentborrowinganddebt­relatedtransactions

(2) Managerial structure for preparation and issuance of centralgovernmentloanguarantees

DebtManagementStrategy

(1) Quality of the DeM strategy document (guidelines and targetrangesofindicatorsforinterestrate,refinancing,andforeigncurrencyrisks)

(2)DecisionmakingprocessandpublicationoftheDeMstrategy

DebtReportingandEvaluation

(1) Publication of a statistical bulletin on debt, loan guarantees anddebt­relatedoperations

(2)Reportingtoparliamentorcongress

Audit (1) Frequency and comprehensiveness of financial, compliance, andperformanceaudits(oftheeffectivenessandefficiencyofgovernmentDeM operations, including the internal control system), andpublicationofexternalauditreports

(2)Degreeofcommitmenttoaddresstheoutcomesfromtheaudits

ImprovingPublicDebtManagementIntheOICMemberCountries

11

Performance Indicator Description

2. Coordination with Macroeconomic Policies

CoordinationwithFiscalPolicy

(1)Supportingfiscalpolicymakersthroughtheprovisionofaccurateand timely forecasts on total central government debt service underdifferentscenarios

(2) Availability of information on key macroeconomic variables, aswellasthequalityandfrequencyofdebtsustainabilityanalyses

CoordinationwithMonetaryPolicy

(1) Clarity of separation between monetary policy operations andDeMtransactions

(2) Coordination with the central bank through regular informationsharing on current and future debt transactions and the centralgovernment’scashflows

(3)Extentofthelimitofdirectaccesstofinancialresourcesfromthecentralbank

3. Borrowing and Related Financial Activities

DomesticBorrowing (1)The extent to which market­basedmechanismsareused to issuedebt; the preparation of an annual plan for the aggregate amount ofborrowinginthedomesticmarket,dividedbetweenthewholesaleandretail markets; and the publication of a borrowing calendar forwholesalesecurities

(2) Availability and quality of (documented) procedures forborrowing in the domestic market and interactions with marketparticipants

ExternalBorrowing (1) Documented assessment of the most beneficial or cost­effectiveborrowingtermsandconditions(includinglenderorsourceoffunds,currency,interestrateandmaturity)andaborrowingplan

(2) Availability and quality of documented procedures for externalborrowings

(3) Availability and degree of involvement of legal advisers beforesigningoftheloancontract

LoanGuarantees,On­lendingandderivatives

(1)Availabilityandqualityofdocumentedpoliciesandproceduresfor

approvalandissuanceofcentralgovernmentloanguarantees

(2)Availabilityandqualityofdocumentedpoliciesandproceduresforapprovalandissuanceofcentralgovernmenton­lending

4. Cash Flow Forecasting and Cash Balance Management

(1)Effectivenessofforecastingtheaggregatelevelofcashbalancesin

governmentbankaccounts

(2) Decision of a proper cash balance (‘liquidity buffer’) andeffectiveness of managing the intended cash balance in governmentbank accounts (including the integration with any domestic debtborrowingprogram,ifrequired)

ImprovingPublicDebtManagementIntheOICMemberCountries

12

Performance Indicator Description

5. Debt Recording and Operational Risk Management

DebtAdministrationandSecurity

(1) Availability and quality of documented procedures for theprocessingofdebt­relatedpayments

(2) Availability and quality of documented procedures for debt andtransaction data recording and validation, as well as storage ofagreementsanddebtadministrationrecords

(3)Availabilityandqualityofdocumentedproceduresforcontrollingaccess to the central government’s debt data recording andmanagementsystemandaudittrail

(4) Availability and frequency of off­site, securely stored debtrecordingandmanagementsystembackups

SegregationofDuties,StaffCapacityandBusinessContinuity

(1)Segregationofduties forkeyfunctionsandthepresenceofariskmonitoringandcompliancefunction

(2)Sufficientstaffcapacityandhumanresourcemanagement

(3) Presence of an operational risk management plan, includingbusinesscontinuityanddisasterrecoverystrategies

DebtandDebt­RelatedRecords

(1)Completenessandtimelinessofcentralgovernmentrecordsonitsdebt,loanguaranteesanddebt­relatedtransactions

(2)Completeandup­to­daterecordsofgovernmentsecuritiesholdersinasecureregistrysystem,ifapplicable

Source: World Bank (2015)

(1)GovernanceandStrategyDevelopment

Legal framework and managerial structure

Public debt management requires a legal framework defining the authority for public debtmanagement operations such as borrowing and issuing new debt, undertaking debt­relatedtransactions andproviding loan guarantees. Themanagerial structure should includea cleardefinition of roles and responsibilities. Generally, it is recommended to have a divisionbetweenthepolitical level,i.e.thepresident,ministeroffinance,thecabinet,theparliamentorcongress, or any other responsible political authority at the executive level who sets theoverall government debt management objectives and decides on the risk level that thegovernment is willing to tolerate, and the executive level, i.e. the entities responsible forimplementingsuchpolicydecisions(seeFigure1­1).

ImprovingPublicDebtManagementIntheOICMemberCountries

13

Figure 1-1: Public Debt Management Governance Structure

Note: DeM = Public Debt Management, SAI = Supreme Audit Institution Source: World Bank (2015, p. 6).

It is advisable that public debt management operations are undertaken by one integratedprincipal entity, such as a debt management office (DMO). Only as an alternative if suchintegration is not feasible, multiple entities may execute specialized tasks. In that case, allentities should ensure a regular exchange of information and a clear coordination of theiractivitiesthroughformalinstitutionalmechanisms.Inprincipal,itprovestobebeneficialifthetask of public debt management is assigned to either the national central bank or to theMinistry of Finance. On one hand, concerns over price stability and a smooth transmissionchannel of monetary policy may speak in favor of the central bank. On the other hand, thepursuit of macroeconomic goals and, in practice most importantly, the minimization offinancingcostsforthebudgetmaymaketheMinistryofFinancetheadequateinstitutionforsupervising and conducting debt managementoperations. Moreover, locating a consolidateddebt management entity within the Ministry of Finance facilitates coordination andinformation sharing. For a separate debt management office outside the mentionedinstitutions,formalagencyarrangementsaswellasstrongeraccountabilityandtransparencyframeworksarerequired(Togoetal.2003).Finally,debtmanagementtasksmaybeassignedtoaninter­agencybody.However,giventhattheMinistryofFinanceisthenaturalauthorityresponsibleforacountry’sfinancialstability,suchabodyshouldbechairedbytheMinistryofFinance(Banguraetal.2000).

Debt management strategy

The legislation should stipulate the debt management entity to develop a debt managementstrategy. The strategy defines the objectives for the management of domestic and externalpublic debt, other financial (contingent) liabilities and related assets. In particular, the debtmanagementstrategyreferstoadocumentthatdefinestargetvaluesandbenchmarksforriskindicatorsof the debt structure.Developinga debtmanagement strategymayprovide manyadvantages(Cabral2015),includingbutnotlimitedto:

ImprovingPublicDebtManagementIntheOICMemberCountries

14

Makingprudentborrowingdecisionsbasedonananalysisofcostsandrisks Facilitatingintra­governmentalandcreditor­addressedcommunicationandcoordination

toreduceuncertainty Givingdebtmanagersaclearmandate,therebyensuringgoodgovernanceand

accountability Fosteringthedevelopmentofadomesticdebtmarketbymakingthegovernment’sdebt

goalstransparenttomarketparticipants

Overall, a sound risk management is essential for fiscal sustainability. The most importantriskstobetakenintoaccountarethefollowing:

Refinancingriskorrolloverrisk,i.e.theriskthatthegovernmentisunabletorefinancematuringdebt.Theshorterthematurityofdebtis,thehigheristheamountofdebttoberolled­overinagivenyearandthehighertherefinancingrisk.

Interestrateriskorrefixingrisk,i.e.theriskthatborrowingcostsincreasedueofunfavorabledevelopmentsininterestrates.Interestrateriskishigherifcontractsarebasedonvariableinterestrates.Withfixedinterestrates,itcoverstheriskthatrefinancingofmaturingdebtisrealizedathigherinterestrates.

Exchangeraterisk,i.e.theriskthatadevaluationoftheexchangerateincreasesthevalueofdebtexpressedindomesticcurrency.Hence,exchangerateriskisrelevantfordebtdenotedinforeigncurrency.

Additionally, debt managers face operational risks that should be managed throughgovernance and control functions (see Table 1­2). Indicators to be assessed in the debtmanagement strategy also include projections of the total debt service and the maturitystructureunderdifferentscenarios.

Table 1-2: Risks Relevant for Public Debt Management

Risk Description

Refinancingriskorrolloverrisk

Referstotheriskthatdebtwillhavetoberefinancedatahighercostorcannotberefinancedatall.Totheextentthatrefinancingriskislimitedtotheriskthatdebt might have to be financed at higher interest rates, including changes increditspreads,itmaybeconsideredatypeofinterestraterisk.However,itisoften treated separately, because the inability to refinance maturing debtand/orexceptionallylargeincreasesingovernmentfundingcostsarelikelytogiverisetoadebtcrisis.Additionally,bondswithembeddedputoptionsmaypotentiallyexacerbaterefinancingrisk.

Measures of refinancing risk include the share of debt maturing within one,twoandthreeyearstototaldebttheaveragetimetomaturity(ATM),theshareofshort­termtolong­termdebt,ortheredemptionprofile.

Interestrateriskorrefixingrisk

Refers to the risk of increases in the cost of debt arising from changes ininterestrates.Forbothdomesticandforeigncurrencydebtchangesininterestrates influencedebtservicingcostson newissuances when fixed ratedebt isrefinanced,andonexistingandnewfloating­ratedebtat therateresetdates.Generally,short­termandfloatingratedebtisconsideredtobethesubjecttoahigherriskthanlong­term,fixed­ratedebt.

Measuresofinterestrateriskincludetheaveragetimetomaturity(ATM),theshare of fixed­rate to floating­rate debt and the average time to interest raterefixing(ATR).

ImprovingPublicDebtManagementIntheOICMemberCountries

15

Risk Description

Exchangeraterisk

Refers to the risk of increases in the value of debt arising from changes inexchangerates.Debtdenominatedinorindexedtoforeigncurrenciesmayaddvolatility to debt servicing costs as measured in domestic currency due toexchangeratemovements.

Measures of exchange rate risk include the share of foreign currency todomestic currency debt, the currency composition of foreign currency debt,andtheshareofshort­termexternaldebttointernationalreserves.

Liquidityrisk Referstotheriskthatthevolumeof liquidassets,especiallycash,diminishesquickly as a result of unanticipated cash­flow obligations and/or possibledifficultiesinraisingfundsthroughshort­termborrowing.

Creditrisk Theriskofnon­performancebyborrowerson loans orother financialassets,orbyacounterpartyonfinancialcontracts.Thisriskisparticularlyrelevantincases where debt management includes the management of liquid assets. Itmay also be relevant with regard to the acceptance of bids in auctions ofsecuritiesissuedbythegovernmentandcreditguarantees,andwithrespecttoderivativecontractsenteredintobythedebtmanager.

Settlementrisk Referstotheriskthatcounterpartydoesnotdeliverasecurityasagreedinacontract,afterthecountry(othercounterparty)hasalreadymadethepaymentaccordingtotheagreement.

Operationalrisk

Refers to a range of different types of risks, including but not limited totransaction errors in the various stages of executing and recordingtransactions; inadequacies or failures in internal controls, or in systems andservices;reputationrisk;legalrisk;securitybreaches;ornaturaldisastersthataffect the debt manager’s ability to pursue activities required to meet debtmanagementobjectives.

Sources: IMF (2014, pp. 12-13), World Bank (2015)

Debt reporting and evaluation

To ensure a transparent disclosure of the debt portfolio, it is recommended that a statisticbulletin is published regularly, including information on domestic and external public debtstocks and ratios (by creditor, residency classification, instruments, currency, interest ratebasis and original and residual maturity), debt flows (especially principal and interestpayments)andloanguaranteesdecomposedbytypeofloanandclarifyingtheamountthathasalreadybeenamortized.

(2)CoordinationwithMacroeconomicPolicies

Publicdebtmanagement interactswith fiscal andmonetarypolicy.Fiscal policy involves theusage of public spending, taxes and other sources of revenue which determine the primarybudgetbalanceandinfluenceeconomicoutcomes.Objectivespursuedbyfiscalpolicyincludestabilizing the economy, improving resource allocation and providing public goods andservicesandinfluencingtheincomedistribution.Monetarypolicyprimarilyaimsatachievingprice stability.Bydoingso, it inevitablyaffects both interest rates and exchange rates whilepossibly trying to stabilize output. Instruments available to monetary policy include openmarket operations and regulatory tools, e.g. reserve requirements. The objectives and the

ImprovingPublicDebtManagementIntheOICMemberCountries

16

implementation of public debt management, fiscal policy and monetary policy areinterdependentandinvolvetrade­offs(seeTable1­3).However,itisadvisedthatpublicdebtmanagement should be pursued independently (Togo 2007). Nevertheless, fiscal policymakers, monetary policy makers and debt managers should coordinate their actions, e.g. byestablishing an internal public debt committee, and agree on common objectives such astargetsorceilingsonthedeficitandonthestockofpublicdebt(Allenetal.2013).

Table 1-3: Interdependencies of Public Debt Management, Fiscal Policy and Monetary Policy

Source: Togo (2007)

Debtmanagementtransactionsshallbeformallyseparatedfrommonetarypolicyoperationsifthe central bank conducts debt management transactions as an agent of the centralgovernment.Itisrecommendedthatthecentralbankprovidesinformationtothegovernmentandmarkets,clearlystatingwhetheritperformstransactionsundertheobjectiveofmonetarypolicy or debt management on behalf of the government. A steady exchange of informationbetween the debt management entity and the central bank on current and future debttransactionsandoncentralgovernmentcashflowsisadvisable,especiallyifthosetransactionsare important for monetary policy. Moreover, a formal limitation concerning public funding

Public Debt Management

Objective:raisingtherequiredamountofgovernmentfundingatthelowestpossiblecost,consistentwithaprudentdegreeofrisk

Target:debtstructuring

Instruments:operationsonthecapitalmarkets

Fiscal Policy

Objective:achievingtheleastdistortingbudgetarypolicythatstabilizesoutput,improvestheresourceallocationandmanagesdistributiveeffects

Target:primarybudgetbalance

Instruments:governmentspending,taxes

Debt management actions are likely to influence thegovernment’s debt service costs, and can thus forcegovernmentstoreduceexpenditurestodecreasedebtlevelsandmeettheirdebtobligations.

Fiscalpolicymeasures(inparticularspendingandtaxation)arelikely to influence the risk premium of government debt whichaffects debt managers’ ability to issuing debt instruments andbuildasounddebtportfolio.

Monetary Policy

Objective:achievingpricestabilitywhilepossiblystabilizingorincreasingoutput

Targets:inflation,interestrates,monetaryaggregates,exchangerate

Instruments:openmarketoperations,regulatorytools.

Thedebtstructure,includingmaturity,floatinginterestratesorcurrencydenomination,are likelytorestrainthecentralbank’spolicyoptions,e.g.inincreasinginterestratesordevaluatingthedomestic currency, given that these measures may potentiallytriggeradebtcrisis.

Exchangerateandinterestratepoliciesarelikelytorestricttheissuanceofforeigncurrencydebtandfloatingratedebt.Aloosemonetary policy may increase the inflation expectations ofinvestors,andhencerequiredebtmanagerstoissueshort­termdebt,ordebtthatisindexedtoinflationrates.

ImprovingPublicDebtManagementIntheOICMemberCountries

17

through the central bank may be put in place, restricting direct financing to exceptionalemergencysituationsandalimitedtimeperiod.

(3)BorrowingandRelatedFinancialActivities

To fulfill theprojectedborrowingrequirements,market­based instrumentssuchasauctions,syndication, tap issuance or retail issuance might be used. Moreover, it is recommended topublishanannualborrowingplanfordomesticandexternalborrowing.Thisborrowingplanshall distinguish between wholesale and retail markets, and other sources of funding. Aborrowingcalendarincludingdebtinstruments,issuedatesandindicativeborrowingamountsfor wholesale securities may be released regularly. It is usually advisable that the generalpublicshallhaveaccesstoinformationonproceduresfordomesticandexternalborrowing,aswellastheterms,conditionsandcriteriaforaccessingprimarywholesaleandretailmarkets.Thedebtmanagemententitymayregularlydiscussitsassessmentonborrowingplansandthedevelopmentof(domestic)marketswithmarketparticipants.Similarly,anassessmentofthemost advantageous and cost­effective terms and conditions for external borrowing may beprepared. Internal documented procedures for all external borrowing should be easilyaccessibleandregularlyreviewed.Allrelevantfinancialtermsoftheloantransactionshallberegisteredintoadebtrecordingsystem,preferablyinatimelymanner.Legaladvisersmaybeconsultedduringthenegotiationprocessandmayauthorizethelegalarrangements.

To facilitate the process, internal documented procedures for the approval and provision ofcredits, and for the approval, issuance and monitoring of loan guarantees should be easilyaccessible. The procedures may require an assessment of credit risk before the issuance ofcredits and loan guarantees. Additional procedures regarding derivative transactions maydemand that certain derivative transactions are regularly supervised and that the counter­partycreditriskisaddressed.

(4)CashFlowForecastingandCashBalanceManagement

Thecentralgovernmentshallprovidedata­basedandeasilyaccessibleaggregateforecastsofcash inflowsandoutflows,preferablyatamonthlybasis,aswellascashbalancesoncentralgovernment bank accounts for the budget year. Ideally, such monthly cash flow forecastsinclude weeklypredictions. Moreover, the float shall be kept within the ranges proposed bycentralgovernmentpoliciesthroughappropriatetransactions,e.g.issuanceandbuybackofT­Bills. Forecasts of cash balances may be taken into account for the planning of short­terminstrument issuance, and surplus cash shall be invested by the central government withinadequatecreditrisklimits.

(5)DebtRecordingandOperationalRiskManagement

Itisadvisablethateasilyaccessiblemanualsfortheprocessingofdebtservicepayments,datarecording and validation, and documented procedures for controlling access to the centralgovernment’sdebtrecordingandmanagementsystemexist.Moreover,suchmanualsshallbereviewed regularly. Internal payment orders are recommended to be prepared and issuedelectronically,whiledebtdatamaybeindependentlyverifiedeachyearbyexternalauditors.Backup systems for debt recording and management can be created, safely preserved andregularly checked. Central government liabilities and all debt­related transactions, includingpastdebtrestructuringandreliefactions,shouldbeconsistentlyrecorded.Itisrecommendedthat government securities arestored in electronic form in a safe and continuouslyupdatedcentralregistry,whichisregularlyauditedregardinginternalcontrolsandthemanagementofoperationalrisk.

ImprovingPublicDebtManagementIntheOICMemberCountries

18

Staffmembersof thedebtmanagemententityshouldbeappropriatelytrainedandboundtogoodgovernanceguidelines.It isadvisablethatthereexistseparateunitsresponsiblefor(1)negotiating loansandenteringcontractdata inthedebtmanagementsystem,(2)confirmingcontract details and finalization of records and (3) initiating and processing payments.Business continuity and disaster recovery plans, operational risk management and anoperationalrecoverysiteshouldexist.

ImprovingPublicDebtManagementIntheOICMemberCountries

19

2 Global Practices in Public Debt Management

Thischapterexaminespublicdebtdevelopments,debtstructuresandperformanceindicatorsfor public debt management in a global context. Section 2.1 portrays how debt levels andstructureshaveevolvedgloballysince1980.Both,structureandperformanceofpublicdebt,might depend on the underlying institutional framework. Therefore, the advantages anddisadvantagesofdifferentlegalandorganizationalstructuresofpublicdebtmanagementwillbediscussedinSection2.2andlessonslearnedforOICmembercountrieswillbedescribedinSection2.3.Asurveyamonginternationaleconomicexpertsaboutdebtmanagementpracticesintheirhomecountriesandtheirassessmentofrisksencounteredinpublicdebtmanagementcomplementsthissectionbyqualitativeinsights.

Publicdebtmanagementcanbeassessedindependentlyfromthestructureofpublicbudgetsaccordingtothecriterialaidoutabove.However,theoverallevaluationofthedebtsituationofa country needs to take into consideration not only theoverall debt levels and the waythisdebtismanaged,butalsotheunderlyingstructureofrevenuesandexpendituresaswellastheoveralldebtdynamics.If,forinstance,debtisincreasedtemporarilyasaresponsetoaglobaleconomiccrisisasrevenuesfallshortofexpectations,atransitoryincreaseinpublicdebtmaybepreferabletodecreasingexpenditurestomaintaincurrentlevelsofpublicserviceswhereasa permanent increase indebt levels maynot. Inasimilarvein,a temporary increase indebtlevelsthat financesproductivepublic investment ineducation,physical infrastructureorthelikemaybea reflectionofproductivepublic investment. Improved growthperformancewillpay off debt and thus the increase in expenditures may be tolerable. An opposing scenariowould be deficit spending of the same amount to finance unproductive governmentconsumption, leading to a permanent upward­shift in debt levels. While the present reporttakesintoaccountdebtdynamicsintherecentpast,adetailedanalysisoftheexpenditureandrevenuestructureofOICmemberstatesisbeyondthescopeofthepresentanalysis.

2.1 Descriptive Statistics and Performance Indicators

Thissectiondescribeshowlevelsofsovereigndebthaveevolvedovertime,andpresentsdataongovernmentbudgetbalances.Moreover,itprovidesstylizedfactsregardingthestructureofsovereigndebt,e.g.itsmaturity,currencydenominationandcreditorstructure.

To examine whether developments depend on the level of income, which is commonlyregardedasameasureofacountry’sstanceofdevelopment,andtoidentifypotentialcommonfeatures, countries are grouped into low­, middle­, and high­income countries. Thisclassification is based on the World Bank method that divides countries into certain groupsbased on their Gross National Income (GNI) per capita,using the World Bank Atlasmethod.The specific thresholds may change over time. To reduce the number of groups, countriesclassified as lower middle­income and upper middle­income by the World Bank are mergedintoonegrouplabeledmiddle­incomecountries(alistofthecountriesincludedinthisstudymaybefound intheAppendixB).Besidestheclassificationaccordingto the levelof income,regional country groups are formed, as levels of sovereign debt and their evolution mightshare common features within a region. Moreover, governments may easier justify theirfinancialpoliciesiftheyfollowneighboringcountries.

2.1.1 Public Debt Dynamics

Figure 2­1 shows the evolution of sovereign debt as a percentage of GDP for a sample of amaximum of 193 countries over the period 1980­2015 including projections until 2021.ScalingbyGDPismotivatedbytheideathatthisratioexpressesindebtednessrelativetothe

ImprovingPublicDebtManagementIntheOICMemberCountries

20

economic size of a country. To some extent, GDP may be regarded as a measure of the taxpotentialofacountry.1

TheupperpanelofFigure2­1showstwodifferentmeasuresofaveragedebtlevels.Theblueline corresponds to the unweighted average of public debt relative toGDP across countries.Theredlineisameasureofglobalindebtedness.Itdisplaystheratiooftheworldwidesumofgovernment debt relative to world GDP. Over the period of consideration, debt levels havebeen locatedbetween40%and80%ofGDPwitha tendency to increase.Exceptionsaretheperiods just before and during the global financial crisis and the European sovereign debtcrisis. Debt levels are projected to rise further. While the current average debt level acrosscountries (blue line) lies below its mean across the period, debt has reached anunprecedentedlyhighlevelifexpressedastheaggregatedworldwidelevel(redline).

Figure 2-1: Gross Public Debt Worldwide

Sources: WEO (2016), calculations by the Ifo Institute.

ThelowerpanelofFigure2­1showstheevolutionofdebtfordifferentcountry­incomegroups(left) and for different regions(right). In most years, relative sovereign debt in high­incomecountries is larger than in middle­income and low­income countries. This difference has

1 Alternatively, sovereign debt might be scaled by government revenues. This variable would provide information on

government’sabilitytorepaysovereigndebtinthefuture.

0

20

40

60

80

Sh

are

of

GD

P (

in %

)

1980 1990 2000 2010 2020

Year

Public debt over GDP averaged across countries Worldwide public debt over world GDP

Projections

0

20

40

60

80

100

120

Share

of G

DP

(in

%)

1980 1990 2000 2010 2020

Year

All

Low income

Middle income

High income

Projections

0

20

40

60

80

100

120

Share

of G

DP

(in

%)

1980 1990 2000 2010 2020

Year

All East Asia, Pacific

Europe, Central Asia Latin America & Carib.

North America South Asia

Sub-Saharan Africa MENA without Jordan

Projections

ImprovingPublicDebtManagementIntheOICMemberCountries

21

become more pronounced since the middle of the first decade of the 2000s: while debt hasbeenincreasinginhigh­incomecountries,debtdrasticallydecreasedinlow­incomecountries.Debt in low­income countries shows the largest volatility over time. Different dynamics canalsobeobservedwithintheregionalcountrygroups:countriesintheMiddleEastandNorthAfricaand, toa lowerextent, those inSub­SaharanAfricashowasubstantialandcontinuousreductionofdebtlevelsoverthepast20years.Afterreachingapeakintheearly2000s,debtlevels in East and South Asia have been decreasing. Debt levels in Latin America and theCaribbean showed relatively constant values in the recent past. North America, Europe andCentralAsiahaveincreasedtheirdebtlevelssignificantlysince2007.

Figure 2­2 zooms into the more recent period starting in 2008 and presents debt classifiedaccordingtoincomelevel.Averagedebtratiosinhigh­incomecountriesaremorethantwiceaslargeasinmiddle­incomeandlow­incomecountries.Debtcrisesandfinancialcrisesinmanyadvancedcountriesareresponsibleforthedebtincreasesuntil2011;ratiosinmiddle­incomeandlow­incomecountries,inturn,remainedrelativelystable.

Figure 2-2: Gross Public Debt Worldwide Since 2008

Sources: WEO (2016), calculations by the Ifo Institute.

Figure 2­3 provides an alternative way to illustrate global debt developments: it shows theunconditionaldistributionof sovereigndebt levels(in%ofGDP) inselected years for thosecountries for which data is available in the IMF World Economic Outlook (WEO 2016).Histogramsandkerneldensitiesportrayanincreasingconcentrationofsovereigndebtratiossince2010comparedtothepreviousperiod.Whilemorecountriesareconcentratedatvaluesaround50%,thenumberofoutlierswithhighdebt levelshasalsorisen.Themeanisalwayslargerthanthemedian.Nevertheless, thestandarddeviationhasdecreased.Thedistributionhasbecomesteeperwithmoremassbeingconcentratedinthecenter.

0

20

40

60

80

100

Sha

re o

f GD

P (

in %

)

2008 2010 2012 2014 2016 2018

Year

All Low income

Middle income High income

Projections

ImprovingPublicDebtManagementIntheOICMemberCountries

22

Figure 2-3: Distribution of Gross Public Debt to GDP Ratios Worldwide

Notes: The histograms show the distribution of gross government debt levels (in % of GDP) for the years 1990, 2000, 2010 and 2015. Each graph includes all countries for which data are available in the IMF World Economic Outlook (WEO 2016). Outliers with debt values larger than 150% of GDP were dropped. The bin width amounts to 5 percentage points. The line graph plots a kernel density estimate for ratios of government debt over GDP. As kernel-weight function the function of Epanechnikov is used. The width of the density window is computed as that width that would minimize the mean integrated squared error if data were from a normal distribution and a Gaussian kernel was used.

Sources: WEO (2016), calculations by the Ifo Institute.

2.1.2 Government Budgets

ScalingdebtlevelsbyGDPimpliesthatforbalancedgovernmentbudgetsfallingdebtratiosinperiodsofeconomicgrowthandincreasingdebtratiosinrecessionaryperiods(characterizedby a reduction in GDP) can be observed. In addition, given that for many low­ and middle­income countries a substantial share of their government debt is denominated in foreigncurrencies(seeSection2.1.3),exchangeratechangesaffectthemeasureofgovernmentdebt.Inparticular,adepreciationofthedomesticcurrencyincreasesdebtexpressedrelativetoGDP.Toisolatetheeffectoffiscalpolicyongovernmentdebt,itisthereforewarrantedtoconsiderthegovernmentbudgetbalance.

TheupperpanelofFigure2­4showsaveragesacrosscountriesfortwomeasures:thegeneralbudget balance and the primary budget balance, which excludes interest payments onoutstandingdebt.Asgovernmentsarenetdebtorsonaverage,thegeneralbalanceliesbelow

0.00

0.01

0.01

0.01

0.02

De

nsity

0 50 100 150

Gross government debt (in % of GDP)Statistics: median: 56.3; mean: 63.8; std.dev: 53.0

1990

0.00

0.01

0.01

0.01

0.02

De

nsity

0 50 100 150

Gross government debt (in % of GDP)Statistics: median: 55.2; mean: 67.6; std.dev: 61.0

2000

0.00

0.01

0.01

0.01

0.02

0.03

De

nsity

0 50 100 150

Gross government debt (in % of GDP)Statistics: median: 40.3; mean: 46.0; std.dev: 31.5

2010

0.00

0.01

0.01

0.01

0.02

De

nsity

0 50 100 150

Gross government debt (in % of GDP)Statistics: median: 48.7; mean: 54.1; std.dev: 32.6

2015

Density Kernel density

ImprovingPublicDebtManagementIntheOICMemberCountries

23

the primary balance. Because of the low interest rate environment, the difference betweenboth measures has become smaller in the recent past. While the average budget deficit was7.2% of GDP during the period 1980­1995, average budget deficits drastically decreased to1.4%overtheperiod1996­2006.However,theglobalfinancialcrisishasmarkedastructuralbreak and pushed balances deeper into deficit, where they will remain in coming yearsaccordingtotheprojections.

Figure 2-4: Government Net Lending Worldwide

Source: WEO (2016), calculations by the Ifo Institute.

The classification according to the income level (lower left panel) shows a remarkableimprovementingovernmentbudgetbalancesinlow­incomecountries.Whilehistoricallytheyranmuch largerdeficits, theirbehaviordoes not differmuch from the behaviorobserved inmiddle­andhigh­incomecountriesfrom2000onwards.Theregionaldata(lowerrightpanel)revealthattheimprovementinlow­incomecountriescanbetracedbacktocountriesinSub­SaharanAfrica.Thisdevelopmentmightbepartiallyattributedtodebtreliefprogramswhichwere implemented over the last two decades. The volatilityobserved inMiddle EasternandNorthAfrican(MENA)countriesispronounced,whichcouldbeduetotheroleofcommodities,especiallyoilandgas,asamajorsourceofgovernmentrevenues.WhiletheMENAcountriesran large surpluses between 2004 and 2008, they currently display the largest deficit of all

-10

-5

0

5

Sh

are

of

GD

P (

in %

)

1980 1990 2000 2010 2020

Year

General balance Primary balance

Projections

-6

-4

-2

0

2

4

Share

of G

DP

(in

%)

2000 2005 2010 2015 2020 2025

Year

Low income Middle income

High income

Projections

-15

-10

-5

0

5

Share

of G

DP

(in

%)

2000 2005 2010 2015 2020 2025

Year

East Asia, Pacific Europe, Central Asia

Latin America & Carib. MENA

North America South Asia

Sub-Saharan Africa

Projections

ImprovingPublicDebtManagementIntheOICMemberCountries

24

countrygroups(10.4%in2015). It isnotedthatmanycountries inthisregionbelongtotheOIC.

2.1.3 Debt Structures

Whenevaluating fiscalsustainability,keyparameters toconsiderare debt levels andbudgetdeficits, which enter the intertemporal budget constraint. Besides these “hard” figures, thestructureofpublicdebtprovidesimportantinformationabouttherisksentailedinpublicdebt.Consequently,byturningtoananalysisofdebtstructures,apictureofthematuritystructure,currency composition and interest rate types of public debt is drawn. In addition, it will bedistinguishedbetweendomesticandforeignaswellasprivateandofficialcreditors.

Creditors

Who lends to governments? Financial resources might be provided by domestic or foreigncreditors.AsshowninFigure2­5thereisasubstantialdifferenceintheresidenceofcreditorsbetween different income groups: High­income countries rely mostly on domestic creditors(59% in 2015), middle­income countries divide their financing needs equally between bothtypes of investors and low­income countries only sold 31% of their liabilities to domesticcreditors.

Figure 2-5: Creditor Structure of Public Debt Worldwide

Sources: IMF and World Bank (2016), Quarterly Public Sector Debt database, calculations by the Ifo Institute. Note: Due to missing data the graph for low income countries covers a shorter time period only.

GrantElement

Individual countries may be unable to finance themselves on international capital markets.Macroeconomic instability,politicaluncertaintyand legalenforcementproblemsmightdeter

0

20

40

60

80

100

%

1995 2000 2005 2010 2015

Year

All income levels

0

20

40

60

80

100

%

1995 2000 2005 2010 2015

Year

Low income

0

20

40

60

80

100

%

1995 2000 2005 2010 2015

Year

Middle income

0

20

40

60

80

100

%

1995 2000 2005 2010 2015

Year

High income

Domestic creditors External creditors

ImprovingPublicDebtManagementIntheOICMemberCountries

25

internationalinvestorstoprovidefinancialresources.Theseimpedimentsarereinforcediftheborrowerisasovereignwhoselikelihoodtorepaydoesnotonlydependonitsability­to­repay,butalsoonitswillingness­to­repay.Hence,theshareofconcessionaldebtintotalpublicdebtisakeyfigureinacountry’spublicdebtstructure.Itshowswhetheracountryisabletoissuebonds on domestic or external markets or whether it depends on the willingness ofinternational institutions and other governments to supply funds. Figure 2­6 displays theaveragegrantelementinherentinpublicdebt.Thegrantelementofaloanisameasureofitsconcessionality.Itiscalculatedasthedifferencebetweenitsnominalfacevalueandthesumofthediscountedfuturedebt­servicepayments(netpresentvalue)oftheborrower,expressedasapercentageofthenominalvalueofthecommittedloan.Hence,aloanentailsagrantelementwhenever the interest rate charged for a loan is lower than the discount rate. The grantelementhasbeenrisingovertimeandamountedto50%in2014.Whilegrantsareprimarilyextended by official creditors, private credit contracts also have a small grant element onaverage.Grantstolow­incomecountriesaremoregenerousthantomiddle­incomecountries.GrantshavebeenabovetheglobalaverageinSub­SaharanAfricaandtheMENAcountries.

Figure 2-6: Grant Element Worldwide

Sources: World Bank (2016) International Debt Statistics, calculations by the Ifo Institute.

0

20

40

60

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

All creditors Official creditors Private creditors

0

10

20

30

40

50

60

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

All Low income

Middle income

0

20

40

60

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

All East Asia, Pacific

Europe, Central Asia Latin America & Carib.

MENA North America

South Asia Sub-Saharan Africa

ImprovingPublicDebtManagementIntheOICMemberCountries

26

RefinancingRisk

Maturity

Thematuritystructureofpublicdebtdeterminestheshareofdebtthathastoberefinancedinagivenyear.Theshareofshort­termdebthasbeenidentifiedasanimportantdeterminantoffinancialandsovereigndebtcrises.Intheperiodprecedingacrisis,short­termdebtfinancingusuallybecomesmoreimportantbecauseinvestorsbecomereluctanttolong­termlending.Assuch,ahighshareoflong­termdebtisasignoftheconfidenceinvestorsputintheeconomy.Therearemanystudiesonthematuritystructureofpublicdebt(see,amongothers,Arellanoand Ramanarayanan2012,Debortoliet al. 2014,Greenwood et al. 2015).Bothgovernmentsandinvestorsfacetrade­offs:whileinterestratesonshort­termdebtareusuallylowerthanonlong­term debt, short­term debt is positively associated with refinancing risk. From theperspective of investors long­term credits provide a hedge against future interest ratefluctuations,butshort­termcontractsaremoreeffectiveinprovidingincentivestorepay.

Short­termdebtisdefinedasdebtwithanoriginalmaturityofoneyearorless.Since1995asubstantialreductionintheshareofshort­termdebthastakenplace(seeFigure2­7)(IMFandWorldBank2016):Theshareofshort­termintotalpublicdebtaveragedacrossallcountriesdecreased from 24% in 1995 to 11% in 2015. Low­income countries have a lower share ofshort­termdebtthanhigh­incomecountries.Figure2­8showsthedevelopmentof long­termandshort­termpublicdebtexpressedas%ofGDP.Theincreaseinpublicdebtsincetheglobalfinancial crisis has been financed by long­term instruments; the share of short­term debt inGDPhasremainedrelativelyconstant.

Figure 2-7: Share of Short-Term in Total Public Debt Worldwide

Sources: IMF and World Bank (2016), Quarterly Public Sector Debt database, calculations by the Ifo Institute Note: Due to missing data the graphs for low income countries (left panel) and for Latin America & Carib., Sub-Saharan Africa, South Asia & MENA (right panel) cover a shorter time period only.

5

10

15

20

25

%

1995 2000 2005 2010 2015

Year

All High income

Low income Middle income

0

10

20

30

40

%

1995 2000 2005 2010 2015

Year

All East Asia, Pacific

Europe, Central Asia Latin America & Carib.

MENA North America

South Asia Sub-Saharan Africa

ImprovingPublicDebtManagementIntheOICMemberCountries

27

Figure 2-8: Long-Term and Short-Term Public Debt Worldwide

Sources: IMF and World Bank (2016), Quarterly Public Sector Debt database, calculations by the Ifo Institute Note: Due to missing data the graphs for low income countries (upper panels) and for Latin America & Carib., Sub-Saharan Africa, South Asia & MENA (lower panels) cover a shorter time period only.

If a country pursues an active policy to lengthen the average maturity of its public debt byissuing relatively more long­term bonds, this manifests itself only with a lag in the averagematurityofthestockofoutstandingdebt.Asanalternativemeasuretheaveragematurityonallnewpublicandpubliclyguaranteedloanscontractedduringayearwillbepresented(seeFigure2­9).Theaveragematurityforagivencountryiscalculatedbyweightingmaturitiesbytheamountsoftheloans.

TheupperpanelofFigure2­9showsthattheaveragematurityofnewdebtcommitmentshasbeenrelativelystableovertimeandhasfluctuatedbetween20and25years.However,thereisan important difference with respect to the nature of the creditor: Private creditors extendtheircreditforanaverageperiodofapproximately5years.Creditorsprovidingtheirfinancialresourcesforperiodsexceedingadecadearetypicallyofficialcreditors.Officialcreditorsareinternational organizations such as the World Bank, regional development banks and other

0

20

40

60

80

Sh

are

of G

DP

(in

%)

1995 2000 2005 2010 2015

Year

Low income Middle income

High income

Long-term

0

5

10

15

20

Sh

are

of G

DP

(in

%)

1995 2000 2005 2010 2015

Year

Low income Middle income

High income

Short-term

0

20

40

60

80

100

120

Share

of G

DP

(in

%)

1995 2000 2005 2010 2015

Year

East Asia, Pacific Europe, Central Asia

Latin America & Carib. MENA

North America South Asia

Sub-Saharan Africa

Long-term

0

5

10

15

20

Share

of G

DP

(in

%)

1995 2000 2005 2010 2015

Year

East Asia, Pacific Europe, Central Asia

Latin America & Carib. MENA

North America South Asia

Sub-Saharan Africa

Short-term

ImprovingPublicDebtManagementIntheOICMemberCountries

28

multilateralandintergovernmentalagenciesandgovernments.Thematurityofnewcontractsissignificantly larger in low­incomecountries thaninmiddle­incomecountries,whichmightbeexplainedbythelargershareofofficialcreditorsinlow­incomecountries.

Figure 2-9: Maturity of New External Public Debt Commitments Worldwide

Sources: World Bank (2016) International Debt Statistics, calculations by the Ifo Institute.

InterestRateRisk

Interest rate types

Long­termdebtallowsgovernmentstoreliablyforecastandplanthecostsofoutstandingdebtin the mediumterm.However, this onlyholds if interest ratesare fixed. If interest ratesarevariable, e.g. reset annually, long­termcontracts reduce the rollover risk, butnot the riskofrisingcostsofdebt.Figure2­10showstheshareofloanswithfixedinterestratesintotalloans.Since 2000, low­income countries have relied almost exclusively on loans with fixed rates.Albeit small, the share of variable rate contracts is highest in high­income countries. Theclassification by regions shows a convergence to fixed interest rates over the past15 years.LatinAmerica,whichreliedonasignificantshareofloanswithvariableinterestratesuntilthemid­1990s,hasmovedtofixedratefinancing.ThesharpdropintheshareoffixedrateloansinSouth Asia in the second half of the 1990s can be explained by the Asian financial crisis of1997/98.Whencreditratingshadimprovedafterwards,thesecountriesretunedtofixedratefinancing.

5

10

15

20

25

30

In y

ears

1980 1985 1990 1995 2000 2005 2010 2015

Year

All Official creditors Private creditors

15

20

25

30

In y

ea

rs

1980 1985 1990 1995 2000 2005 2010 2015

Year

All Low income

Middle income

10

15

20

25

30

35

In y

ea

rs

1980 1985 1990 1995 2000 2005 2010 2015

Year

All East Asia, Pacific

Europe, Central Asia Latin America & Carib.

MENA North America

South Asia Sub-Saharan Africa

ImprovingPublicDebtManagementIntheOICMemberCountries

29

Figure 2-10: Interest Rate Types Worldwide

Shareoffixedinterestratecreditsintotalcredits(in%)

Sources: BIS Debt Securities Statistics (2016), calculations by the Ifo Institute. Due to missing data the graphs for Sub-Saharan Africa, South Asia & MENA (right panel) cover a shorter time period only.

Interest rates

Interestratesdeterminethecostsofoutstandingdebt.Besidesthelevelofdebt,interestratesinfluence the difference between generaland primary public balance. Figure 2­11highlightsthatfinancingcostshavedecreasedovertimeasinterestratesfollowtheglobalfallingtrend.Interestingly,theaverageinterestrateisoftenlowerthantheU.S.lendingratetotheprivatesector.Thismightbeexplainedbetheimportanceofconcessionallendingtogovernments.Theseparation between official and private creditors supports this hypothesis: Official creditorslend at preferential rates. While the difference between private and official creditors wassubstantialinthe1980s,ithasbecomelesspronouncedsincethen.Low­incomecountriesfacelower interest rates than middle­income countries, because they have greater access toconcessionallending.

0

20

40

60

80

100

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

All Low income

Middle income High income

0

20

40

60

80

100

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

All East Asia, Pacific

Europe, Central Asia Latin America & Carib.

MENA North America

South Asia Sub-Saharan Africa

ImprovingPublicDebtManagementIntheOICMemberCountries

30

Figure 2-11: Interest Rates on Public Debt Worldwide

Note: The graph displays the average interest rate on newly committed public debt contracts in a given year. Sources: World Bank (2016) International Debt Statistics, calculations by the Ifo Institute.

CurrencyRisk

Currency composition

The effect of exchange rate changes on the level of public debt depends on the currencycomposition of debt. Governments especially in emerging and developing countries face atrade­off. On the one hand, debt denominated in foreign currency is usually less expensive.Foreigninterestratesaregenerallylower,becausedomesticinterestratesincluderiskpremiathatarisefromahigherpossibilityofadevaluationofthelocalcurrency.Ontheotherhand,ifthe currency indeed devaluates, the debt burden expressed in local currency increases. Toassess the risks of devaluations, debt denominated in foreign currency can be expressedrelativetothecentralbank’sinternationalreservesortoexportrevenues.

Figure 2­12 shows that the share of debt denominated in domestic currency has decreasedslightlysince1995.In2015,itmadeup64%oftotaldebtonaverage.Thedifferencesbetweendifferent income groups aresignificant:Whilehigh­income countries’debt isalmost entirelydenoted in domestic currency, debt in low­income countries is primarily denominated inforeigncurrency.

0

2

4

6

8

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

All Official creditors Private creditors

0

2

4

6

8

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

All Low income

Middle income

2

4

6

8

10

12

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

All East Asia, Pacific

Europe, Central Asia Latin America & Carib.

MENA North America

South Asia Sub-Saharan Africa

ImprovingPublicDebtManagementIntheOICMemberCountries

31

Figure 2-12: Currency Composition of Public Debt Worldwide

Sources: IMF and World Bank (2016), Quarterly Public Sector Debt database, calculations by the Ifo Institute.Note: Due to missing data the graph for low income countries (top-right panel) covers a shorter time period only.

Whichcurrenciesdominateforeign­denominatedpublicdebt?TheinternationalroleoftheU.S.Dollar is revealed in public debt contracts: the share of the U.S. Dollar in total foreign­denominatedpublicdebthasbeenrisingovertimeandequals59%in2014(seeFigure2­13).ThesecondmostimportantcurrencyistheEuro(13%in2014),whichtookupthesharesthatGerman Mark and French Franc occupied before its introduction. The share of the JapaneseYen has been decreasing over time. It should be noted that there is an important role formultiple currency arrangements, too. Overall, no significant difference in the currencycomposition between middle­ and low­income countries is observed. However, currencydenomination depends on the region (see Figure 2­14). While in Europe, Central Asia andMENA the Euro is especially strong, Dollar loans are dominant in Latin America and theCaribbean (89% in 2014). Asia has a larger share of the Yen at the expense of the Euro. Ingeneral,apart fromthe global roleof the Dollar, countriesbase loancontracts preferablyonthe dominant currency of their region. This is reasonable, because trade revenues are oftendenominatedinthiscurrency.

0

20

40

60

80

100

%

1995 2000 2005 2010 2015

Year

All income levels

0

20

40

60

80

100

%

2009 2010 2011 2012 2013 2014 2015

Year

Low income

0

20

40

60

80

100

%

1995 2000 2005 2010 2015

Year

Middle income

0

20

40

60

80

100

%

1995 2000 2005 2010 2015

Year

High income

Domestic currency Foreign currency

ImprovingPublicDebtManagementIntheOICMemberCountries

32

Figure 2-13: Currency Composition of Public Debt by Income Groups Worldwide

Sources: World Bank (2016) International Debt Statistics, calculations by the Ifo Institute.

Figure 2-14: Currency Composition of Public Debt by Regional Groups Worldwide

Sources: World Bank (2016) International Debt Statistics, calculations by the Ifo Institute.

0

20

40

60

80

100

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

All countries

0

20

40

60

80

100

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

Middle income

0

20

40

60

80

100

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

Low income

USD Multiple Yen SDR

Pound DM FFranc SFranc

Euro Unspecified

0

20

40

60

80

100

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

Europe, Central Asia

0

20

40

60

80

100

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

Latin America & Carib.

0

20

40

60

80

100

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

South Asia

0

20

40

60

80

100

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

East Asia, Pacific

0

20

40

60

80

100

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

MENA

0

20

40

60

80

100

%

1980 1985 1990 1995 2000 2005 2010 2015

Year

Sub-Saharan Africa

USD Multiple Yen SDR

Pound DM FFranc SFranc

Euro Unspecified

ImprovingPublicDebtManagementIntheOICMemberCountries

33

2.2 Institutional Frameworks

Thissectionfocusesontheinstitutionalorganizationofpublicdebtmanagement,theaimsofpublicdebtmanagementand itsrelationtoothermacroeconomicpolicies.As faraspossiblethissectionfollowsthestructureoftheDebtManagementPerformanceAssessment(DeMPA)methodologyasdescribedinTable1­1.2

GovernanceandStrategyDevelopment

Legal framework

Whilethelevelofpublicdebtisprimarilydeterminedbythedecisionsatthepoliticalexecutivelevel,thestructureofdebtmaybechosenbyaDebtManagementOffice(DMO).Withrespectto the institutional characteristics of the DMO, two main areas can be distinguished. First,policymakersneedtodecidewheretheDMOisplacedwithintheinstitutionallandscapeofacountry. The DMO might be a department of the Ministry of Finance, an office within thecentralbankoranindependentagency.Second,thelegislatorhastoendowtheDMOwiththelegalandorganizationalstructurewithinwhichdebtismanaged.

WhiletheDMOmayproposeastrategyandtargets,thesehavetobeapprovedatthepoliticalexecutiveor legislativelevel.Theexistenceofaprincipaldebtmanagemententitywithclearobjectives, a medium­term strategy and the requirement to report to the government isgenerally considered as best practice and may be regarded as a hypothetic but sufficientstructureforpublicdebtmanagement.LikeCurrieetal.(2003,p.27)putit,“eachinstitutionalchoiceoflocationandorganizationhasadvantagesanddisadvantages”.Thereisnouniversalbest practice; the appropriate institutional choice rather depends on the characteristics andpreferences of a country. Nevertheless, public debt management in the OECD countries hasfollowed a common trend since the 1990s: It has become emancipated from fiscal andmonetarypoliciesandisnowconsideredasanactivitywithitsownobjectives.

Managerial structure

ThetypicalfunctionsofaDMOcanbeseparatedinthreeareas:(1)Thefront officeisinchargeoffundingoperationsandexecutestheoperationsinfinancialmarkets.(2)Themiddle officeisresponsibleforanalyzingandmonitoringrisks.Itassessestheperformanceofdebtmanagersonthebasisofthebenchmarksoutlinedinthedebtmanagementstrategy.(3)Theback officeisresponsibleforthesettlementoftransactionsandforkeepingfinancialrecordsuptodate.Theoretically, these three offices might be spread between different departments of theMinistryofFinanceorevenbelocatedindifferentorganizationalunits.Separationshouldnotbeaproblemgiventhatclearlydefinedobjectivesareinplaceandcoordinationiseffective.Inpractice, however, poor coordination, low accountability and rivalries between the differentunitsledtotheconsensus“thatconsolidatingdebtmanagementfunctionsintooneofficeisoneof the most important steps that can be taken to improve the overall quality of debtmanagement”(Currie2003,p.22).

IntheearlyDMOs,middleofficesoftenwerebasicallyabsent.DMOswereresponsiblefordebtissuanceandsettlementwithoutanexplicitdebtmanagementstrategy.Whendebtlevelsroseand interest payments amounted tosubstantial shares of government budgets in the 1980s,

2GiventhattheDeMPAcategories“BorrowingandRelatedFinancialActivities”,“CashFlowForecastingandCashBalance

Management” and “Debt Recording and Operational Risk Management” refer to tasks of the DMO and not to itsinstitutionalform,thesepointsarenotaddressedexplicitlyinthissection.TheyarediscussedinSection1.2.

ImprovingPublicDebtManagementIntheOICMemberCountries

34

cost considerations and the management of risks became important components of debtmanagement though. Consequently, public debt management adopted portfolio managementpracticesoftheprivatesector.

To implement those practices, trained staff was needed. As it turned out to be difficult toattract portfolio managers from the private sector given low wages of civil servants, somecountries(e.g.Denmark,IrelandandSweden)optedtocreateDMOsasindependentagenciesoutside 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 andtherefore favor cheap, but risky funding, e.g. a higher share of short­term contracts, moreforeigncurrencydebtorfloatinginterestrates.

Debt management strategy

The rather general objectives of public debt management, which may be derived fromgovernment preferences with respect to costs and risks, have to be translated into a debtmanagement strategy that is implementable. It should be based on medium­term targets,which may be numerically specified. Potential targets are the allocation of public debt indomesticandexternalcurrencydebt,thedivisionbetweenfixedandfloatinginterestratedebtand the percentageof total debt that has to berefinanced within12 months(see also Table1­2).3Publicationofthepublicdebtmanagementstrategyishighlyrecommended,becauseitincreasestransparencyandthusaccountabilityoftheDMO.

Provided active trading takes place, targets may be complemented by performancebenchmarks.However, fora numberof reasons, active trading isratherabsent in the globalpractice of public debt management. In expected terms, active trading only contributes tolower costs if debt managers possess superior information compared to other marketparticipants.While this islikelytrueonthedomesticmarket,manygovernmentsconsider itunethicaltobenefitfromtheirinsideinformation.Manygovernmentsaredominantissuersofdebtontheirdomesticmarketandmaymanipulatemarketconditions.However,thisbehaviorwould be detrimental to the development of domestic debt markets. Consequently, mostgovernments abstain from active trading on the domestic market. On the foreign market, inturn,itisquestionablewhethergovernmentspossessthenecessaryinformationandcapacitytobeatthebenchmark.

Debt reporting and evaluation

DMOs are typically responsible for the publication of data on public debt developments,borrowingamountsandstructuralchangesinpublicdebt.Sincethesedatainfluencedomesticandforeigninvestors’decisionwhethertoprovidefinancialresourcestothepublicentity,itisintheowninterestoftheDMOtoprovidecomplete,reliableandtimelydata.Thesemightbesupplementedbyadocumentcontainingdebtforecastsandariskanalysisbasedondifferentstress tests scenarios. Finally, DMOs should make the debt management strategy public andprovideanex­postanalysisexplainingwhytargetsmayhavebeenmissedorrevised.Overall,transparencyisakeyelementofadvancedpublicdebtmanagement.

3SeeCurrieetal.(2003,p.34)foratabularcompilationofpublishedstrategictargetsinselectedindustrializedcountries.

ImprovingPublicDebtManagementIntheOICMemberCountries

35

Audit, transparency and accountability

OncedecisionswithrespecttotheinstitutionalformandstrategyoftheDMOhavebeentaken,itssuccessdepends–amongotherfactors–onitsaccountability,governanceandmonitoringby the political entity in charge of public debt management, in most cases the Ministry ofFinance or Parliament. An efficient governance structure of DMOs depends on a number ofconsiderations. DMOs have to be institutionalized with a clear mandate. Clearly definedobjectives such as strategic targets and performance benchmarks help to improveaccountabilityandlimitprincipal­agentproblems.TheMinistryofFinance,parliamentortherespectivesupervisingauthorityshouldbeendowedwiththenecessaryresourcestocarryouttheirmonitoringfunction.

Both DMOs within the ministry and separate Debt Management Offices (SDMOs) imply thatauthorityisdelegated.Insuchsituationsaclassicalprincipal­agentproblemarises:whiletheMinisterofFinanceisresponsibleforthedebtmanagementstrategy,itsexecutionisdelegatedto the DMO. Due to asymmetric information the Minister of Finance cannot distinguishwhether targets have been missed because of developments outside the control of the debtmanager,orbecauseofinsufficienteffortorskilloftheagent.Agencyriskincreaseswiththedegree of separation and autonomy of public debt management from the ministry. To limitagency problems, it is important to clearly specify the objectives of the DMO such that theagent’s performance canbe measured and to formulatean incentive­compatible contract forthe agent. In addition, to facilitate delegation, public debt management functions should beconsolidatedinasingleofficewithaclearlydesignatedheadwhoisdirectlyanswerableforthemonitoringentity.IfaSDMOisestablished,aboardofdirectorsmightbridgethegapbetweenSDMOandMinistryofFinance.TheboardmightmonitortheSDMO,evaluateitsperformancevis­à­visthetargetsandultimatelysanctionitsdecisions.

CoordinationwithMacroeconomicPolicies

Coordination with fiscal and other public policies

Whenpublicdebtmanagement is implementedasportfoliomanagement, theDMOfollowsanarrow objective function according to which costs are minimized for given risks. Anotherviewarguesthatthisstrategyisinefficientandtheobjectivefunctionshouldalsoincludetheinterplay of public debt management with other public policies. On one hand, theindependence fromthepolitical processallowsefficiencygains,because debt is managed bypurelyeconomicconsiderations.Ontheotherhand,ifotherpublicpoliciesarenottakenintoaccount,thismightnotbeoptimalbecausethecoordinationofdifferentpublicpoliciesmightprovetobebeneficial.

The view that debt management is a component of public policy argues that the analysis ofrisksandcostsshouldfocusontheentirepublicbalancesheetinsteadofbeingrestrictedtoitsliabilityside.Thisstrategyacknowledgescurrencyandinterestraterisksand,hence,focusesonbudgetaryrisks.Thisformofpublicdebtmanagementaimsatreducingfinancialrisksbyguaranteeing that the government can meet its obligations at any point in time. Therefore,publicbudgetmanagementhastoexaminethenatureofgovernmentrevenuesandcashflowsand try to prevent mismatches between revenues and debt payments. The structure ofrevenues and spending – maturity and currency denomination – should be as similar aspossible.Giventhattaxrevenuesareusuallyindomesticcurrency,thisapproachimpliesthatcountriesshouldprimarilyusedebtinstrumentsdenominatedindomesticcurrency.Examplesof countries following this broader framework for debt management are Australia and New

ImprovingPublicDebtManagementIntheOICMemberCountries

36

Zealand. Since 1997, the New Zealand’s DMO has been part of its Asset and LiabilityManagementBranchandinAustraliaitiscalledOfficeofFinancialManagement.

Coordination with monetary policy

Untilthe1980s,publicdebtmanagementwasmainlyconsideredtobepartofmonetarypolicy.When debt levels in many OECD countries were rising during the 1970s and 1980s as aconsequence of expansionary macroeconomic policies, debt management was considered achoice between inflation financing and debt issuance. Debt management offices operated asdepartmentsofcentralbanksandgovernmentscontrolledthesupplyofcentralbankliabilitiesinordertofinancetheirexpenditures–aphenomenonknownasfiscal dominance.

Academicresearchaswellastheexperienceofhighandcostlyinflationratesinthe1970sand1980s led to a rethinkingofcentralbanking:aconsensusemerged that independent centralbanks equipped with a clear mandate for price stability – such as an inflation targetingframework–areimportantcommitmentdevices.Manystudiesfoundanegativerelationshipbetweeninflationandcentralbankindependence(seeCukierman1992,EijffingeranddeHaan2016). The separation between monetary and fiscal considerations often included the legalprohibitionforcentralbankstopurchasegovernmentbonds.Asanexample,theTreatyontheFunctioning of the European Union (2012) prohibits the European Central Bank to provideoverdraftfacilitiestopublicentitiesandtopurchasesovereignbondsdirectlyontheprimarymarket(Article123).

Fiscal financing may give rise to excessive money growth, which then causes inflationaccording to the quantity theory of money. Besides this inconsistency between debtmanagementandapricestabilityobjective,thereareotherconflictsofinterestsifthecentralbankmanagespublicdebt:

1) Levelofinflation:thecentralbankmighttargetaninflationratethatishigherthanwhatisoptimalfortheaggregateeconomyinordertoinflateawaytherealvalueofdebt.

2) Interest rate reaction: the central bank might be reluctant to raise interest rates even ifthis is indicated by standard monetary reaction functions. Higher interest rates wouldincreaseinterestpaymentsonpublicdebtandcontributetoahigherlevelofpublicdebt.

3) Manipulation of financial markets: the central bank might align the timing of monetarypolicy with its debt management. If it injects liquidity just before the issuance ofgovernment bonds, this will lower their yields. Moreover, the maturity and currencystructureofgovernmentdebtmightbechosentosupportmonetarypolicy.

4) Time horizon: while monetary policy is guided by short­term considerations, debtmanagementoptimallyhasalongerplanninghorizon.

Aclearallocationoftheresponsibilitiesformonetarypolicyanddebtmanagement,whichisaprecondition for accountable institutions, suggests dividing these policies between twoinstitutions. As an example, this reasoning accounted for the decision to transfer the BritishdebtmanagementfromtheBankofEnglandtoaDMOwithintheTreasuryin1998.

ImprovingPublicDebtManagementIntheOICMemberCountries

37

2.3 Lessons Learned and Relevance for OIC Member Countries

In sum, the experience inOECD countries has revealed four issues crucial for the successofpublicdebtmanagement.First,publicdebtmanagementshouldbebasedonasoundlong­termstrategy.Second,thisstrategyshouldbeimplementedbyaninstitutioncapableofdealingwithpublic portfolio management. Third, public debt management has tobe modernized. Finally,suitablemechanismstoensureaccountabilityandsuccessfuldelegationhavetobedesigned.WhiletheserecommendationsreflectbestpracticeinOECDcountries,theymaynotbedirectlytransferable to emerging and developing countries. Since domestic debt markets are oftenunderdeveloped and domestic financial savings limited, governments in emerging anddevelopingcountries have lessdomestic financingoptions. In particular,governments mightbeunabletoissuedomesticcurrencydebtwithlongmaturitiesandfixedinterestrates.Thisimplies that the preferred low­risk category of debt is unavailable. As a consequence,governmentsareconstrainedintheformulationoftheirstrategictargets.

Public debt management might be even more important and beneficial in emerging anddeveloping countries than in developed countries. Large volatilities in macroeconomicfundamentals, higher risks of contagion and inefficient tax systems characterized by low taxincome make those countries more prone to public financing problems. Moreover, majorexternalities are attached to the government debt portfolio: given that public debt oftenconstitutes the most important liability for the country, instabilities in government financesmight endangerdomestic financial stabilityasa whole.Governmentactivity is important fordomesticdebtmarketdevelopmentandamajordeterminantofthefinancialconditionsfacedbytheprivatesector.Withrespecttotheinstitutionalarrangement,priorityshouldbegiventoconsolidating public debt management functions inone single administrative unit. However,there is no apparent need to locate the DMO strictly outside the Ministry of Finance. Theadvantage of a SDMO to attract better trained staff thanks to higher salaries is likely to beoutweighed by the agency problems of a SDMO. Concerning the objectives, emerging anddeveloping countries are advised to focus on risk reduction and to lower costs only in thesecond place. Reduced risks have positive spillovers to the whole economy and lower riskpremiamayeventuallytranslateintolowerinterestcosts.

Countries are likely to learn from each other. Existing institutional settings and public debtmanagement documents might be taken as models by countries that take the first steps inimplementing formal public debt management. Moreover, countries are likely to cooperate.Tasks such as the training of specialized staff, the development of capacities of the middleoffice and the creation of risk quantification models might be centralized. Given theircommonalities, this opens the room for cooperation among the OIC member countries.International institutions like the World Bank and the IMF provide consulting support. TheWorld Bank and the IMF developed jointly the Medium­Term Debt Management Strategy(MTDS), which helps countries to design an appropriate strategy. The MTDS toolkit reflectsbestpracticeindebtmanagement(Cabral2015,p.4).

In 2013 the World Bank (Cabral 2015)conducted a survey that gathered information aboutcountries’ public debt management policies. Out of a sample of 117 participating countries60% had a formal strategy in place. While countries in Europe, Central Asia and East Asianshowsharesabovetheaverage,LatinAmericaandtheCaribbeanistheregionwhereaformalstrategyislessprevalent.Forthesubgroupofcountrieswithstrategies,theirdesign,however,differs significantly: 77% publish their strategy, 76% aim at strategic targets, 71% usequantitativeanalysisandonlyaminoritygroundsthestrategyonalegalframework.Althoughhavinga strategy, countries inSoutheastAsiaand MENA aremostreluctant inpublishing it.

ImprovingPublicDebtManagementIntheOICMemberCountries

38

Indicatorsonrefinancingriskarethemostprevalentstrategic target, followedbytargetsoninterest­rateriskandexchangeraterisk(seeFigure2­15).Thesupportofdebtmanagementbyquantitativeanalysis,whichrevealsacertainsophisticationoftheDMOanditsstaff,ismostprevalent in high­income countries. Compared to the results of a similar survey, which wascarriedoutin2007,theshareofcountrieshavingastrategyhasnotincreased.However,thosecountrieshavingastrategyincreasinglybaseitontargetvalues.

Figure 2-15: Use of Strategic Targets by Type of Risk Worldwide

Source: Cabral (2015, p. 13).

2.4 Survey Results

After the reviewofpublicdebt levels and theirstructureas well as the illustrationof globalpracticeintheinstitutionaldesignofpublicdebtmanagement,theanalysisiscomplementedby qualitative results on the present stage of public debt management around the world. Asurvey was conducted among international economic experts about debt managementpractices in their home countries and their assessment of risks encountered in public debtmanagement.

ThesurveywasexecutedaspartoftheWorldEconomicSurvey(WES)oftheIfoInstitute.4Thesurvey was launched in1981 as Economic Survey International (ESI) and renamed in 2002.Thisquarterlysurveyaimsatprovidingatimelypictureabouttheeconomicconditions–thecurrentsituationandexpectationsaboutfuturedevelopments–aroundtheworld.WESpollsmore than 1000 experts in more than 100 advanced, emerging and developing countries.Experts provide an assessment about the economic situation in the country where they areconsideredtobeinsiders.Panelmembersarenormallylocatedinthecountryonwhichtheyreport.Theselectionofexpertsisbasedontheirprofessionalcompetenceineconomicmattersandtheirability toevaluate economicdevelopments.The largestgroupofexpertsworks forresearchinstitutes,universitiesorthinkthanks(30%).16%arebasedatfinancialinstitutions,14%workforfirmsand13%arerepresentativesofassociationsorchambersof industryortrade.Theremaining25%aremadeupofemployeesofministries,centralbanks,embassies,

4 For more detailed information about the survey and the latest results, please refer to the homepage of WES at

https://www.cesifo­group.de/ifoHome/facts/Survey­Results/World­Economic­Survey.html. The survey design isillustratedathttps://www.cesifo­group.de/ifoHome/facts/Survey­Results/World­Economic­Survey/WES­Design.html.

ImprovingPublicDebtManagementIntheOICMemberCountries

39

internationalorganizationsorareprivateconsultants.AboutoneintwoWESexpertsholdsadegree in economics and over 40%have a Ph.D. 76% are between 35 and 65 years oldand86% are male. Participation is strictly voluntary and experts do not receive a monetarycompensation.

Besides the standard questions on economic conditions, which are repeated in each of thequarterlyWES issues,WES alsocontainsa one­offquestiononcurrent economic orpoliticalrelevantissuesintheworld.IntheWESsurveyfromthefourthquarterof2016,expertswereaskedfortheirassessmentofpublicdebtmanagementintheirhomecountry(thesurveyformis included in Appendix A, Figure A­0­1). The experts’ answers provide new insights in theevaluationofpublicdebtmanagementingeneralandthefunctioningofthedomesticmarketforpublicdebt inparticular.5ThequestionswereansweredduringthemonthofOctoberbymorethan1070expertsin113countries.

In the first question on public debt management, WES experts were asked to provide theiropinionontheefficiencyofpublicdebtmanagement.Theprecisewordingofthequestionwas:“Howdoyouassessthepublicdebtmanagementofyourcountry?”Thepossibleanswerswere“efficient”, “satisfactory” and “not efficient”. On average experts consider public debtmanagementintheircountrytobebelowsatisfactorylevels.Ifnumberswereassignedtotheanswerssuchthattheneutralanswer“satisfactory”=0and“efficient”=1and“notefficient”=­1,the average across all responses amounts to ­0.24. There is a marked difference betweencountries of different stances of development with the assessment improving in the level ofincome:6whereashigh­incomecountries’debtmanagementisassessedassatisfactory(­0.05),itisworstinlow­incomecountries(­0.57).ResultsforOICcountriesverymuchresemblethosefor middle­income countries. Only 7% of OIC experts assess public debt management asefficient in their country, while the answers “satisfactory” and “not efficient” are given withalmostequalfrequency.

Figure2­16showsthesharesofthethreecategoriesintotalanswers:Whenmovingfromhigh­to low­income countries, the share of experts considering public debt management as“efficient” decreases, while the share of those answering “not efficient” increases. Ifdifferentiatedbyregionalgroups,publicdebtmanagementisassessedbestinWesternEurope,whereas Africa, North America and countries of the Commonwealth of Independent States(CIS)areattributedtheleastefficientpolicies(notshown).

5ResearchersinterestedinusingthesedatamaycontacttheLMU­ifoEconomics&BusinessDataCenter(EBDC).

6Whenincome­groupsareused,theaverageiscalculatedinatwo­stepprocedure:First,thecountryaverageiscomputedasthesimplearithmeticmeanoftheindividualresponses fortherespectivecountry.Second,theunweightedmeanoverthose countries that belong to the income group under consideration is calculated. In contrast to the standard WESprocedurecountryaveragesarenotweightedbythecountries’shareinworldtradesincethepurposeoftheanalysisistodrawapictureofpublicdebtmanagementofanaveragecountryindependentlyofcountrysizes.

ImprovingPublicDebtManagementIntheOICMemberCountries

40

Figure 2-16: Assessment of Public Debt Management

Source: Ifo World Economic Survey (WES) IV/2016.

Asdescribedinprevioussections,themostimportantrisksfacedbypublicdebtmanagementare foreign currency risk, interest rate risk and refinancing risk. The task of public debtmanagement consists in controlling those risks and in evaluating their effect on borrowingcoststodetermineacost­riskportfoliothataccountsforacountry’spreferences.WESexpertswereaskedtoassesstheimportanceofthesedifferentkindsofrisksintheircountryas“mostimportant”, “important” or “not so important”. In the entire sample, refinancing risk isconsideredtobethemostimportantrisk,followedbyforeigncurrencyriskandinterestraterisk. However, this result is driven by high­income countries. In middle­ and low­incomecountries,foreigncurrencyriskisrankedasmostimportant.

Figure2­17comparestheimportanceofrisksinthedifferentcountrygroups.Forhighincomecountriesforeigncurrencyriskisleastimportantwhileinterestrateriskandrefinancingriskreceive almost equal attention of being less than important. This reflects the fact that high­income countries usually have access to financial resources denominated in their owncurrency. In middle­and low­income countries interest rate riskreceives the lowest rank inimportance. In these countries foreign currency risk is most important. OIC countries are

ImprovingPublicDebtManagementIntheOICMemberCountries

41

characterised by an environment where foreign currency risk and interest rate risk areevaluatedtobealmostequallyimportant.Noteworthyisthelowrelevanceofrefinancingriskin the OIC sample. For all three types of risks individually holds that their importance isconsidered to be negatively correlated with the level of income: All three types of risk areattributed the highest importance in low­income countries and the lowest in high­incomecountries.

Figure 2-17: Importance of Risk Categories in Public Debt Management

Source: Ifo World Economic Survey (WES) IV/2016.

Domesticdebtmarketsareanimportantsourceoffinancialresourcesforgovernments.Awell­functioning domestic market for public debt helps to reduce risks linked to public debtbecause it provides additional diversification opportunities. Data suggest that low­incomecountries might try to expand their base of domestic creditors: while in 2015 high­incomecountriesreliedmostlyondomesticcreditors(59%), low­incomecountriesonlysold31%oftheir liabilities to domestic agents. Moreover, given that in many emerging and developingcountriesthegovernmentisthelargestdebtor,itdominatesdebtmarketsandmayassumeacrucialroleindevelopingafunctioningdomesticdebtmarket,whichhaspositivespilloversfortheprivatesector.

WES experts were asked the following question: “How do you assess the functioning of thedomestic public debt market?” Possible answers were “good”, “satisfactory” or “bad, whichwere again attributed values from +1 to ­1, respectively. In the entire sample, public debtmarkets are assessed to work below satisfactory levels (­0.12). Figure 2­18 depicts thedistributionofunweightedindividualanswers.Publicdebtmarketsinhigh­incomecountriesreceivedthebestassessment(+0.14), in low­incomecountriestheworst(­0.43).Publicdebtmarkets in the group of OIC countries perform relatively unsatisfactory in the internationalcomparison(­0.35).

These results are an indication for a positive correlation between the functioning of thedomestic debt market and the quality of public debt management: low­income countriesreceived the least favourable assessment of both their domestic public debt market

ImprovingPublicDebtManagementIntheOICMemberCountries

42

functioning and their public debt management. Public debt markets function best in NorthAmerica, Western Europe and Oceania whereas the worst assessment is attributed tocountriesinAfricanandCIScountries.

Figure 2-18: Functioning of Domestic Public Debt Market (in percent of individual responses)

Source: Ifo World Economic Survey (WES) IV/2016.

Therearevariousreasons forwhy domestic markets forpublicdebt might bedeficient. Theeconomymightbesmallandaninvestorbasemissing,apoorlegalandregulatoryframeworkmightbedetrimentaltoinvestorconfidence,market infrastructureingeneralmightbepoor,macroeconomicrisksmightbeprevailingandanunreliablepublicdebtmanagementstrategymightunderminetheconfidenceingovernmentbonds.WESexpertswereaskedtoranktheseproblemsas“mostimportant”,“important”or“notsoimportant”.

The survey results suggest that macroeconomic risks and a small economy with a missinginvestorbaseareconsideredtobethemostimportantproblemsfacedbydomesticpublicdebtmarkets (see Figure 2­19). Poor legal and regulatory frameworks, in turn, is the leastimportantproblemamongthoselisted.Ifcountrygroupsaccordingtothelevelofincomeareformed, two observations are striking. First, the assessment of all individual categoriesworsens with a decreasing level of income. Second, the ranking differs markedly betweenincome groups: in high­income countries macroeconomic risks rank as the most importantproblem,whilethesizeoftheeconomyandtheinvestorbaseareconsideredleastimportant.Inmiddle­incomecountriestherankingequalstheaverageoftheentiresurvey.Whileinlow­incomecountriespoorregulationsandweaklegalsystemsarealsoconsideredtobetheleastimportant impediments on public debt markets, the limited size of the economy and themissinginvestorbasearementionedasmostimportant.InOICcountriesmacroeconomicrisksareseentoplayaratherminorrole.Moreproblematiconthedomesticpublicdebtmarketarethepoormarket infrastructureandthemissing investorbase jointwith thesmallsizeof theeconomy.

ImprovingPublicDebtManagementIntheOICMemberCountries

43

Figure 2-19: Problems Faced by the Domestic Public Debt Market

Source: Ifo World Economic Survey (WES) IV/2016.

Insum,thesurveyresultsprovidenewinsightswithrespecttothequestionwhereexpertsseepublic debt management policies and domestic debt market development in OIC countriescompared to the rest of the world. They offer indicators for governments and DMOsconcerning which aspects of their public debt management might be reconsidered orimproved. First, experts see room for improvement in the efficiency of public debtmanagement. Second, while a majority considers domestic public debt markets to functionsatisfactorily,publicpoliciesarewelladvisedtoprovidethenecessaryregulatoryframeworktofurtherimprovetheirfunctioning.Besidesasmallinvestorbase,poormarketinfrastructureisfoundtobethemost importantimpedimentforproperlyfunctioningdomesticpublicdebtmarkets in OIC countries. Better functioning public debt markets would also help to retainmoresavingsinthedomesticeconomy,whichwouldalleviatetheproblemofasmallinvestorbase.Experts consider foreign currency risk and interest rate risk to be quite important in OICpublic debt markets. OIC member countries might therefore focus on strategies to reducevulnerabilitiestothoseriskcategories.Theymighttargettoissueahighershareofpublicdebtin domestic currency. Moreover, a further lengthening of the maturity of newly issued debtinstrumentsmighthelptoreduceinterestraterisk.These survey results provide important information about priorities for a reform of publicdebt management in OIC countries. These findings complement the conclusions from theglobalbestpracticesandthecountrycasestudies.Inthefollowingsectionsrecommendationsare based on a comparison between public debt management in the respective country andglobal best practice. In contrast to that approach, this section presented the evaluation ofcountryexperts.Theiropinionisespeciallyimportantbecausetheexpertsmightbepotentialinvestors,i.e.thoseworkingatfinancialinstitutionsandfirms,ortheymayinfluencethepublicview of the functioning of public debt markets, i.e. those working at think tanks, researchinstitutesanduniversities.Ifgovernmentssucceedinimprovingexperts’assessmentofpublicdebtmarkets,theymayalsobeabletoexpandtheinvestorbaseandissuedebtatalowercost.

ImprovingPublicDebtManagementIntheOICMemberCountries

44

3 Public Debt Management in the OIC Member Countries

Thischapterexaminespublicdebtdevelopments,debtstructuresandperformanceindicatorsfor public debt management in the OIC member countries. Section 3.1 describes how debtlevelsandstructureshaveevolvedintheOICmembercountriessince2006.Thestructureandperformance of public debt might depend on the underlying institutional framework.Therefore,governancestructuresandpublicdebtmanagementstrategiesarediscussedbasedon a survey among OIC member countries in Section 3.2. Islamic finance has become animportantpartofthefinancialsystemsinseveralOICcountries.Consequently,IslamicfinancepracticesinOICmembercountrieswillbedescribedandtheadvantagesanddisadvantagesofusingsovereignIslamicbonds(sukuk)inpublicdebtmanagementwillbediscussedinSection3.3.

3.1 Descriptive Statistics and Performance Indicators

ThischapterdescribeshowlevelsofsovereigndebthaveevolvedovertimeintheOICmembercountries. Moreover, it presents data on government budget balances and provides stylizedfacts of the structure of sovereign debt, including but not limited to its maturity, currencydenominationandcreditorstructure.Toexaminewhetherdevelopmentsdependonthelevelofincome,whichiscommonlyregardedasameasureofacountry’sstageofdevelopment,andto identify potential common features, countries are grouped into low­, middle­, and high­incomecountries.Furthermore,countriesaregroupedaccordingtotheOICclassificationintotheArab,AfricanandAsianregion.

3.1.1 Public Debt Dynamics

Figure3­1showstheevolutionofsovereigndebtasapercentageofGDPfortheOICmembercountries over the period 2006­2015 including projections until 2017. The upper panel ofFigure3­1showstwodifferentmeasuresofaveragedebtlevels.Thebluelinecorrespondstothe unweighted average of public debt relative to GDP across OIC countries. The red linedisplays the ratio of the sum of public debt in all OIC countries relative to GDP of all OICcountries.Afteramoderatedeclinebetween2006and2012,theaveragedebt­to­GDPratiointhe OIC member states started to increase slightly in 2013. The average debt­to­GDP ratioincreasedfrom36.7%in2012to46.1%in2015andisprojectedtoriseto51.1%in2017.Thisisasubstantialincreaseoverthisshorttimeperiod.

Since2006theaveragedebt­to­GDPratioinhighincomeOICcountrieshasbeenlowerthaninlow­and middle­income countries (see lower left panel of Figure 3­1). Average debt­to­GDPratiosinlow­andmiddle­incomecountriesareatsimilarlevelsinmostyears.Averagedebt­to­GDP ratios have started to increase across all income groups after 2013. The highestaverage debt­to­GDP ratios are expected in low­income countries in the next years, whileaveragedebt­to­GDPratiosinthemiddle­incomecountriesareexpectedtodecrease.Thehigh­incomecountriesareexpectedtoexperiencethe largest increase intheaveragedebt­to­GDPratio.Differentdynamicscanalsobeobservedamongtheregionalcountrygroups:debtratiosintheAfricangrouphavesubstantiallydecreasedbetween2006and2009andhavebeenonlyslightly rising again afterwards. Several African countries have been granted debt relief orrestructuring under the Heavily Indebted Poor Countries (HIPC) Initiative or by externalbilateralandmultilateralcreditorsoverthelastdecade.7Theaveragedebt­to­GDPratiointhe

7Onsovereigndebtrestructurings,see,e.g.,Dasetal.(2012).

ImprovingPublicDebtManagementIntheOICMemberCountries

45

Asian grouphas beenon a relativelystable path. The average debt­to­GDP ratio in the Arabgroup,however,hasbeenstronglyincreasingsince2014(seelowerrightpanelofFigure3­1).

Figure 3-1: Gross Public Debt in OIC Member Countries

Sources: WEO (2016), calculations by the Ifo Institute.

TheamountofoutstandinggrosspublicdebtasashareofGDPisveryheterogeneousamongthe OIC countries. Figure 3­2 shows the public debt­to­GDP ratios in the individual OICcountriesin2015.Thehighestdebt­to­GDPratioswereobservedinLebanon(139.1%),Jordan(91.7%),Gambia(91.6%)andEgypt(87.7%).Thelowestdebt­to­GDPratioswereobservedinBruneiDarussalam(3.1%),SaudiArabia(5.8%),Afghanistan(6.8%)andAlgeria(8.7%).

0

10

20

30

40

50

60

Share

of

GD

P (

in %

)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

Public debt over GDP averaged across countries OIC public debt over OIC GDP

Projections

0

10

20

30

40

50

60

Sh

are

of G

DP

(in

%)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

All Low income

Middle income High income

Projections

0

10

20

30

40

50

60

Sh

are

of G

DP

(in

%)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

All Arab Group

Asian Group African Group

Projections

ImprovingPublicDebtManagementIntheOICMemberCountries

46

Figure 3-2: Gross Public Debt in OIC Member Countries (2015)

Note: Data for Somalia and Syria is not available. Sources: WEO (2016), IMF Country Reports (see 4.1 Case Studies).

3.1.2 Government Budgets

To disentangle the effects of fiscal policy on government debt from exchange rate effects,governmentbudgetbalancesisconsidered.TheupperpanelofFigure3­3showsgeneralandprimarygovernmentnet lendingwhichexcludesinterestpaymentsonoutstandingdebt.Theaveragegovernmentnet lendingoftheOICcountrieswaspositiveorbalancedinmostyearsbetween2006and2012.Duringthe financialcrisisin2009and2010,however, theaveragegeneral net lending turned negative. Net borrowing started to increase strongly in 2013.Between2013and2015averageborrowingasashareofGDPincreasedfrom1.2%to6.3%.While high­income OIC countries ran large surpluses between 2006 and 2014, the situationchangeddramaticallyin2015andtheaveragebudgetbalanceturnednegative(seelowerleftpanel of Figure 3­3). The average budget balance in low­ and middle­ income countries hasbeennegativeinallyearssince2009.Low­andmiddle­incomecountriesexperiencedafurtherdeterioration of their budget balances in the last years, a development more pronounced inmiddle­income countries. Across all regional groups a decline in the budget balance can beobserved,withtheaveragenetlendingbeinglargestintheArabgroupin2015(seelowerrightpanelofFigure3­3).

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

Sh

are

of G

DP

(in

%)

Brunei

Dar

ussalam

Saudi A

rabia

Afgha

nistan

Alger

ia

Kuwait

Uzbek

istan

Niger

ia

Om

an Iran

Unite

d Ara

b Em

irate

s

Turkm

enistan

Kazakh

stan

Comor

os

Indo

nesia

Burkina F

aso

Turke

y

Camer

oon

Banglad

esh

Côte

d'Ivo

ire

Uganda

Qata

r

Tajik

ista

n

Azerb

aijan

Mali

Benin

Chad

Palestine

Surin

ame

Niger

Gabo

n

Sierra

Leo

ne

Guin

ea

Guy

ana

Tunisia

Djibout

i

Senega

l

Malay

sia

Guinea

-Bissa

u

Togo

Bahra

in

Mor

occo

Pakista

n

Liby

aIra

q

Yemen

Kyrgy

z Rep

ublic

Sudan

Alban

ia

Mald

ives

Maur

itania

Moza

mbiqu

e

Egypt

Gam

bia

Jord

an

Leba

non

ImprovingPublicDebtManagementIntheOICMemberCountries

47

Figure 3-3: Government Net Lending in OIC Member Countries

Sources: WEO (2016), calculations by the Ifo Institute.

Whatgivesrisetotheincreasingdeficitsanddebtlevelsinthehigh­incomecountriesandtheArabcountrygroup?Severalofthesecountriesstronglydependonoilrevenues.Thedeclineinoilpricesstartingin2014hashadandwillcontinuetohaveasubstantialnegativeimpactontheeconomiesoftheoil­producingcountries.Figure3­4showstheaveragenetlendingintheoilproducingOIC countries since 2006, as well as the decline intheoilprice perbarrelandfiscalbreak­evenoilpriceswhichoilproducingOICcountriesneedtobalancetheirbudgets.

-10

-5

0

5

Sh

are

of

GD

P (

in %

)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

General balance Primary balance

Projections

-20

-10

0

10

20

Sh

are

of G

DP

(in

%)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

Low income Middle income

High income

Projections

-15

-10

-5

0

5

Sh

are

of G

DP

(in

%)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

Arab Group Asian Group

African Group

Projections

ImprovingPublicDebtManagementIntheOICMemberCountries

48

Figure 3-4: Oil Price Developments and Net Lending

Sources: Regional Economic Outlook (2016), WEO (2016), OPEC (2016), Bloomberg (2015), RAM Ratings (Brunei) (2017), calculations by the Ifo Institute.

SeveraloilrichOICcountrieshaveaccumulatedsubstantialgovernmentassets,whichcanbeusedtoabsorbtheincurringdeficits.ThecapacityofOICcountriestoabsorbdeficitsbysellinggovernment assets and the deterioration of fiscal buffers in some countries is illustrated inFigure3­5,whichshowsnetdebtasashareofGDPcalculatedasgrossdebtminusgovernmentassets.8NetdebtinOICcountrieshasincreasedsince2014,whengovernmentsstartedtosellassetstofinancebudgetdeficits.

8Generalgovernmentnetdebtreferstogrossdebtofthegeneralgovernmentminusitsfinancialassetsintheformofdebt

instruments.Examplesoffinancialassetsintheformofdebtinstrumentsincludecurrencyanddeposits,debtsecurities,loans,insurance,pension,andstandardizedguaranteeschemes,andotheraccountsreceivable.

Libya

Brunei

Algeria Bahrain

Oman Saudi ArabiaKazakhstan

Iran

UAEIraq

QatarKuwait AzerbaijanTurkmenistan

Nigeria

-10

-5

0

5

10

Sh

are

of G

DP

(in

%)

0

25

50

75

100

125

150

175

200

U.S

. D

olla

rs

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Year

Oil price per barrel (left)

Fiscal break-even oil price per barrel (left)

Average net lending in oil producing OIC countries (right)

ImprovingPublicDebtManagementIntheOICMemberCountries

49

Figure 3-5: Net Debt in OIC Member Countries

Sources: WEO (2016), calculations by the Ifo Institute.

Todealwithloweroilrevenues,governmentshavetakenvariousfiscaladjustmentmeasuresincludingcutsoncurrentandcapitalspending(see,e.g.,Sommeretal.2016a).Governmentshavealsoincreasedtaxestotacklefiscaldeficits.Forexample,theGCCcountrieshavereacheda general agreement to introduce a GCC­wide value­added tax (VAT), which could be aneffectiveinstrumenttoincreasefiscalrevenues(Alreshanetal.2015,Sommeretal.2016b).Ina similar vein, introducing or increasing direct taxes, such as personal or corporate incometaxes,mighthelpreducefiscaldeficits.Inadditiontothemeasuresmentionedabove,mostGCCcountrieshaveincreasedchargesordecreasedsubsidiesforfuel,waterandelectricity.

3.1.3 Debt Structures

Thestructureofpublicdebtprovidesimportantinformationabouttherisksentailedinpublicindebtedness in the OIC countries. Creditor structures, maturity structures, the currencycompositionandinteresttypesofpublicdebtintheOICmembercountriesareconsidered.

Creditors

The average share of domestic debt inOIC memberstateshasslightly increased since 2006andwas42.2%in2015(seeFigure3­6).TheshareofdomesticcreditorsinOICcountriesliesabovetheworldwideaverage.Low­incomecountrieshaveahighershareofexternalcreditorsthan middle­ and high­income countries. In high­income countries the share of domesticcreditorshasincreasedsince2008andamountedtoabout77.7%in2015.

-30

-20

-10

0

10

20

30

40

50

Sh

are

of

GD

P (

in %

)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

Projections

-150

-100

-50

0

50

Share

of G

DP

(in

%)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

All Low income

Middle income High income

Projections

-150

-100

-50

0

50

Share

of G

DP

(in

%)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

All Arab Group

Asian Group African Group

Projections

ImprovingPublicDebtManagementIntheOICMemberCountries

50

Figure 3-6: Creditor Structure of Public Debt in OIC Member Countries

Sources: IMF Country Reports (see 4.1 Case Studies), national central banks, national Ministries of Finance, Moody’s, World Bank (2016) International Debt Statistics, calculations by the Ifo Institute.

OIC member countries differ considerably in their creditor structures. Figure 3­7 shows thesharesofdomesticandexternaldebtintheOICmembercountriesin2015.AllpublicdebtinSaudiArabiawasowedtodomesticinstitutions,andinBahrain,EgyptandIranexternalpublicdebtaccountedforlessthan10%oftotalpublicdebtin2015.However,someofthecountrieswhich were indebted mainly domestically plan to or already did access international debtmarkets. For example, Saudi Arabia also introduced a debt management office, which wasresponsible for the first international bond sale in 2016. Iran is planning to return tointernationaldebtmarkets.Ontheotherhand,severalOICcountriesrelyheavilyonexternaldebt. Afghanistan’s and Uzbekistan’s public debt comprised completely of external debt in2015.IntheKyrgyzRepublic,Djibouti,MauretaniaandAzerbaijanlessthan10%oftotalpublicdebtisdomestic.

0

20

40

60

80

100

%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

All income levels

0

20

40

60

80

100

%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

Low income

0

20

40

60

80

100

%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

Middle income

0

20

40

60

80

100 %

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

High income

Domestic creditors External creditors

ImprovingPublicDebtManagementIntheOICMemberCountries

51

Figure 3-7: Creditor Structure of Public Debt by Country (2015)

Note: Data for Brunei Darussalam, Kuwait, Libya, Palestine, Somalia, Turkmenistan, and UAE is not available. Sources: IMF Country Reports (see 4.1 Case Countries), national central banks, national Ministries of Finance, Moody’s, World Bank (2016) International Debt Statistics, calculations by the Ifo Institute.

GrantElement

Figure3­8showsthegrantelementofloans,definedasthegrantequivalentasapercentageoftheamountcommitted.TheaveragegrantelementinOICcountrieshasbeenabout50%since2006, similar to the worldwide average. Grants are primarily extended by official creditors,whileprivatecreditcontractshaveasmallgrantelement.Grantstolow­incomecountriesaremoregenerousthantomiddle­incomecountries(seelowerleftpanelofFigure3­8).ThegrantelementisparticularlyhighintheAfricangroup(seelowerrightpanelofFigure3­8).

0

10

20

30

40

50

60

70

80

90

100

Sh

are

of to

tal pu

blic

de

bt (i

n %

)

Saudi A

rabia

Bahra

in

Egypt

Iran

Leba

non

Niger

iaSyr

ia

Qat

ar

Kazak

hsta

n

Yemen

Pakista

n

Maldi

ves

Turk

ey

Guine

a-Biss

au

Jord

an

Banglad

esh

Malay

sia

Guine

aTo

go

Alban

ia

Surin

ame

Mor

occo

Gam

bia

Indo

nesia

Chad

Om

an

Côte

d'Ivo

ire

Tunisia

Ugand

a

Benin

Iraq

Camer

oon

Seneg

al

Sierra

Leo

ne

Burkina

Fas

o

Guy

ana

Niger

Mali

Alger

ia

Gab

on

Moz

ambiqu

e

Tajik

istan

Sudan

Comor

os

Mau

ritan

ia

Djibou

ti

Kyrgy

z Rep

ublic

Azerb

aijan

Afgha

nistan

Uzbek

istan

Domestic creditors External creditors

ImprovingPublicDebtManagementIntheOICMemberCountries

52

Figure 3-8: Grant Element in OIC Member Countries

Sources: World Bank (2016) International Debt Statistics, calculations by the Ifo Institute.

Refinancingrisk

Maturity structure

Theshareofshort­termdebt(debtwithanoriginalmaturityofoneyearorless)hasdecreasedoverthelastdecadeintheOICmembercountries,amountingto10.2%ofoutstandingdebtin2015.Thisshareisslightlyhigherthantheworldwideaverageof7.5%.

Figure 3­9 shows the average maturity of all new public and publicly guaranteed loanscontracted by OIC countries during each year for 2006­2014. The average maturity of newdebt commitments has fluctuated between 18 and 23 years. Private creditors extend theircredit for an average period of approximately four years. This average maturity for privatecredits lies belowtheworldwideaverageof fiveyears.Creditorswhoprovidetheir financialresourcesforperiodsexceedingadecadearetypicallyofficialcreditorssuchasinternationalorganizations (e.g. the World Bank, regional development banks and other multilateral andintergovernmentalagencies)andgovernments.Thematurityofnewcontractsissignificantlylargerinlow­incomecountriesthaninmiddle­incomecountries,whichmightbeexplainedbythe larger share of official creditors in low­income countries (see lower left panel of Figure3­9).Consequently,theaveragematurityofnewcontractsislargerintheAfricangroup,whichmayalso beexplained bya largershareofofficial creditors (see lowerright panel of Figure3­9).

10

20

30

40

50

%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

All creditors Official creditors Private creditors

0

10

20

30

40

50

60

%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

All Low income

Middle income

30

40

50

60

70%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

All Arab group

Asian group African group

ImprovingPublicDebtManagementIntheOICMemberCountries

53

Figure 3-9: Maturity of New External Debt Commitments in OIC Member Countries

Sources: World Bank (2016) International Debt Statistics, calculations by the Ifo Institute.

Interestraterisk

Interest rates

Overthelastdecade,manyOICcountrieshadfixedinterestrates.Since2010theshareofloanswithfixedinterestratesintotalloanshasbeenalmost100%inOICcountries.

TheupperpanelofFigure3­10showsthattheaverageinterestrateonpublicdebthasbeenrelatively stable and low in OIC countries over the last decade (on average about 1.8% in2014). Official creditors lend at preferential rates (on average about 1.2% in 2014). Theaverageinterestrateforprivatecreditsdecreasedto3.9%in2014,aratebeinghigherthanthe worldwide average. Low­income countries face lower interest rates than middle­incomeonespresumablybecausetheyhaveaccesstoconcessionallendingaswellasdevelopmentandpromotionalloans.AverageinterestratesintheArabandAsiangrouphavedecreasedoverthelast years, while average interest rates in the African group have increased since 2006 (seelowerrightpanelofFigure3­10).

5

10

15

20

25

In y

ears

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

All Official creditors Private creditors

15

20

25

30

In y

ea

rs

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

All Low income

Middle income

10

15

20

25

30

35In

ye

ars

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

All Arab group

Asian group African group

ImprovingPublicDebtManagementIntheOICMemberCountries

54

Figure 3-10: Interest Rates on Public Debt in OIC Member Countries

Note: The graph displays the average interest rate on newly committed public debt contracts in a given year. Sources: World Bank (2016) International Debt Statistics, calculations by the Ifo Institute.

CurrencyRisk

Currency composition

The currency composition determines the effects of exchange rate changes on public debt.Figure3­11showsthecurrencycompositionofexternalpublicdebtintheOICcountriesoverthe period 2006­2014. In 2014, the largest share of external debt in OIC countries wasdenominatedinU.S.Dollars(51.3%),followedbyEuro(15.4%),SpecialDrawingRights(6.6%)and Japanese Yen (3.2%). The share of external public debt denominated in U.S. Dollar andSpecial Drawing Rights (SDR) has increased between 2006 and 2014 while the share ofexternalpublicdebtdenominatedinEurohasbeenrelativelyconstant.Theshareofexternalpublic debt denominated in Japanese Yen has decreased. The share of external debtdenominatedinEuroishigherinmiddle­incomecountriesthaninlow­incomecountries(seelower leftpanel of Figure3­11). In low­income countries the share ofSDR ishigher than inmiddle­incomecountries.

0

2

4

6

8

%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

All Official creditors Private creditors

0

2

4

6

8

%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

All Low income

Middle income

1

2

3

4

%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

All Arab group

Asian group African group

ImprovingPublicDebtManagementIntheOICMemberCountries

55

Figure 3-11: Currency Composition of External Public Debt in OIC Member Countries

Sources: World Bank (2016) International Debt Statistics, calculations by the Ifo Institute.

Figure 3­12 shows the currency composition of external public debt in individual OICcountries. Lebanon, Guyana, Indonesia and the Central Asian countries Kazakhstan, KyrgyzRepublic, Azerbaijan and Tajikistan mainly rely on external public debt denominated in U.S.Dollars.AlbaniaandtheNorthAfricancountriesAlgeria,MoroccoandTunisiamainlyrelyonexternaldebt denominated in Euro. Othercountries, such as Bangladesh, Guinea, and Sudanhavemorediversifiedcurrencystructuresoftheirexternalpublicdebt.

0

20

40

60

80

100

%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

All countries

0

20

40

60

80

100

%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

Middle income

0

20

40

60

80

100

%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

Low income

USD Multiple Yen SDR

Pound DM FFranc SFranc

Euro Unspecified

ImprovingPublicDebtManagementIntheOICMemberCountries

56

Figure 3-12: Currency Composition of External Public Debt by Country (2014)

Note: Data for Bahrain, Brunei Darussalam, Iraq, Kuwait, Libya, Oman, Palestine, Qatar, Saudi Arabia, Suriname and the UAE is not available. Source: World Bank (2016) International Debt Statistics.

3.2 Institutional Frameworks

Todescribepublicdebt management objectives inmoredetail intheOIC countries, aPublicDebtManagementSurveywascarriedoutbytheIfoInstitutefromAugusttoDecember2016.Thesurveyincludedquestionsontheinstitutionalframeworkofpublicdebtmanagementandstrategictargetsandbenchmarks(seeFigureA­0­2intheAppendixA).9WiththehelpoftheCOMCEC Coordination Office and the German embassies in the respective OIC membercountries, this survey was sent to institutions and persons responsible for public debtmanagement in the individual countries. The survey was answered either directly by debtmanagers in the individual countries or by using information from debt managementstrategiesandotherdocumentswhichwerepubliclyavailable.UntilFebruary2016thesurveywas(partly)filledoutfor37OICmembercountries(71.1%ofallOICmembercountries).10

9ThesamequestionsonstrategictargetsandbenchmarksasCabral(2015)areused.

10 Thesurvey was filledoutby debt managers from Azerbaijan, Bangladesh, Benin, Chad, Côte d’Ivoire, Egypt, Indonesia,Kazakhstan,Malaysia, Mauretania,Nigeria, Oman, Senegal,Tajikistanand Turkey. Using information from public debtmanagementstrategydocuments,surveyresultsfromCabral(2013)andotherpublicinformationthesurveycouldbe(partly)filledoutfor22furtherOICmembercountries.

0

10

20

30

40

50

60

70

80

90

100

Sh

are

of e

xte

rna

l d

eb

t (in

%)

Alger

ia

Benin

Tunisia

Moro

cco

Alban

iaSyr

ia

Burkina F

aso

Mali

Togo

Mald

ives

Com

oros

Cam

eroo

n

Turk

meni

stan

Mala

ysia

Iran

Senega

l

Djib

outi

Gam

bia

Banglade

sh

Maur

itania

Ugan

da

Guin

ea-B

issa

u

Somal

ia

Guin

ea

Côte

d'Iv

oire

Pakistan

Sudan

Egypt

Nig

er

Gab

on

Yemen

Turkey

Sierra

Leon

e

Uzb

ekistan

Chad

Jord

an

Moza

mbiqu

e

Azerb

aijan

Afgha

nista

n

Nig

eria

Indon

esia

Kyrgy

z Rep

ublic

Tajikista

n

Guy

ana

Leba

non

Kazakh

stan

U.S. dollars Euro

Pound sterling Swiss franc

Japanese yen Multiple currencies

Other currencies SDR

ImprovingPublicDebtManagementIntheOICMemberCountries

57

GovernanceandStrategyDevelopment

Legal framework and managerial structure

In most OIC member countries, a specialized department at the Ministry of Finance isresponsible for public debt management. Alternatively or additionally, in a number ofcountriesadepartmentatthecentralbankcarriesoutdebtmanagementoperations.However,onlyafewcountrieshaveestablishedfullyindependentdebtmanagementoffices.Incontrast,in several countries not one single entity is responsible for public debt management, butseveraldepartmentsindifferentinstitutionsandcommittees,mostlylocatedattheMinistryofFinanceandthecentralbank,sharerelevanttasks.

Debt management strategy

AmongtheOICmembercountries,62%haveestablishedaformaldebtmanagementstrategy(seeFigure3­13).Thisshareissimilartotheworldwideaverageof60%(Cabral2015).Amongthe OIC member countries with a formal public debt management strategy, 78% havepublished this document and 67% use strategic targets and benchmarks. The latter share islowerthantheworldwideaverageof77%(Cabral2015).

Figure 3-13: DeM Strategies in OIC Member Countries

Formal Debt Management Strategy

Use of Strategic Targets

Note: 37 observations. Sources: Ifo Public Debt Management Survey (2016), public debt management strategies, Cabral (2015).

AmongtheOICmembercountrieswithaformalpublicdebtmanagementstrategy,62%haveset targets for currency risk, 57% have set targets for refinancing risk, and 52% have settargets for interest rate risk (see Figure 3­14). In contrast, the worldwide survey by Cabral(2015) showed that it is most common to set strategic targets for refinancing risk (66%),followedbyinterestraterisk(56%)andcurrencyrisk(50%).Targetsusedforcurrencyriskincludetheshareofforeigncurrencydebtintotaldebt,whiletargetsusedforinterestrateriskincludetheshareoffixedinterestdebtintotaldebtandtheaveragetimetorefixing.Finally,targetsusedforrefinancingrisk includeaceilingonmaturingdebtwithinoneyear(in%oftotaloutstandingdebt)andtheaveragetimetomaturity.

Yes62%

No38%

Yes67%

No33%

ImprovingPublicDebtManagementIntheOICMemberCountries

58

Figure 3-14: Use of Strategic Targets by Type of Risk

Note: 21 observations. Sources: Ifo Public Debt Management Survey (2016), public debt management strategies, Cabral (2015).

3.3 Islamic Finance in Public Debt Management

3.3.1 Islamic Finance

IslamicfinancehasbecomeanimportantpartofthefinancialsysteminseveralOICcountries.Broadly speaking, Islamic finance is based on sharia rules (see also Table G­0­2 in theGlossary). An important difference between Islamic finance and conventional finance is theavoidance of interest based finance instruments. The Islamic finance system relies onpartnershipandrisksharing,whichmeansthatthepurchaserofanIslamicbondparticipatesin the profits or losses of the underlying asset (principle of profit­and­loss­sharing). Profitsand losses areconnectedto real economicactivitiesandeconomic risks (LewisandAlagoud2001). As returns on investment should be derived from proprietary risk taking, not frompurely financial risks, Islamic finance promotes realeconomicactivity(Songand Oosthuizen2014).11

Between2000and2015,theamountofglobalassetsofIslamicfinanceincreasedbymorethanthe twentyfold (see Figure 3­15). The global financial crisis starting in 2007 only slightlymoderated the growth of Islamic finance assets. The majority of Islamic finance institutionsremainedrelativelyimmunetothenegativeeffectsofthefinancialcrisis(Baeleetal.2014,OIC2012,SongandOosthuizen2014).Islamicbanksdidnotownsignificantamountsofsubprimeandothertoxicassets(COMCEC2016a,WorldBank2012).

In 2015, global assets of Islamic finance are estimated to total $1.88 trillion (compared toabout$1.81trillion in2014).The breakdownof Islamic financeassets in2015 isas follows:$1,497 billion for banking assets, $291 billion for outstanding sukuk (meant as a broadcategory for Islamic finance bonds), $71 billion for Islamic fund’s assets and $23 billion fortakaful (meant as a broad category for Islamic finance insurance). The relatively moderateincreaseofIslamicfinanceassetsin2015wascausedbyexchangeratedepreciationsinlargeIslamicfinancemarkets,thewithdrawalofamajorissuerofsukukbonds,namelytheCentral

11 Besides the prohibition of any kind of interest, Islamic finance is bound to shariah­approved activities. Investment in

certain areas, for example drugs or gambling, is forbidden. Social justice and the sanctity of contracts are importantprinciples,too(SongandOosthuizen2014).Ambiguouscontracts,forexample,arenotallowedunderIslamicprinciplesin order to prevent excessive uncertainty in contracts, to increase transparency and to prevent defraud (Mohieldin2012).

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Currencyrisk

Refinancingrisk

Interestraterisk

OICMemberCountries Worldwide

ImprovingPublicDebtManagementIntheOICMemberCountries

59

BankofMalaysia),andoveralldownwardpressuresintheglobalequitymarkets(IFSB2016).TheIslamicfinancesectorisforecastedtocontinuegrowingstronglyinthefuture:until2020,Islamicfinanceassetsareprojectedtoreach$3.25trillion(Reuters2015).

Figure 3-15: Global Assets of Islamic Finance

Note: Data for banking and takaful in 2015 refers to 2015H1, data for sukuk and Islamic funds refers to 2015M11. Projections for sukuk, Islamic funds and takaful are not available for 2020. Sources: IFSB (2016), OIC (2012), Reuters (2015), calculations by the Ifo Institute.

Islamicbanksaresupposedtofocusonasset­basedintermediationandrisksharing,whereasconventional banks conduct debt­based intermediation and rather focus on risk transfers(López et al. 2014). However, Islamic banks may sometimes mimic the characteristics ofconventional lending products while complying with sharia principles. A large share of theliabilitysideofIslamicbanksisbasedonprofitandlosssharing(Baeleetal.2014).Ingeneral,Islamic banks invest mostly by engaging in trade and industrial activities. Investments arebased on partnerships or on shared profit agreements with depositors (Lewis and Algaoud2001). Islamicbankstendtobebettercapitalized(Becketal.2010)andfinanciallystronger(Čihák and Hesse 2010) than conventional banks. Moreover, Islamic finance limits excessiverisk­takingandleverage(Baeleetal.2014).

To illustrate the size and importance of the Islamic banking sector, Figure 3­16 shows theIslamicbankingshareintotalbankingassetsforindividualcountries.Abankingshareof15%ormoreindicatesthattheIslamicfinancialsectorissystemicallyimportantintherespectivecountry. As the whole financial systems in Iran and Sudan rely on Islamic principles, theIslamic banking share is 100% in both countries. Other countries have established mixedsystems consisting of conventional banks and sharia compliant banks (see also COMCEC2016b).Figure3­17showsthatIranhadthelargestshareofworldwideIslamicbankingassetsin 2015 (37.3%), followed by Saudi Arabia (19%), Malaysia (9.3 %) and the United ArabEmirates(8.1%).

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Bill

ion

U.S

. dol

lars

2000 2011 2012 2013 2014 2015 2020

Total assets

Banking assets

Sukuk (bonds)

Islamic funds, Takaful (insurance) and other assets

ImprovingPublicDebtManagementIntheOICMemberCountries

60

Figure 3-16: Islamic Banking Share in Total Banking Assets by Country (2015H1)

Source: IFSB (2016, p. 8).

Market shares of the Islamic bankingsectorareexpectedtogrowbyaconsiderable amountoverthenextyearsinSaudiArabia,Malaysia,theUnitedArabEmirates,Kuwait,Turkey,andIndonesia,whilestabilizinginBahrain,PakistanandQatar.Ingeneral,worldwidegrowthratesoftheIslamicfinancesectorhaveexceededgrowthratesoftheconventionalbankingsectorby190%onaverage.TheaverageannualgrowthrateoftheIslamicbankingsectorisestimatedtoequal19%between2014and2019acrossQatar,Indonesia,SaudiArabia,Malaysia,theUnitedArab Emirates and Turkey (Ernst & Young 2015). Islamic banks also operate in countrieswhereMuslimsonlyaccountforaminorityofthepopulation,e.g.,inKenya,SouthAfricaortheUnitedKingdom.Islamic finance isoftenconsideredapromising innovationandaddressesasubstantialminorityinthesecountries(LewisandAlgaoud2001,SongandOosthuizen2014).In theEurozone,anIslamicbankhasopened inGermany,whileplans foranIslamicbankinLuxembourgarebeingdeveloped(COMCEC2016a).

ImprovingPublicDebtManagementIntheOICMemberCountries

61

Figure 3-17: Shares of Global Islamic Banking Assets by Country (2015)

Source: IFSB (2016, p. 9).

3.3.2 Islamic Bonds

Sukukareprivateorpublic financialcertificatescommonlyreferred to as"sharia compliant"bonds. Sukuk are defined by the Accounting and Auditing Organization for Islamic FinancialInstitutions (AAOIFI) as “certificates of equal value representing undivided shares in theownership of tangible assets, usufructs and services or (in the ownership of) the assets ofparticular projects or special investment activity” (AAOIFI 2008). In contrast to commonbonds,sukukdonotpayinterest.Theinvestorratheracquiresashareoftheunderlyingprojectthat the sukuk bond is linked to. Investors either participate in profits in the form of equityholdings of the underlying asset or project, or in other forms of profit and loss sharing thatyield flexible returns on the investment (musharakah). Another possibility is to earn fixedincomebyreceivingrentalpaymentsfromtheissuer,similartoleasing(ijarah),orbyengaginginaformoftrustfinancing(mudarabah).Attheendofthecontractterm,theissuerrebuystheinvestor’sshareoftheassetat facevalue(LewisandAlgaoud2001).Sovereignsukukcanbeconnectedtoprojectsthatyieldanassessablerateofreturn,forexampleafactoryoratradingcompany(mudarabah), and to projects that do not yield a readily identifiable rate of returnsuch as, for example, schools (ijarah). In both cases, investors that buy the sukuk certificatebecome co­owners (see also Table G­0­3 in the Glossary). Securities that allow investors toparticipate in government revenues in return for their investment in public services areanothercommonfundinginstrument(Sundararajanetal1998).

Thefirstsukukissuancebyagovernmenttookplacein2002inMalaysiaandhasbecomemorecommon since then (Jobst et al. 2008). Figure 3­18 illustrates the trend of increasing sukukissuance. In 2012 and 2013 the highest amounts of sukuk issuance were observed. In 2014sukuk issuances slowed down and in 2015 sukuk issuances dropped to $60.69 billion. Thedecline in internationalsukuk in2014canpartlybeexplainedbyuncertaintiesontheglobalfinancialmarkets.Additionally,therewereseverallong­termsukukthatmaturedin2014andwerenotre­issued.Themajordeclineoftotalsukukissuancein2015camefromadecreaseindomesticsukukcausedbythedecisionoftheMalaysiancentralbank–themostprolificissuerofsovereignsukuk–tostopitsshort­termliquiditymanagementsukukprogram(IIFM2016).Sukukissuancehitarecordinthefirstquarterof2016inseveralcountries,namelyMalaysia,Indonesia,Turkey,SingaporeandPakistan.Inthesecountries,issuancewasup22%fromthe

37.3

19

9.3 8.15.9 5.1 2.9

1.7 1.6 1.4 1.3 1.2 1 0.6 0.4 0.3

3.1

0

5

10

15

20

25

30

35

40

ImprovingPublicDebtManagementIntheOICMemberCountries

62

fourthquarterof2015(FitchRatings2016).Overall,internationalSukukissuanceamountedtoabout 34.4% of total sukuk issuance ($20,88 billion) while the domestic Sukuk issuanceamounted to 65.6% of total sukuk issuance ($39,81 billion) in 2015 (see upper left panel ofFigure3­18).

The lower left panel of Figure 3­18 shows the breakdown of sukuk issuance by whether theissuerisasovereign,aquasi­sovereign(e.g.,IslamicDevelopmentBank,InternationalIslamicLiquidity Management, World Bank) or a corporation. Sukuk issuances by sovereigns andquasi­sovereignshavemainlycausedthestrongincrease insukuk issuancesince2008(IIFM2016).Thesukukmarkethasshowntobequitestablebetween1990and2014withadefaultrateofonly0.6%.Thereasonforthisresiliencecouldbetheirasset­backedstructure,aswellas the fact that since the 2000s around 80% of sukuk bonds are issued by governments(COMCEC2016a,WorldBank2012).

TheupperrightpanelofFigure3­18showshowoutstanding sukukhasincreasedsince2003.In 2015, total sukuk outstanding have reached $321 billion. About 28.2% of total sukukoutstanding is international ($90 billion) and 71.8% is domestic ($231 billion). Thebreakdown between sovereign/quasi­sovereign and corporate outstanding sukuk is aboutfifty­fifty(seelowerrightpanelofFigure3­18).

ImprovingPublicDebtManagementIntheOICMemberCountries

63

Figure 3-18: Global Sukuk Issuances and Outstanding

Source: IIFM (2016), illustration by the Ifo Institute.

Figure3­19showssovereignissuancesbyjurisdictionin2015.Malaysiaaccountsfor57.6%ofthesovereignsukukvolume,followedbyIndonesia(17.5%),Bahrain(5.6%),theUnitedArabEmirates(4.6%),SaudiArabia(3.8%)andTurkey(3.1%).Thesecountriesalsoaccountforthelargestsharesoftotaloutstandingsukuk(seeFigure3­20).

0

20

40

60

80

100

120

140

Bill

ion

U.S

. dolla

rs

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Global Sukuk Issuance

International Domestic

0

50

100

150

200

250

300

350

Bill

ion

U.S

. dolla

rs

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Global Sukuk Outstanding

International Domestic

0

20

40

60

80

100

120

140

Bill

ion

U.S

. do

llars

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Issuance by Issuer

Sovereign

Quasi-Sovereign

Corporate

0

50

100

150

200

250

300

350

Bill

ion U

.S.

do

llars

Total Domestic International

Outstanding by Issuer

Sovereign

Quasi-Sovereign

Coporate

ImprovingPublicDebtManagementIntheOICMemberCountries

64

Figure 3-19: Sovereign Sukuk Issuance by Country (11M2015)

Source: IFSB (2016, p. 16).

Figure 3-20: Sukuk Outstanding by Country (2015)

Source: IIFM (2016, p. 43).

Many countries are planning on issuing sovereign sukuk to signal their willingness toparticipate in the global Islamic financial sector. New sukuk markets in Africa and East Asiapresent promising opportunities for Islamic finance to access key emerging economies. Forexample, Côte d’Ivoire and Nigeria are planning to follow Senegal’s example and issuesovereignsukuk.EvenChina, Singapore, Hong Kongand Japanare increasingly interested inIslamicfinance(Reuters2015).

Sovereign sukuk are likely to gain popularity in OIC and in non­OIC countries given thatvariousgrowthdriversforthesukukmarketexist(IFSB2013).Animportantfactorisgrowingpreferenceforshariacompliantfinanceproducts,especiallybyIslamicstatefunds.Moreover,the issuance of sukuk bonds serves market development purposes by diversifying domestic

ImprovingPublicDebtManagementIntheOICMemberCountries

65

capital markets and attracting new investors from Islamic countries. Investors also benefitfromnewsovereignsukukissuancesbecauseoftheopportunitytodiversifytheirportfolios.Inthepast,sukukhavebeenlimitedintheirstructuralandregionaldiversity(Jobstetal2008).Governments have provided incentives and initiatives in creating benchmark issuance forsukuk,suchastax­deductibleexpensesandmonthlyshort­termpapersforliquiditypurposes.Sukuk bonds can obtain higher credit ratings because their asset­backed structure links thebondstorealeconomicactivityandreturns.

Among the OIC countries, about 64% use sukuk in public debt management. Among thosecountries participating in the Ifo Public Debt ManagementSurvey,62% plan to increase theshareofIslamicfinanceproductsinpublicdebtmanagementinthenextyears.MalaysiaandCôted’IvoirehaveevensetstrategictargetsfortheuseofIslamicfinanceinstrumentsinpublicdebtmanagement,especiallyconcerningtheshareofIslamicbondsovertotalbonds.

Sukuk allows issuers to raise capital for various purposes, such as funding large­scaleinfrastructure projects. In several Islamic markets, funding gaps and infrastructurerequirements exist. Infrastructureprojects areespeciallysuitable as anunderlyingstructurefor sovereign sukuk bonds given their asset­backed characteristics. Moreover, risk sharingrelatedtotheunderlyingproject ispossible(musharakah),andastructureallowingforfixedreturns,dependingontheinvestor’sriskpreferences(murabahah, ijarah).As investments ininfrastructure are expected to increase in developing and emerging countries with Islamicbanking playing an important role in many of these markets, sukuk issuance related toinfrastructureisexpectedtofurtherincrease(MIFC2013). Inparticular,theGCCcountries–one of the key markets for Islamic finance – are expected to see substantial investments inroads, railways, telecommunication, electricity, water infrastructure, airports and seaportsoverthenextdecade.ThesegovernmentsmaytakeadvantageofIslamicbondstofinancesuchlarge­scale infrastructure investments. Even nowadays, a big portion of sukuk funds arealreadyraisedtofinanceinfrastructureprojectsinGCCcountriesandSoutheastAsia.In2013,forexample,21.2%of total globalsukukwas related to infrastructure. In Malaysia, themostprolificissuerofsukuk,theinfrastructuresharewas73.3%andinSaudiArabia21.9%in2012.The governments of Indonesia, Pakistan, Kuwait and Brunei Darussalam have also raised aconsiderableamountofinfrastructurefundsbyissuingsovereignsukuk(MIFC2013).

However, sukuk have some shortcomings, too. Islamic finance instruments do not alwaysminimizecosts,whichmaybea priority forpublicdebt management. The issuance of sukukgoesalongwithadditionaladministrativecostsandincreasedlegalandaccountingchallenges,becausecashflowsfromrealassetsneedtobe identifiedandtheshariacompliantstructurehas to be administered. Thus, more time is needed for preparing and issuing sukuk bondscomparedtoconventionalbonds.Duetohigheradministrativecosts,sukukareusuallyboughtatahigherpremium(Jobstetal2008).Figure3­21showsthatyieldsonvarioussukukbondswereabovetheyieldofUSgovernmentsecurities.

Duetotheproject­basedstructureofsukukbonds,theirratherinfrequentissuanceandthefactthat sukuk are yet not as widely held by international investors as conventional bonds, thesukukmarketisexposedtotheriskofaninefficientpricesystem.Marketpricesarenotusefulas a reference rate for sukuk bonds with different structures (Sundararajanet al 1998). Thenon­price features that arewarrant toraise the rates of returnmakesukukbonds relativelyilliquid and may restrict the progression of a secondary market. However, market­basedmethods and the presence of vital and efficient primary and secondary markets that useinstruments such as discounting are often essential in the context of cost minimization(Sundararajanetal.1998).

ImprovingPublicDebtManagementIntheOICMemberCountries

66

Theavoidanceofinterestandthesomewhatlimitedsecondarymarketgivesrisetoconcernswithregardstothetradabilityofsukukbonds.Thislimitedtradability,thehighissuancecostsand the rather limited volume of sukuk bonds may constrain market liquidity and hence agovernment’sflexibilityinfiscalpolicyandacentralbank’sflexibilityinmonetarypolicy.

Figure 3-21: Selected USD Sukuk Yields vs. U.S. Government Securities Yield

Note: CBB = Central Bank of Bahrain, DOF = Dubai Department of Finance, SECO = Saudi Electricity Company, SoQ = State of Qatar, Hazine = Hazine Mustesarligi (Turkish Under Secretariat), MGS = Malaysia Global Sukuk Wakalah, US 5Y = US 5-Year Generic Government Yield, US 10Y = US 10-Year Generic Government Yield. Source: IFSB (2016, p. 17).

3.4 Lessons Learned

Theaveragedebt­to­GDPratiointheOICmembercountrieshasincreasedfrom36.7%in2012to 46.1% in 2015 and is expected to rise to 51.1% in 2017. However, the amount ofoutstanding gross public debt as a share of GDP is very heterogeneous among OIC membercountries, ranging between 3% and 139%. The highest average debt­to­GDP ratios areexpected in low­income countries in the next years. Average debt­to­GDP ratios in middle­income countries are expected to slightly decrease. High­income countries are projected toexperiencethelargestincreaseintheaveragedebt­to­GDPratio.Differentdebtdynamicscanalsobeobservedattheregionallevel:severalAfricancountrieshavebeengranteddebtreliefor restructuring in the last decade. Consequently, debt ratios have substantially decreasedbetween 2006 and 2009 in the African group and have only slightly risen again afterwards.The average debt­to­GDP ratio in the Asian group has been on a relative stable path. Theaverage debt­to­GDP ratio in the Arab group has increased since 2014, as the decline in oilpriceshadasubstantialnegativeeffectontheeconomiesofoil­producingcountries.Whilethefiscal buffers of some OIC member countries are expected to be capable of absorbing thebudget deficits potentially following lower oil revenues for a period of years, other OICmembercountriesmayhavetoissuesubstantialamountsofadditionaldebtobligations.

The average grant element in OIC countries has been about 50% since 2006, a share beingsimilar to the worldwide average. Grants are primarily extended by official creditors, i.e.internationalorganizationsandgovernments,whileprivatecreditcontractshaveasmallgrantelement.Grantstolowincomecountriesaremoregenerousthantomiddle­incomecountries.ThegrantelementisparticularlyhighintheAfricangroup.

ImprovingPublicDebtManagementIntheOICMemberCountries

67

The share of short­termdebt in total debt in the OIC membercountrieshas decreased from68.1%in2006to54.5%in2015.Thisshareisslightlyhigherthantheworldwideaverageof52%. Official creditors sign contracts with maturities similar to the worldwide average ataround 21 years on average. Private creditors extend their credit for an average period ofapproximatelyfouryears,whichisbelowtheworldwideaverageoffiveyears.Thematurityofnew debt contracts is significantly larger in low­income countries than in middle­incomecountries, which might be explained by the larger share of official creditors in low­incomecountries. Hence, the average maturity of new contracts is largest in the African regionalgroup.

TheaverageshareofdomesticdebtintotaldebtinOICmemberstateshasslightlyincreasedsince2006andliesataround41.5%in2015,whichisashareabovetheworldwideaverage.Low­income countries have a lower share of domestic debt (31%) than middle­ and high­income countries (41.9%). In high­income countries the share of domestic creditors hasincreasedsince2008andhoveredataround77.7%in2015.However,individualOICmembercountriesdifferconsiderablyintheirsharesofexternaldebt.

ThelargestshareofexternaldebtinOICcountrieswasdenominatedinU.S.Dollars(51.3%),followed byEuro (15.4%),SpecialDrawingRights(6.6%)and Japanese Yen(3.2%) in2014.TheshareofexternalpublicdebtdenominatedinU.S.DollarandSpecialDrawingRights(SDR)hasincreasedbetween2006and2014,whiletheshareofexternalpublicdebtdenominatedinEurohasbeenrelativelyconstant.TheshareofexternalpublicdebtdenominatedinJapaneseYenhasdecreased.

Since2010,OICmembercountrieshavereliedalmostexclusivelyonloanswithfixedinterestrates.TheaverageinterestrateonpublicdebthasbeencomparativelystableandlowinOICmembercountriesoverthelastdecade(e.g.1.9%in2014),butobviouslydifferssignificantlyfordifferentcountries.ThoseOICmembercountriesborrowingfromofficialcreditorsdosoatpreferential rates (on average about 1.2% in 2014). The average interest rate for privatecreditswasabout3.9% in2014,a ratewhich washigher thantheworldwideaverage.Low­incomecountriesfacelowerinterestratesthanmiddle­incomeones,presumablybecausetheyhave access to concessional lending as well as development and promotional loans. Averageinterestrates intheArabandAsiangrouphavedecreasedoverthe lastyears,whileaverageinterestratesintheAfricangrouphaveincreasedsince2006.

IslamicfinancehasbecomeanimportantpartofthefinancialsystemsinseveralOICmembercountries.Mostimportantly,manygovernmentsinOICcountriesusesukukintheirpublicdebtmanagement. Sukuk are financial certificates commonly referred to as "sharia compliant"bonds,whichdonotpayinterest.Theinvestorratheracquiresashareoftheunderlyingassetor project that the sukuk bond is linked to. Overall, several OIC member countries plan toincreasetheshareofIslamicfinanceinstrumentsinthenextyears.

In most OIC member countries, a specialized department at the Ministry of Finance isresponsible for public debt management. Alternatively or additionally, in a number ofcountriesadepartmentatthecentralbankcarriesoutdebtmanagementoperations.However,onlyafewcountrieshaveestablishedfullyindependentdebtmanagementoffices.Incontrast,in several countries not one single entity is responsible for public debt management, butseveraldepartmentsindifferentinstitutionsandcommittees,mostlylocatedattheMinistryofFinanceandthecentralbank,sharerelevanttasks.

ImprovingPublicDebtManagementIntheOICMemberCountries

68

AmongtheOICcountries,62%countrieshaveestablishedaformaldebtmanagementstrategy;thisshareissimilartotheworldwideaverageof60%.AmongtheOICmembercountrieswithaformalpublicdebtmanagementstrategy,78%havepublishedthisdocument.AmongtheOICmembercountrieswithaformalpublicdebtmanagementstrategy,68%usestrategictargetsand benchmarks, which is a share lower than the worldwide average of 77%. Out of thesecountries, 63% have set targets for currency risk, 58% have set targets for refinancing risk,and53%havesettargetsforinterestraterisk.Incontrast,onaglobalview,itismostcommonto set strategic targets for refinancing risk (66%), followed by interest rate risk (56%) andcurrencyrisk(50%).Targetsusedforcurrencyriskincludetheshareofforeigncurrencydebtintotaldebt,whiletargetsusedforinterestrateriskincludetheshareoffixedinterestdebtintotaldebtandtheaveragetimetorefixing.Finally,targetsusedforrefinancingriskincludeaceilingonmaturingdebtwithinoneyear(in%oftotaloutstandingdebt)andtheaveragetimetomaturity.

ImprovingPublicDebtManagementIntheOICMemberCountries

69

4 Public Debt Management in Individual OIC Member Countries

ThischapterexaminespublicdebtmanagementpracticesinindividualOICmembercountries.

The first subchapter includes case studies for15 OIC member countries. The first section ofeachcasestudygivesashortoverviewofpublicdebtdynamicsintherespectivecountry.Thesecondsectiondescribespublicdebtmanagementpractices.TheanalysisreferstotheWorldBank DeMPA Performance Indicators (see Table 1­1) and risk management guidelines fromtheIMF(seeTable1­2).Inthesecondpart,thefirstsubsectionsdescribethelegalframeworkandthemanagerialstructureofdebtmanagement,includingcoordinationwithotherpolicies.Thesectionalsodescribesdebtreporting,contingentliabilitiesandtransparencyaspects.Thesecondsubsectionsdescribethedebtmanagementstrategy, includingriskmanagement.Thethirdsubsectionsgiveanoverviewofdebtoperations,includingadiscussionofIslamicfinanceinstruments used, and describes domestic borrowing. Based on the analysis of public debtmanagementpracticesintheindividualcountries,policyrecommendationsareprovided.Thecase studies are ordered by income groups: low­income (Islamic Republic of The Gambia,Republic of Mozambique, Togolese Republic and Republic of Uganda), lower­middle income(ArabRepublicofEgypt,RepublicofIndonesia,TheFederalRepublicofNigeriaandRepublicoftheSudan),upper­middleincome(RepublicofAlbania,IslamicRepublicofIran,RepublicofKazakhstan,LebaneseRepublicandRepublicofTurkey)andhighincome(SultanateofOmanandKingdomofSaudiArabia).Inthecasestudies,generallycountryshortnamesareused.

The second subchapter compares public debt management practices among the case studycountries.

Finally, the third subchapter compares public debt management practices in countries withIslamicfinancesystemswithcountrieswithconventionalfinancesystems.

ImprovingPublicDebtManagementIntheOICMemberCountries

70

4.1 Case Studies

4.1.1 Islamic Republic of The Gambia

A) Public Debt Dynamics

Between2000and2008,theIslamicRepublicofTheGambiaqualifiedfordebtreliefundertheenhanced Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt ReliefInitiative (MDRI) after having made significant progress in implementing its PovertyReduction Strategy (AfDB 2001, IMF 2008).12 However, between 2010 and 2014 generalgovernmentdebt inGambiasteadily increasedfrom69.6to101.1%ofGDP(seeFigure4­1).Meanwhile,theelevatedgeneralgovernmentdebtlevelhaserodedinternationalreserves.Thegrossofficialreserves’importcoveragehasdeclinedfrom6monthsin2012tobelow3monthsin 2014 (IMF 2015). Even though the debt­to­GDP ratio slightly decreased to 91.6% $804.9millioninabsolutetermsin2015,projectionsforthenextyearsindicateanincreaseindebt.Explicit liabilities also include loans to public enterprises (World Bank 2003). There is nofurtherdataaboutcontingentliabilities.

Gambia historically experienced low levels of economic growth characterized by repeatedweather­relatedshocks.RealGDPgrowthovertheperiod2004­2014wasonaveragelessthan0.5% per year, which is among the lowest in Sub­Saharan Africa (IMF 2015). Large fiscaldeficitscontinuetoimposemajorchallengesforpolicymakers.Afterhavingachievedabudgetsurplusin2007,thefiscalbalancefellintoadeficitexceeding6%ofGDPby2010(AfDBetal.2015).Areformprogram,whichaimedatlimitingthegovernment’sdomesticborrowing,wasset up at the beginning of 2011. Little commitment to the program and loose fiscal policy,however, stalled the implementation of the reform program. The government’s continuedefforts to strengthen revenue administration and to eliminate subsidies for domestic fuelpriceshelpedtoraiserevenues(IMF2015).Despitetheseeffortsontherevenueside,sizableextra­budgetaryspendingpressuresandthefiscalburdenarisingfromfinancialdifficultiesofkeypublicenterprisesincreasedtheoverall fiscaldeficit.Thefiscaldeficit islargelyfinancedbydomesticborrowing,whichincreasedfrom4.4%ofGDPin2012toaround8.6%ofGDPin2013. Interest payments amounted to 22.5% of government revenues in 2012, out of which81% was interest on net domestic debt. The regional Ebola outbreak, together with thedelayedsummerrainsin2014,widenedfiscal imbalancesfurther.Withoutfiscalreformsthemedium­term budgetdeficit is projected to increase to10.8%ofGDP in2015and 11.2% in2016.Thenetdomesticborrowing(NDB)rateisexpectedtoreach12%ofGDPattheendof2014againstthelessthan2.5%projectedatthebeginningoftheyear(AfDBetal.2015).

12 Gambia received debt reliefs of $66.6 million (8.2% of GDP) in 1999 net present value (NPV) terms under the HIPC

Initiative(IMF2008).

ImprovingPublicDebtManagementIntheOICMemberCountries

71

Figure 4-1: Gambia – Public Debt Dynamics

Sources WEO (2016), IMF (2008, 2015), calculations by the Ifo Institute.

05

01

00

150

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Gross Net

Projections

Public Debt

02

55

07

51

00

% o

f to

tal p

ub

lic d

eb

t

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Creditor Structure of Public Debt

Domestic External

-10

-50

51

0

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Net lending

Primary net lending

Net interest payments

Net Lending

02

04

06

08

0100

% o

f e

xt.

pu

blic

de

bt

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Currency Structure of Ext. Public Debt

USD EUR GBP

CHF JPY Mult.

Other SDR

ImprovingPublicDebtManagementIntheOICMemberCountries

72

B) Public Debt Management

GovernanceandStrategyDevelopment

Legal framework

In 2014 the government of Gambia enacted a comprehensive Public Finance Law whichprovidesnecessaryandrequiredstandardlegislationprovisionsforpublicdebtmanagement,protection for the investor community, and strengthens the institutional arrangement ofoveralldebtmanagementprocessesandpractices(MoFEA2015).13Thelawalsoaddressesthemanagement of sub­national and public enterprises’ debt and the roles of the internal andexternalauditaswellastheNationalAssembly.

Managerial structure (incl. coordination with other policies)

TheMinistryofFinanceandEconomicAffairs(MoFEA)istheonlygovernmentbodyallowedto “borrow and/or on­lend money from any legal entity or person and to enter into aguaranteeor indemnitywiththirdparties”(MoFEA2015,p.23).TheMoFEAdeterminestheform, terms, conditions and instruments of borrowing. In issues relating to monetary policythe MoFEA consults the Central Bank of Gambia (CBG). The National Assembly has to ratifyexternalloansandguarantees.TheCBGismainlyabanker,financialadvisorandfiscalagentofthegovernment, “but inaddition issuesdomesticgovernmentsecurities–mainlyT­bills– inthe primary market for implementation of both monetary policy and for funding thegovernment‘sfiscaldeficits”(WorldBank2010,p.16).TheMoFEAandtheCBGcoordinateviavarious communication committees (e.g. High­level Economic Committee, Macro­EconomicCommittee,MonetaryPolicyCommittee,TreasuryBillsCommittee).

TheDirectorateofLoansandDebtManagement(DLDM)attheMoFEAisresponsibleforthemanagement and implementation of public debt operations. The front office at the DLDM isresponsible for resource mobilization (external loans and credits negotiation); the middleoffice is responsible for the preparation of MTDS and coordinating the Debt SustainabilityAnalysis(DSA);andthebackofficeisresponsibleforrecordingandreportingofdebtstatistics.TheDLDMissupposedtoincreaseitscapacitiesandbemoreactiveinreporting,recordingandmanagingdomesticdebtinthefuture(MoFEA2015).

A Public Debt Management Advisory Committee has been established and was fullyoperational in 2014 (MoFEA 2014). The committee is responsible for advising on debtmanagementreforms.Inaddition,theMoFEAisconsideringthecreationofanad­hocworkinggroup with representatives from the MoFEA, CBG and market participants to evaluatedomesticdebtmarketdevelopments(Morachielloetal.2015).

Debt reporting

TheMoFEApublishesanAnnualPublicDebtBulletin,whichincludesacostandriskanalysisofthepublicdebtportfolio(MoFEA2013,2014).Thedebtmanagementstrategydocumentalsoincludes statistics of debt developments and debt structures (MoFEA 2012, 2015). A newcomprehensive database on general government debt, which includes also liabilities ofmunicipalcouncils,iscurrentlybeingplanned(Morachielloetal.2015).

13 Prior to the introduction of the Public Finance Law, the most important legal document referring to public debt

managementinGambiawastheGovernmentBudgetManagementandAccountabilityAct(GBMAAct2004,Article35).

ImprovingPublicDebtManagementIntheOICMemberCountries

73

Debt management strategy (incl. risk management)

TheobjectivesofthedebtmanagementstrategyofGambia,whicharehighlightedinthePublicFinance Law, are primarily to ensure that the government meets its financing needs andpayment obligations at the lowest possible costs over the medium­ to long­term with aprudentdegreeofrisk.Thedebtmanagementstrategyalsopromotesthedevelopmentofthedomestic debt market. The MoFEA created the first MTDS for the years 2010­2012 (MoFEA2012). The 2010­2012 strategy aimed at maximizing domestic borrowing and significantlyreducingexternalborrowing.Externaldebtshouldmainlycomefrommultilateralandbilateralconcessionalsourceswithagrantelementofatleast35%.

Domesticdebtincreasedovertheperiod2010to2012becauseoftheissuanceof(short­term)T­Bills. The domestic debt portfolio was thus prone to high interest and refinancing risks.Consequently, theMTDSof2011­2014focusedonaddressingthechallengesof thedomesticdebtportfolio.ThekeyaimsoftheMTDS2011­2014weretotargetNDBat­0.9%ofGDPattheend of 2014, to reduce domestic borrowing and to lengthen the maturity profile of thedomesticdebtbyintroducingthreeyearnominalbondsand–inthemediumterm­fiveyearbonds(MoFEA2014).TheimplementationoftheMTDS2011­2014wasdifficultduetofiscaldominance and an underdeveloped domestic debt market. Heavy domestic borrowingrequirements gave rise to increasing interest rates and higher refinancing risks because ofhighcostsoflengtheningmaturities(seealsoTable4­1).

Table 4-1: Gambia – Cost and Risk Indicators for the Government's Debt Portfolio (2014)

Type of risk Risk indicator

2010 Baseline

2014 Actual

2014 Targets

Solvency Nominaldebtas%ofGDP 68.3 105.0 59.8PVofdebtas%ofGDP 57.5 90.0 46.1

Cost of debt Impliedinterestrate 5.3 6.0 5.2Refinancing risk ATMexternalportfolio(years) 13 11.1 15.4

ATMdomesticportfolio(years) 3.8 2.6 4.6ATMtotalportfolio(years) 9.1 7.5 12.6

Interest rate risk ATR(years) 9.1 7.3 12.6Debtrefixingin1year(%oftotal) 34.2 40 15.4Fixedratedebt(%oftotal) 100.0 97.1 100.0

Exchange rate risk

FXdebt(%oftotal) 57.0 57.9 72.7STFXdebt(%oftotal) 8.9 15.7 8.4

Note: ATM = Average Time to Maturity; ATR = Average Time to Refixing; FX = Foreign exchange; ST = Short-term. Source: MoFEA (2014).

TheobjectivesoftheMTDS2015­2017aretoreducepublicdebtbydecreasingNDBtowards1%ofGDPand to increase externalborrowings inparticular fromthe concessional window(MoFEA 2015). Based on three different shock scenarios, the risks of four different debtmanagement strategies are evaluated in the MTDS. The favored strategy envisions aprogressive reduction of the NDB to 2% of GDP in 2015, 1% of GDP in 2016 and zerothereafter (MoFEA 2015). Domestic borrowing is financed at 100% by T­Bills and externalborrowing isamixtureofsemi­andconcessionalexternalborrowing.TheMTDS2015­2017furtherdiscouragescentralbankfinancingasitcreatesinflationarypressure(MoFEA2015).

ImprovingPublicDebtManagementIntheOICMemberCountries

74

BorrowingandRelatedFinancialActivities

Operations (incl. Islamic finance)

Gambia issues T­Bills and T­Bonds. T­Bills are available with maturities of 91, 182 and 364days,whiletherearethreematuritiesforT­Bonds(3,10and30years)(AFMI2016).AllT­Billsand T­Bonds can be purchased by foreign investors, as long as they fulfill the general rulesconcerningforeigninvestment(AFMI2016).

Islamic finance is still at an early stage of development in sub­Saharan Africa. The share ofIslamicbanksisstillsmall,andIslamiccapitalmarketsarevirtuallynonexistent.Smallsukukissuances however took place in Gambia (Gelbard et al. 2014). Sukuk-al-salaam (SAS) bills,whichhaveamaturityof91days(AFMI2016),constituted2.96%ofthetotaldomesticdebtstock in 2013 and were first issued in November 2007. The notional asset, on which thefinancialtransactionsofSASbillsarebasedinGambia,isgold.TheCBGisthusempoweredtosellgold and issueSASbillsona bookentrysystem.Thetitle issurrendered backtoCBG atmaturity in exchange of costplus mark­up (World Bank 2010). The minimum investment isGMD25000(about$595)(AFMI2016).

Domestic debt market

Theshareofdomesticdebthasremainedrelativelystablesince2007beingslightlylowerthantheshareofexternaldebt(seeFigure4­1).Domesticdebtconstitutedabout50%ofthetotalpublic debt in 2014 (MoFEA 2014). Gambia uses a relative high portion of external fundingbecauseoftherelativelylowdevelopeddomesticdebtmarketandapolicyaimingtominimizecrowding­outofprivatesectorinvestment.

Fewcommercialbanksdominatethedomesticdebtmarket.About47%oftotaldomesticdebtin 2014 is held by commercial banks, 37.3% by the central bank and 15.8% by non­banks(MoFEA2014).Domesticpublicdebtcomprisesof81%marketableand19%non­marketableinstruments (MoFEA 2014). T­Bills constitute 78% of the domestic debt portfolio (MoFEA2014). The increasing T­Bill holdings of the central bank reflect that the central bank isfinancingthegovernmentdeficit,whichcouldincreasepressureoninflation.

Foreign borrowing

The external debt portfolio is characterized by loans borrowed on concessional and semi­concessionalterms,asGambiahasnotcontracteddebtfromcommercialcreditors.Multilateralcreditorsaccountforalmost70%oftheexternaldebtstock,whilebilateralcreditorsaccountfor 30% (MoFEA 2014). The major multilateral creditors are the Islamic Development Bank(IDB)andtheInternationalDevelopmentAssociation(IDA).ThelargestbilateralcreditorsareChina, Venezuela, India EXIM Bank and the Kuwait Fund for Arab Economic Development.External debt is mainlyused to finance projects and programs of the energy, transportationandagriculturesector.

Theexternaldebtportfolioiscomposedof46.8%ofU.S.Dollars,3.9%ofSDRs,3.8%ofEuros,and45.5%ofothercurrenciesin2014(seeFigure4­1).14Asaresultofthedepreciationofthedalasiagainstallmajortradingcurrencies,theshareofexternalpublicdebtinlocalcurrencyhas increased (MoFEA 2014). The average time to maturity (ATM) of the external debtportfoliois11.1years,whereasthatofthedomesticdebtportfoliois2.6years(seealsoTable

14ValuestakenfromtheWorldBank.TheMTDSdescribesthe followingcurrencycompositionin2014:56%U.S.Dollars,

22%Euros,6%Poundsterling,6%JapaneseYen,5%KuwaitDinars,3%SaudiRiyalsand2%UAEDirham.

ImprovingPublicDebtManagementIntheOICMemberCountries

75

4­1).TheexternaldebtportfoliohashigherATMduetofinancingmostlyfrommultilateralandbilateralcreditors.Therefinancingriskof theexternaldebtportfolio istherefore lowerthanthat of the domestic debt portfolio. The domestic debt portfolio with mostly one yearmaturities poses a high rollover risk (MoFEA 2014). The interest rate exposure, which isindicatedbytheaveragetimeforrefixing(ATR), is2.6years forthedomesticdebtand10.7years for the external debt portfolio (MoFEA 2014). In the domestic debt market variableinterestrateshardlyexist.

While the implied interestrateonexternaldebt isquite lowataround1.7%(MoFEA2014),domesticinterestratesremainhighinGambia,whichistheresultofaconstantcrowdingoutofcreditbythepublicsector(IMF2015).Legalandinstitutionaldifficultiescontributetotheelevateddomesticinterestrates.Currently,theyieldsofT­Billsareequalto15.73%(91­day),16.98%(182­day)and20.17%(364­day).TheratesofreturnonT­BillsandSASbills followtheformofclassicalyieldcurves(seeFigure4­2).

Figure 4-2: Gambia - Yield Curves of T-Bills and Sukuk (2016)

Sources: Central Bank of the Gambia (2016), calculations by the Ifo Institute.

C) Policy Recommendations

Public debt management in Gambia needs to be improved although “efforts are underway”(IMF 2015, p. 9). The government has installed a public debt management office but stillseveral institutions and committees are involved in debt management. The MTDS does notincludenumericalstrategictargetsandbenchmarksregardingtherisksthegovernment’sdebtportfolioisfacing.15

Domesticdebtisconfrontedwithhighinterestrateriskandrefinancingriskbecauseofshortmaturities.Thegovernmentisadvisedtousemorelong­termdebtinstrumentstolengthentheaverage time of maturity of domestic debt. The strong reliance of the government onborrowing from the banking sector gives rise to a crowding­out of private credit. Thegovernmentisadvisedtotakemeasurestodevelopthedomesticdebtmarketanddiversifythecreditorstructure.Itisrecommendedtostrengthenmarketorientedpracticesandreducedebtatthecentralbankthatcurrentlyholdsabout37%ofdomesticdebt.

Externaldebtisinfluencedbythedepreciationofdalasi.Monetarypolicyislikelytoreducetheeffectofdepreciationonthenationalcurrency.TheCBGneedstousethemonetarypolicytools

15Numericaltargetsare,however,includedintheAnnualPublicDebtBulletin.

14

16

18

20

22

91­days 182­days 364­days

Yie

ld (

in %

)

Maturity

T­Bills

Sukuk­al­salam

ImprovingPublicDebtManagementIntheOICMemberCountries

76

underitscontrolandmanagetheflexibleexchangeratetoleanagainstinflationarypressures(IMF2015).

It is essential to rebuild fiscal buffers to sustain macroeconomic stability in Gambia. Budgetrestructuring is urgently needed including a strategy to overhaul public enterprises in theenergyandtelecommunicationsectorstostemtheirdemandonbudgetresources(IMF2015).The government is encouraged to continue its efforts in improving supervision capacity toenhancefinancialstability(IMF2015).

ThequalityofoveralldebtrecordsisfairlygoodandrelativelycomprehensivebutGambiaisrecommended to improvetheconnectionandthematchingof theCBGand DLDMdatabases(PEFA2015).Arrearsarenotsystematicallymonitoredandremainedunderreported(MoFEA2015). So far no database for loan guarantees exists (MoFEA 2015) which gives rise tounderestimatedtotalpublicandpubliclyguaranteeddebt.

ImprovingPublicDebtManagementIntheOICMemberCountries

77

4.1.2 Republic of Mozambique

A) Public Debt Dynamics

While the Republic of Mozambique’s general government debt ratio was relatively stablebetween36%and47%ofGDPuntil2012,debthasincreasedsteadilyafter2012andcurrentlyequalsabout86%ofGDP(seeFigure4­3).OnereasonamongothersfortheincreasewasthedepreciationoftheMetical(IMF2016b).Netborrowingincreasedsharplyto10.7%ofGDPin2013 because of publicly guaranteed bond issued by the state­owned company EMATUM(AllAfrica2016).InDecember2015,theIMF(2015b)consideredMozambique’sexternaldebtlevelindicatorstobeclosetoahighriskrating.Mozambique’sdebtsituationhasbecomeevenmorecriticalatthebeginningof2016whentheauthoritiesofMozambiqueadmittedthatanamountinexcessofover$1billionofexternalloansoftwoquasi­publiccompaniesgrantedin2013and2014hadpreviouslynotbeendisclosedtotheIMF(IMF2016a,2016b).MozambiqueAsset Management (MAM), which is owned by 98% by the government of Mozambique,receiveda$535millionloanandProindicus,acompanyintendedtoprovidemaritimesecurityservices and owned by half by the state, had been granted $622 million (IMF 2016c, IMF2016a).Considering these contingent liabilities, the public debt level increased compared topreviousestimations.

Followingrevelationoftheundisclosedguarantees,theIMFstoppedthedisbursementofa$55million loan and suspended lending, as the country had violated the terms of an agreementmade in December 2015, in which the IMF had granted a $283 million rescue loan packageundertheconditionthatMozambiquefullydisclosesallborrowingsandgivesupdatesonanyrecognizedchangesrelatedtopublicdebt(Wernau2016).TheWorldBankstoppedanydirectfinancialaidandheldbackanybudgetarysupport.Allmajorbudgetdonors,includingSweden,theEuropeanUnion,theUnitedKingdomandtheAfricanDevelopmentBank,suspendedtheirbudgetsupport,whichamountedto$467millionfor2016or12%oftotalpublicexpenditure(Wernau and Wirz 2016). Consequently, the IMF revised the debt data for Mozambique inOctober 2016: Including the loan guarantees, the debt­to­GDP ratio increased from 75% ofGDP to 86% of GDP at the end of 2015 (IMF 2016c). Whereas the overall debt risk wasconsideredtobemoderate beforetherevelations, theIMFconsidersittobehigh after.InJune2016, the IMF visited Mozambique to prevent a further deterioration of the economicperformance and to evaluate the impact of the recently disclosed debt guarantees. The IMFalso discussed measures to increase transparency and strengthen governance andaccountabilityoftheinstitutionsresponsibleforpublicdebtmanagement(IMF2016c).

ImprovingPublicDebtManagementIntheOICMemberCountries

78

Figure 4-3: Mozambique – Public Debt Dynamics

Sources: WEO (2016), IMF (2009, 2011, 2013, 2015b), calculations by the Ifo Institute.

05

01

00

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Gross Net

Gross (rev.) Net (rev.)

Projections

Public Debt

02

55

07

51

00

% o

f to

tal p

ub

lic d

eb

t20

0620

0720

0820

0920

1020

1120

1220

1320

1420

15

Creditor Structure of Public Debt

Domestic External

-10

-50

5

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Net lending

Primary net lending

Net interest payments

Net Lending

02

04

06

08

01

00

% o

f e

xt.

pu

blic

de

bt

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Currency Structure of Ext. Public Debt

USD EUR GBP

CHF JPY Mult.

Other SDR

ImprovingPublicDebtManagementIntheOICMemberCountries

79

B) Public Debt Management

GovernanceandStrategyDevelopment

Legal framework

TheparliamentauthorizestheMinistryofEconomyandFinance(MoEF)forborrowingsandgivingloanguaranteesonbehalfofthegovernmentbytheannualapprovalofthestatebudget.Thereupon, theCabinetCouncildevelops thespecificdebtmanagement strategyconsideringthetrade­offsbetweenexpectedcost,risksandotherconstraints.ThePublicDebtUnit(PDU)is responsible for executing the implemented strategy and reporting back to the CabinetCouncil,whichinturnreportsbacktoparliament.

Managerial structure (incl. coordination with other policies)

After the DeMPA in 2008 (see World Bank 2008), Mozambique created a Public DebtManagement Office (MEFMI 2016) and designed a general institutional framework. Mostimportantly,thedebtmanagementfunctionswereshiftedfromthecentralbanktotheMoEF.Today, the PDU, which is the main institution responsible for public debt management, islocated within the National Directorate of Treasury at the MoEF. The PDU consists of threedepartments: The Loans Department, the Debt Strategic Planning Department and theRecordingandDebtServiceDepartment.Otherinstitutionsintegratedinthedebtmanagementprocess are the National Directorate of Budget, the National Directorate of PublicAccountability, the Mozambique Stock Exchange, the Ministry of Planning and DevelopmentandtheBankofMozambique(Banco de Moçambique) (OECD2014).TheBankofMozambique servesasthegovernment’sagentinthedebtissuanceprocess(AFMI2016).

In order to strengthen its debt management capacity further, the MoEF requested theMacroeconomicandFinancialManagementInstituteofEasternandSouthernAfrica(MEFMI)Secretariat for technical assistance for training staff in public debt management. A MEFMIteam visited Mozambique in August 2016 to conduct workshops on “Foundations of DebtManagementandDebtManagementPerformanceAssessment(DeMPA)”(MEFMI2016).

Debt reporting

TheMoEFpublishesannualdebtreports,whichincludeacostandriskanalysisofthepublicdebt portfolio (IMF 2015b). Mozambique’s debt sustainability analysis, the quality of debtrecording and reporting, and the systems for contracting loans and issuance of guaranteeswereevaluatedwithinaPublicExpenditure&FinancialAccountability(PEFA)Assessmentin2015andreceivedagoodrankinggrade(PEFA2015).Atthattime,however,thehiddendebtguaranteesbythegovernmenthadnotyetbeendisclosed.Officialdocumentsdonot includeconsistentinformationoranalysesoncontingentliabilities.Specificrisktypes,includingrisksfrom contingent liabilities, risks related to government’s assets and liabilities, interest andexchangeraterisksaswellasenvironmentalrisks,areconsideredinrecentfiscalreportsbutnotfullyquantified(IMF2015a).

Debt management strategy (incl. risk management)

MozambiquecreateditsfirstMedium­TermDebtManagementStrategy(MTDS)fortheyears2012­2015.ObjectivesoftheMTDSwere(MoEF2012,pp.12­13):

Financingtheactivitiesofthegovernmentviacredits; Ensuringdebtserviceatthelowestpossiblecostconsistentwithminimizingrisk; Maintainingdebtsustainabilityovertime;

ImprovingPublicDebtManagementIntheOICMemberCountries

80

Contributingtothemaintenanceofstabilityanddevelopmentofthefinancialsector; Promotingbalancedandefficientfunctioningoffinancialmarkets; Contributingtopovertyreduction.

InNovember2015,Mozambiquerevised itspublicdebtmanagementstrategywithtechnicalassistancefromtheWorldBankandtheIMF.Keyissuewasthedevelopmentofthedomesticcapitalmarket(IMF2015b).Inordertoprovideamoreefficientandtransparentdebtportfolioandminimizeitscosts,MozambiquedevelopedaMTDSfortheyears2015­2018,includingthefollowingobjectives(MoEF2015,p.4):

Identificationofthetypeandsizeofcontracteddebt; Defineprioritieswhichshouldbeconsideredwhendecidingonnewfinancing; Identificationandanalysisofborrowinglimitsandindicatorsofdebtsustainability; Minimizingthecostsandrisksofthedebtportfolio; Establishingclearrulesfornewborrowings; Establishinginstitutionalcoordinationmechanismsforthemanagementofpublicdebt.

Publicdebtmanagementfacesseveralchallenges(seeTable4­2):

Costofdebt:theweightedaverageinterestratewashighat9.5%,causedmainlybythehighinterestratesondomesticdebt;

Refinancingrisk:morethan40%ofdomesticdebtmatureswithinoneyear; Interestraterisk:morethan70%ofdomesticdebthastoberefixedwithinoneyear; Exchangeraterisk:about95%ofMozambique’sdebtisexternal.

Table 4-2: Mozambique - Cost and Risk Indicators for the Govt.'s Debt Portfolio (2014)

Type of risk Risk indicator

Domestic debt

External debt

Total debt

Solvency Nominalstockofpublicdebt(Mio.$) 1102 7067 8173Nominalstockofpublicdebt(%ofGDP) 7 42 49

Cost of debt Weightedaverageinterestrate(in%) 9.5 1.8 2.9Refinancing risk

ATM(years) 1.6 13.1 13.5Debtmaturingin1year(%oftotal) 43.3 2.7 8.3

Interest rate risk

ATR(years) 1.1 13 12.6Debtrefixingin1Year(%oftotal) 70.7 4.7 13.8

Exchange rate risk

FXdebt(%oftotaldebt) 94.5STFXdebt(%ofreserves) 6.7

Note: ATM = Average Time to Maturity; ATR = Average Time to Refixing; FX = Foreign exchange; ST = Short-term. Source: MoEF (2015).

Inordertoensurethemedium­termdebtsustainability,thestrategyhighlightsthealignmentof the available fiscal space with the project prioritization according to the IntegratedInvestmentPlan(IIP),theStateBudgetandtheEconomicandSocialPlan(PES).Inparticular,infrastructure projects under Public Private Partnerships (PPP) should be prioritized. Apartfrom that, foreign direct investment and the sale of public assets would strengthen privateinvestment.Connectedtodebtmanagement,thestrategyconsiderstherevenuesidetobeveryimportant. By broadening the tax base, intensifying audit and inspection measures and bypushingforwardthecomputerizationoftaxcollection,greaterefficiencyinrevenuecollectioncould translate into revenue growth and smaller budget deficits (MoEF 2015). The strategyidentifies various challenges regarding the implementation of the objectives, including

ImprovingPublicDebtManagementIntheOICMemberCountries

81

harmonizing public debt management with internationally recognized standards andprocedures,andimprovingtransparencyofpublicfundanddebtmanagement(MoEF2015).

BorrowingandRelatedFinancialActivities

Operations (incl. Islamic finance)

Mozambique uses T­Billsand T­Bonds traded via the domestic financial market. The marketforT­Billsandreposisrestrictedtolocalinvestors.T­Billsareissuedweeklywithmaturitiesofthree,sixandtwelvemonths.MaturitiesforT­Bondsrangebetweenthreeandtenyears.TheMaputoStockExchange(Bolsa de Valores de Moçambique)alsolistsoneperpetualbond(BVM2016).

Mozambique has not yet issued Islamic bonds. Officials from the Bank of Mozambiqueparticipated at a workshop about Islamic finance, which was organized by the IslamicResearch and Training Institute (IRTI) and held in February 2016 (IRTI 2016). During theworkshop,MozambiqueannouncedplanstointroducealegalframeworkforIslamicbankinginthenearfuture(IRTI2016).

Domestic debt market

Mozambique’s domestic financial market represents a small but growing sector of theeconomy. The banking industry is composed of 18 commercial banks, of which four foreignowned(StandardBank,MillenniumBim,BCIandBarclays)dominatethemarket(AFMI2016).Investors of T­Bills and T­Bonds are predominantly commercial banks, but also insurancecompaniesandinvestmentmanagementcompanies.T­BillsandT­Bondsrepresent,however,onlyasmallshareoftotalpublicdebt(seeFigure4­4).

Figure 4-4: Mozambique - Creditor Structure of Public Debt (2014)

Sources: MoEF (2015), calculations by the Ifo Institute.

Foreign borrowing

External debt represented 84.3% of total debt in 2015.16 The dominance of external debtindicates a relative underdevelopment of domestic financial markets. As of 2014, 40% ofMozambique’spublicdebtwasheldbymultilateralcreditors,amongotherstheInternationalDevelopmentAssociation(IDA),theArabBankforEconomicDevelopmentinAfrica(BADEA),theIslamicDevelopmentBank(IDB), theEuropeanInvestmentBank(EIB), theInternational

16Becauseoftheundisclosedexternalloans,theshareofexternalpublicdebtisprobablyevenhigher.

40%

46%

7%3% 4%

Multilateral

Bilateral

TreasuryBonds

TreasuryBills

Others

ImprovingPublicDebtManagementIntheOICMemberCountries

82

FundforAgriculturalDevelopment(IFAD),andtheOPECFundforInternationalDevelopment(OFID). Bilateral creditors, which represent 46% of total central government debt, are forinstance the Kuwait Fund, France, Russia, Romania, India, China, Nordea Bank, Libya, Iraq,Germany and Spain (OECD 2014). Most commercial creditors come from Brazil and China(OECD2014).

ThelargestshareofexternaldebtisdenominatedinU.S.Dollar,whichhasdecreasedbetween2006and2010andincreasedagainbeyond2010.TheshareofEuro­denominateddebt,SDRandothercurrencies,however,decreasedafter2010.Asof2014,U.S.Dollardenominateddebtrepresents66.3%,followedbyothercurrencies(14.6%),SpecialDrawingRights(10.3%)andEuro­denominateddebt(7.7%).TheremainderisdebtdenominatedinJapaneseYen(1%).

Theaveragematurityofexternaldebtismuchhigherthantherespectivematurityofdomesticdebt(seeFigure4­5).Whereastheaveragematurityofexternaldebtfluctuatesbetweentenandsixteenyears, theaveragematurityofdomesticdebtremainedrelativelystablebetween2011and2014rangingfrom1.5yearsto2.5years.Withrespecttototalpublicdebt,apositivetrendintheaveragematuritycanbeobserved.

Figure 4-5: Mozambique - Average Maturity of Public Debt

Sources: MoEF (2012, 2015), calculations by the Ifo Institute.

The weakness of domestic debt markets is also reflected in interest rate developments.Whereasthenominalinterestrateonforexdebtincreasedslightlyfrom0.4%in2006to1.5%in 2016, the average real interest rate on domestic debt increased in the same period from0.4% to 6% (see Figure 4­6). The fluctuations in the interest rate can be attributed to thehighlyvolatile inflation,whichrangedfrom1.1%to7.9%,butalso to the increasinginterestrates, which the government had to pay on newly issued government securities. While theyields on government securities with a four year maturity increased from 7.5% in 2013 to12.75% in 2016, the interest rates on 3 year government securities increased from 8.9% in2013to11%in2016(BVM2016).Thisincreaseispredominantlytheresultoftheincreasedmistrustfollowingtherevelationofthepreviouslyundisclosedloans.

0

5

10

15

20

2011 2012 2013 2014

Ye

ars

AverageMaturity,ExternalDebt

AverageMaturity,DomesticDebt

AverageMaturity,TotalDebt

ImprovingPublicDebtManagementIntheOICMemberCountries

83

Figure 4-6: Mozambique - Interest Rates and Inflation

Sources: IMF (2009, 2011, 2013, 2015b), calculations by the Ifo Institute.

C) Policy Recommendations

Mozambiquehasmadeprogressinimprovingpublicdebtmanagementframeworksinthelastyears. The Public Debt Management Unit at the Ministry of Finance is the main institutionresponsibleforpublicdebtmanagement.Thegovernmenthasdevelopedamedium­termdebtmanagement strategy that is published online.The targets of the debt managementstrategyremain,however,vague.Therearenonumericaltargetsregardingtherisksthegovernment’sdebtportfolioisfacing.

Mozambiqueisexposedtohighexchangeraterisksbecauseofthelargeshareofexternaldebt.WhereasauthoritiesinMozambiquedescribedthecountry’sexternaldebtassustainableandtheriskofdebtvulnerabilitywithrespecttoexternalshocksasmoderateattheendof2015(IMF2015b),theadverseeffectoftheU.S.Dollarappreciationonthedebt­to­GDPratioposesahigherriskinthelightoftherevelationofpreviouslyundisclosedloans.Developingadomesticdebtmarketandincreasingdomesticborrowingcouldreducetheexchangeraterisk.

Regarding domestic debt, the Mozambique is exposed to refinancing risk because the shortaverage time tomaturityandhighshareof debtmaturingwithinoneyear,and interest rateriskbecausetheaveragetimetorefixingishighandtheshareofdebttoberefixedwithinoneyearishigh.

Improving public disclosure and accountability is important, in particular following therevelationofundisclosedloansin2016.WhereasthelocalauthoritiesalreadypushedforwardaninvestigationabouttheundiscloseddebtthroughtheAttorneyGeneralandaParliamentaryInquiryCommission,aninternationalindependentauditoftheaffectedcompaniescouldhelprestoringconfidence.Inthelightoftherecentrevelations,itisevenmoreimportanttotightenfiscal and monetary policies substantially and to ensure exchange rate flexibility, which isneeded to restore macroeconomic sustainability and reduce inflationary pressures (IMF2016c).

ItisrecommendedtomodernizetheRevenueAuthorityinordertobroadenthetaxbaseandincreasetaxrevenues,whichwouldgiverisetoareductionofthepublicdeficit(IMF2015b).Apartfromthat,Mozambiquecouldcreateafiscalriskunitresponsibleforevaluatingallkindsofriskswithrespecttopotentialchangesinkeyunderlyingmacroeconomicassumptionsandrelatedtopublicandpubliclyguaranteeddebt,PPPsandSOEs(IMF2015b).

0123456789

%

AverageNominalInterestRateonforexdebt(%)

AverageRealInterestRateonDomesticDebt(%)

Inflation(GDPdeflator,annually,%)

ImprovingPublicDebtManagementIntheOICMemberCountries

84

4.1.3 Republic of Togo

A) Public Debt Dynamics

Afterhavingreachedamaximumgeneralgovernmentdebtratioof107.8%ofGDPin2007,theTogoleseRepublic’sdebtratiosignificantlydecreasedto49.3%by2011(seeFigure4­7).ThedebtreductionwasmainlytheresultofdebtreliefsundertheHeavilyIndebtedPoorCountries(HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI) (IMF 2015c).17 Recently,Togo’s general government debt has risen to about 61% of GDP by 2016, largely caused bydebtfinancedpublicinvestmentsaccompaniedbystagnatingrevenues(IMF2015b).Althoughhaving a debt level still below the threshold of 70% set by the West African Economic andMonetary Union (WAEMU), Togo is facing debt and liquidity pressures (AFMI 2016, IMF2015b).Togohasalsofacedproblemsarisingfromcontingentliabilities,predominantlyfromguaranteedloansofstateownedenterprises(SOEs),whichgaverisetoincreasingdebtlevelswhenguaranteesbecamedue(IMF2009a).

Togo’sgeneralandprimarybudgetbalanceswerenegative inmostyearsbetween2006and2015.Whereasnetborrowingnarrowedupto0.85%ofGDPin2008,thedebtreliefsthroughtheHIPCandMDRIgaveroomforfiscalexpansion.IncreasedspendingforpublicinvestmentscouldnotbeoffsetbyanincreaseinrevenuesbecauseoperationsatthenewlycreatedOfficeofTogoleseRevenue(OTR)didnotstartasearlyasprovisioned(IMF2015b).Accordingtothegovernment of Togo, infrastructure investments were necessary to stimulate private sectorparticipationintheeconomy(IMF2015b).Althoughcurrentspendinghasbeenconsiderablyreduced,exceptforthewagebillandoilpricesubsidies,therevenueshortfallsinprivatizationand cutbacks in donor budget support contributed to the debt accumulation in recent years(IMF2015b).Forthefuture,however,theIMFprojectsanarrowingofthenetlendingbalance(seeFigure4­7).

17TheHIPC,whichhadstartedin2008,reachedthecompletionpointin2010andgrantedTogoadebtreliefofabout$270

million (8.5% of GDP) in terms of net present value (NPV) (IMF 2008). The MDRI debt relief from the InternationalDevelopment Association (IDA) and the African Development Fund (AfDF) contained$404 million (12.8% of GDP) inNPVterms.

ImprovingPublicDebtManagementIntheOICMemberCountries

85

Figure 4-7: Togo – Public Debt Dynamics

Sources: WEO (2016), IMF (2007, 2009b, 2011, 2013, 2015b), calculations by the Ifo Institute.

02

04

06

08

01

00

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Gross Net

Projections

Public Debt

02

55

07

51

00

% o

f to

tal p

ub

lic d

eb

t20

0620

0720

0820

0920

1020

1120

1220

1320

1420

15

Creditor Structure of Public Debt

Domestic External

-8-6

-4-2

02

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Net lending

Primary net lending

Net interest payments

Net Lending

02

04

06

08

01

00

% o

f e

xt.

pu

blic

de

bt

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Currency Structure of Ext. Public Debt

USD EUR GBP

CHF JPY Mult.

Other SDR

ImprovingPublicDebtManagementIntheOICMemberCountries

86

B) Public Debt Management

GovernanceandStrategyDevelopment

Legal framework

Public debt management in Togo is regulated in national and regional laws and decrees.Effectively, the President has delegated the primary legislation power to negotiate and signinternational debt contracts to the Minister of Finance. Secondary legislation is conductedaccordingtodecreeNo.2008­050ofMay7,2008,entitlingtheMinistryofFinancetonegotiatebilateralandinternationalcontractswithrespecttofinanceandeconomy.Borrowinghastobeapproved by the Parliament (Art. 9). These rules are complemented by regulation no.09/2007/CM/UEMOU of June, 22, 2007, which describes a set of debt managementinstrumentsandframeworks,includingdisclosureandcoordinationandcontrolofpolicies.

Thecreation,organizationandattributesof theComité National de la Dette Publique (CNDP)are recorded in decree No 2008­067/PR of June 21, 2008. The CNDP is supposed to makestatementsaboutgovernmentbondsandsecurities.EnactmentNo338/MEF/DGTCP/CABsaysthatallfinancialoffersanddemandhavetobeapprovedbytheCNDP.TheDirection de la Dette Publique (DDP) is responsible for the emission, management, as well as monitoring ofguarantees.

Managerial structure (incl. coordination with other policies)

After the reorganization of the Ministry of Economy and Finance (MoEF) in 2013 and thereformofpublicfinancemanagement(MoEF2016),themostimportantinstitutionrelatedtodebtmanagementistheDDP,whichislocatedattheTreasuryDepartment.TheDDPactivelymanages the debt portfolio, provides legal advice on public funding agreements and isresponsible for recording and maintaining all data related to public debt. Furthermore, itissuesnewdebt,recoversmatureddebtandmonitorsthedebtservice(PEFA2016).TheDDPalsoexaminestogetherwiththeCNDPallinternalandexternalfinancerequeststhatconcerntheresourcesofthestate.TheCNDPwascreatedin2008inordertodevelop,coordinateandmonitortheimplementationofthenationalpublicdebtpolicyandmanagement.Furthermore,theCNDPisresponsibleforensuringthecoherenceofthatpolicywithdevelopmentgoalsandthefinancialcapacityofthestate(PEFA2016).

TheCentralBankoftheStatesofWestAfrica(BCEAO),whichservesasthecentralbankforthemembercountriesof theWestAfricanEconomicandMonetaryUnion(UEMOA),deliversthematerialorganizationofauctionsonbehalfoftheMoEF(AFMI2016).

Debt reporting

TheCNDPhaspublishedthe“AnalysedelaViabilitedelaDetteduTogo”includingshort­andlong­termdebtdevelopmentsprojectionsbasedondifferentmacroeconomicscenarios(CNDP2015). The debt management strategy document (Rapport de Stratégie d’Endettement)includesstatisticsofdebtdevelopmentsanddebtstructures.Thisdocumentis,however,notpublishedonlineandonlyavailableinpaperform.

Debt management strategy (incl. risk management)

TheMoEFconsidersthereductionandrestructuringofpublicdebtasakeypriorityontheiragenda(MoEF2014).TheDDPpreparesanannualdebtmanagementstrategy,whichhastobesupportedbytheCNDPandwhichincludesdomesticandexternalpublicdebt(PEFA2016).

ImprovingPublicDebtManagementIntheOICMemberCountries

87

Generally, the authorities plan to improve the use of resources for project financing anddevelopmentandpursueaprudentdebtpolicyprimarilybasedonthemobilizationofgrantsandconcessionalexternalfinancingandthedevelopmentofthegovernmentsecuritiesmarketwith long maturities. To ensure the proper implementation of the strategy, the governmentstrives to respect the commitments made with regard to the development of the domesticfinancialmarketandthecommitmentsintheframeworkofthepactofconvergence,stability,growthandsolidaritybetweenthememberstatesoftheUEMOA.

The public debt management strategy for 2015 aimed at using concessional and semi­concessional external borrowing and gradually extending the maturity of domestic debtinstruments to reduce the portfolio’s exposure to refinancing risk. The average time tomaturityofdomesticdebtwas,however,stillshortwith3.2yearsin2015(seeTable4­3).Tocover refinancing needs, the debt management strategy of 2016 set the objective of usingconcessional and semi­concessional external borrowing (target creditors are, among others,BOAD,AfDB/ADF,IDA,IFADBADEA, IDB,KuwaitFund,SaudiFund,China,ChinaEXIMBankand India EXIM Bank) and domestic borrowing with a maturityof three to ten years (MoEF2015).

Table 4-3: Togo - Cost and Risk Indicators for the Government’s Debt Portfolio (2015)

Type of risk Risk indicator Domestic debt

External debt

Total debt

Solvency Nominalpublicdebt(mio$) Nominalpublicdebt(%ofGDP) 29.3 17.3 46.7

Cost of debt Averageinterestrate(in%) 4.6 1.6 3.3Refinancing risk ATM(years) 3.2 9.1 5.7

Debtmaturingin1year(%oftotal) 29.2 5.4 18.9Interest rate risk ATR(years) 3.2 9.1 5.7

Debtrefixingin1Year(%oftotal) 29.2 5.4 18.9Fixedratedebt(%oftotal) 80.3 100.0 88.8

Exchange rate risk

FXdebt(%oftotaldebt) 43.1STFXdebt(%ofreserves) 3.9

Note: ATM = Average Time to Maturity; ATR = Average Time to Refixing; FX = Foreign exchange; ST = Short-term. Source: MoEF (2016).

To increase the mobilization of tax resources the performance of the Office of TogoleseRevenueissupposedtoimprove.ThegovernmentalsostrivesforsigningaprogramwiththeIMFandimprovingthequalityofitspoliciesandinstitutionstobenefitfromIDAresourcesanddonationsfromotherpartners.

BorrowingandRelatedFinancialActivities

Operations (incl. Islamic finance)

Togo uses both T­Bills and T­Bonds for domestic financing. T­Bills are available withmaturities of seven days, one month, three months, seven months, one year and two years(AFMI 2016). The nominal value of T­Bills is set at XOF18 one million (about $1,707) or amultipleofthisamount(AFMI2016).T­Bondshavematuritiesbetweentwoandsevenyears.Their nominal value is equal to XOF10,000 (about$17) ora multiple of this amount (AFMI

18Togo’scurrencyisCFA­FrancBCEAO(FrancdelaCommunautéFinancièred’Afrique,XOF)(BCEAO2016).

ImprovingPublicDebtManagementIntheOICMemberCountries

88

2016).T­Billsaremostlyboughtbybanksandotherfinancial institutions,predominantlybyWAEMUcommercialbanks(IMF2015a).Thesecondarybondmarketisunderdevelopedasthebanks pursue mainly a “buy & hold strategy”. Although T­Bonds can be traded over­the­counter (OTC) like T­Bills, they are predominantly traded at the Regional Bond Exchange(BRVM)oftheWestAfricanstates(AFMI2016).

Whereas T­Bonds and T­Bills are predominantly used to finance the deficit, Togo also usesexternalloanstofinancepublicenterprisesandpublicinvestments.Forinstance,in2012Togosignedfundingagreementsworth$194millionwiththeIslamicDevelopmentBank(IDB).Themoney is supposed to be used for financing road construction, improvements in theeducationalsystemandelectrificationofruralareas(NewsGhana2016).

Between 2006 and 2014 nominal interest rates on foreign debt ranged between 0.6% and2.4%(seeFigure4­8).Whereasinterestrateshavebeenquitelowsince2006,theystartedtoriseafter2010asaresultoftheincreaseincommercialbank’sshareinexternalgovernmentdebt(seeFigure4­9).Debtfromofficialcreditorsistypicallycontractedatlowerinterestratesthanloansfromcommercialcreditors.Duetothestrongfluctuationsintheinflationrate,realinterestrateswerepartlynegative.Whereasinflationequaled14.4%in2008,theinflationratedeclinedovertheyearsandisexpectedtostabilizeataround2.5%.

In2016,Togoissueditsfirstsovereignsukukbondwithamaturityoftenyearsandarateofreturnof6.5%.ThetransactioncoveredXOF150billion,whichequals$251.4million(ZodziandPeyton2016).19

Figure 4-8: Togo - Interest Rates and Inflation

Sources: IMF (2007, 2009b, 2011, 2013, 2015b), calculations by the Ifo Institute.

Domestic debt market

ThestructureofTogo’spublicdebthaschangedstronglybetween2006and2015becauseofthe debt reliefs under the HIPC and the MDRI. While in 2006 the share of domestic debtequaled18.5%,thissharehasincreasedto53.1%by2015(seeFigure4­7).Togomanagedto

19 The issuance was organized by the Islamic Corporation for the Development of the Private Sector (ICD) and the lead

auditor was Deloitte Togo. Togo received management assistance from the Africaine de Bourse, Atlantique Finances,BOACapitalSecuritiesSA,CorisBourse,EDCInvestmentCorporationandSGITogo(Owermohle2016).

­15

­10

­5

0

5

10

15

20

%

Averagenominalinterestrateonforexdebt(inpercent)

Averagerealinterestrateondomesticdebt(inpercent)

Inflationrate(GDPdeflator,inpercent)

ImprovingPublicDebtManagementIntheOICMemberCountries

89

reducedomesticdebtarrearsfromaround18%ofGDPin2010to11%ofGDPin2014.Atthesametime,theamountofoutstandingT­BillsandT­Bondsdoubledfrom9.2%ofGDP(2010)to 18.4% of GDP (2014), which are the highest ratios within the WAEMU. Because of theincreasinguseofdomesticborrowinginstrumentswithshort­termmaturities(T­Bills),Togo’srolloverandrefinancingriskshaveincreased(IMF2015b).

The government intends to support the expansion of the domestic debt market through (i)regular and predictable bond emissions; (ii) transparency and adherence to emissionschedules;(iii)regularpresenceonthemarketforcashmanagementoperations;(iv)almostexclusive reliance on the issuance of government securities by invitation to tender for themobilizationofresourcesprogrammedinthebudget;(v)solicitingindividuals,pensionfundsand insurance companies in the public securities issuance operations because share ofgovernment securities held by these investors is low and (vi) intensification of actions foractualoperationofthesecondarymarket(MoEF2016).

Foreign borrowing

Externaldebtcurrentlyrepresentsabout46.9%oftotaldebt.Thecreditorstructureofcentralgovernmentexternaldebtchangedstronglyasaconsequenceofthedebtrelief.Theshareofmultilateralexternaldebtdecreasedfromaround68%oftotalexternaldebtin2010to51%in2014(seeFigure4­9).Theshareofcentralgovernmentexternaldebtfromcommercialbanksincreasedsignificantlyfrom11.8%in2010to42.9%in2014.Asloansfromcommercialbanksaretypicallycontractedatlessfavorableconditionsthanloansfromofficialcreditors,pressureonTogo’sexternaldebthasincreased(IMF2015b,2015c).Throughthedebtreliefs,boththeshare of bilateral debt from Paris­Club creditors and from Non­Paris Club creditors hasdecreasedsignificantly.ExternaldebtfromParis­Clubcreditorshasfullyvanisheduntil2014.Besides, liabilities of state­owned enterprises, which are not considered in Figure 4­9,representaround11%ofthetotalgeneralgovernmentdebt.

Figure 4-9: Togo - Creditor Structure of External Public Debt

Sources: IMF (2015c), calculations by the Ifo Institute.

The currency structure of Togo’s external general government debt changed significantlybetween 2006 and 2014 (see Figure 4­7). The share of Dollar­denominated debt increasedfrom 48.9% to 63%. Afterwards, however, the share of Dollar­denominated debt declined

ImprovingPublicDebtManagementIntheOICMemberCountries

90

steadily to 33.9% in2014. The share of all other currencies increased from 9.8% to 54% inthat period. Recently, the importance of Special Drawing Rights (SDR) has risen, while theSwiss Franc and the Japanese Yen disappeared completely in 2011. The share of Euro­denominateddebtshowsalsoanegativetrendandequaled8.7%in2014. Thehighshareofexternal debt denominated in foreign currencies exposes Togo to exchange rate risks (IMF2015b).

C) Policy Recommendations

Togo is advised to strengthen and improve public debt management in particular datacollection,disclosureandriskanalysis.Furthermore, therole of the DDPand theCNDP maywellbestrengthened.Staffisrecommendedtobetrainedadequatelytoincreasetheefficiencyof debt and treasury cash management. Apart from that, it is important to improve publicdisclosure of debt data and relevant strategic. For instance, the annual debt managementstrategy is currently not publicly available. T­Bonds and arrears should be included in thegovernment’sclassificationofpublicdebt(IMF2015b).Domesticarrearsoughttobecleared.

Toreducethedebtlevel,Togoisrecommendedtoimplementkeyreformstoimprovethefiscalbalance. Reforms include reducing fuel subsidies and increasing the efficiency of publicinvestmentexpenditures.Theunderdevelopmentofthefinancialsectorsuchastherelativelylaxsinglelargeexposurelimitandthelargeamountofillegalfinancialinstitutionsengagedinmicrofinanceactivitiesalsoneedtobeaddressed(IMF2015b).

Togo faces several risks considering the structure of public debt. The large share of foreigncurrencydebtexposesTogotoexchangeraterisks.Theincreasinguseofdomesticborrowinginstrumentswithshort­termmaturitiesincreasesTogo’srefinancingrisk.Theseissuesshouldbe addressed within a prudent debt management framework. The government is thereforerecommended to developa medium­termdebt management strategy following internationalguidelines.Thecurrentannualdebtmanagementstrategylackssomeimportantelements.Thestrategy does not take into account outstanding T­Bills and risks that may result from pre­financingagreements(PEFA2016).

ImprovingPublicDebtManagementIntheOICMemberCountries

91

4.1.4 Republic of Uganda

A) Public Debt Dynamics

Between 2006 and 2007, the general government gross debt of the Republic of Ugandadecreasedfrom31.7%ofGDPto19.6%ofGDP(seeFigure4­10),whichcanbeattributedtodelayed effects of the Heavily Indebted PoorCountries (HIPC) Initiative and the MultilateralDebtReliefInitiative(MDRI),whichstartedin1998(IMF1998).20In2009,Uganda’sdebt­to­GDPratiobegantoincreasesteadilyfrom19.2%toaround35.6%in2015,whichwasmainlyattributed to borrowing used to finance public investment projects (IMF2015b).Contingentliabilities constitute about 13.7% of GDP (MEFMI 2015). Projections show that the generalgovernment debt level will further increase to around 40.2% in 2017. The IMF, however,forecaststhatUganda’sgeneralgovernmentdebtdistresswillremainmanageableinthefutureasitisexpectedtoremainwellbelowprecariousbenchmarks(IMF2015a).

Generalgovernmentnetlendingbalancehasalwaysbeennegativesince2006.Reachingalevelof 5.6% of GDP in 2010, net borrowing reflects funding of infrastructure investments (IMF2015a).Asaresultoftightenedspendingcontrolmeasuresandimprovedrevenuecollection,the net borrowing balance decreased to around 3.0% of GDP in 2015 (IMF 2013, 2015).Beyond 2015, however, net borrowing is expected to increase to 4.4% of GDP in 2016 as aresult of scheduled public investments. In particular, the authorities plan to continueupgradingtheinfrastructurenetwork,whichismainlyfundedbynon­concessionalborrowing(IMF 2015b). The investment package is expected to include expenditures on hydropowerplants, transmission networks, roads and pipelines in preparation to the envisagedcommencementoflarge­scaleoilproduction(IMF2015b).MajorcreditorsaretheChinaEXIMBank,the JapanBankforInternationalCooperation,andtheIslamicDevelopmentBank(IMF2015b).Netinterestpaymentshaveincreasedsteadilyfromaround1.1%in2006to1.8%in2015,atrendwhichisexpectedtocontinue.

20TotalMDRIsupportreleasedin2005/06and2006/07totaledto$3.6billion(IMF2008).

ImprovingPublicDebtManagementIntheOICMemberCountries

92

Figure 4-10: Uganda – Public Debt Dynamics

Source: WEO (2016), IMF (2008, 2013, 2015), calculations by the Ifo Institute.

01

02

03

04

0

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Gross Net

Projections

Public Debt

02

55

07

51

00

% o

f to

tal p

ub

lic d

eb

t20

0620

0720

0820

0920

1020

1120

1220

1320

1420

15

Creditor Structure of Public Debt

Domestic External

-6-4

-20

2

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Net lending

Primary net lending

Net interest payments

Net Lending

02

04

06

08

01

00

% o

f e

xt.

pu

blic

de

bt

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Currency Structure of Ext. Public Debt

USD EUR GBP

CHF JPY Mult.

Other SDR

ImprovingPublicDebtManagementIntheOICMemberCountries

93

B) Public Debt Management

GovernanceandStrategyDevelopment

Legal framework

According to the Public Finance Management Act 2015, the Minister of Finance is the soleresponsibleauthorityforraisingmoneybyloansandissuingguaranteesforandonbehalfofthegovernmentinordertofinancethebudgetdeficit,forthemanagementofmonetarypolicy,to obtain foreign currency, for on­lending to approved institutions, and for defraying anexpenditurewhichmaylawfullybedefrayed(PFMA2015,Article36).

The accountability of the Minister of Finance is ascertained by the so­called Budget Code,which requires the Ministry of Finance, Planning and Economic Development (MoFPED) topresent information regarding guarantees of loans and grants to the Ugandan parliament(MoFPED2013).AsspecifiedbytheConstitutionofUganda,theparliamentisresponsibleforapprovingnewloans(ConstitutionofUganda1995,Article159).Moreover,themanagementofpublicdebtisevaluatedbytheOfficeoftheAuditorGeneral(OAG2015).

Uganda has a legislation on contingent liabilities, especially those arising from stateguarantees, and established a unit within the Ministry of Finance to manage contingentliabilities. Furthermore, the parliament has to authorize guarantees. This process isimplemented in the national constitution (MEFMI 2015). Managerial structure (incl. coordination with other policies)

TheMinisterofFinanceisauthorizedtosecureloansbyissuinggovernmentbills,governmentbonds or any other appropriate financing method, including but not limited to a fluctuatingoverdraft (PFMA 2015, Art. 36). Furthermore, the MoFPED is responsible for directing andorganizingthepublicdebtmanagementsystem,“includingpolicyformulation,regulationandmobilizationofresourcesaswellasestablishmentofalegalframeworktogovernpublicdebtfunctions”(OAG2015,p.11).

In any event, the responsibilities for debt management duties within the MoFPED remainrelatively vague (OAG 2015). In the past, various independent divisions of the MoFPEDconsidered themselves responsible for different areas of the debt management process,combined with a partly improvable communication between the different entities. Acentralization of debt management functions has been planned since 2013, but has beendelayeduntilrecentlyduetomissingapprovalofthenewMoFPEDstructurebytheMinistryofPublicService(MoFPED2013,OAG2015).However,alldebtmanagementfunctionsarenowcentralized in the Directorate of Debt and Cash Management, which integrates front officefunctions (i.e. debt issuance), middle office functions (i.e. research and analysis) and backofficefunctions(i.e.settlement,drawdownandrecording)(OAG2015,MoFPED2013).

OtherinstitutionssuchastheBankofUganda(BoU),theOfficeoftheAccountantGeneralandline ministries support the MoFPED in the debt management process (MoFPED 2013). Forexample, the BoU serves as an advisor to the government and is responsible for thedeterminationof“thetypeofdomesticdebttoissue,theassetmix,thecalendar,thevolumestobeissuedandissuingofdomesticdebtinagivenyear”(OAG2015,p.11).TheOfficeoftheAccountant General keeps the records of both domestic and external public debt levels andexecutesdebtservicepaymentsandloandrawdown(OAG2015).

AlthoughtheBoUsupportstheMoFPEDintheareaofdebtmanagement,itconductsmonetarypolicy separately from the fiscal policy of the government. Whereas the BoU usespredominantly repos and reverse repos for monetary policy purposes, the proceeds from

ImprovingPublicDebtManagementIntheOICMemberCountries

94

primary issuance of securities for monetary policy are deposited in a separate, blockedaccounttowhichthegovernmentdoesnothaveaccess(MoFPED2013).

Debt reporting

Each year, the Minister for Finance, Planning and Economic Development presents toparliamentareportonthestateofUgandanpublicdebt,grantsandguaranteesthatincludesadetailed description of the structure of the debt portfolio (see, for example, MoFPED 2014,RepublicofUganda2015,2016).Thedebtstrategydocumentalsoincludesstatisticsandcostandriskanalysisoftheexistingdebtportfolio(MoFPED2016).Bothdocumentsarepublishedonline.

Debt management strategy (incl. risk management)

The objective of the government concerning public debt management is to “meet theGovernment’sfinancingrequirementsattheminimumcost,subjecttoaprudentdegreeofrisk,(…)ensurethatthelevelofpublicdebtremainssustainable,overthemediumandlong­termhorizonwhilebeingmindfulofthefuturegenerationsand(…)promotethedevelopmentofthedomesticfinancialmarkets”(MoFPED2016,p.8­9).

The Public Debt Management Strategy (PDMS) is prepared by the MoFPED in collaborationwiththeBankofUganda.Thegovernmentconsidersprudentpublicdebtmanagementtobeanimportantpolicyfieldasthegovernment’sdebtportfoliocanhaveahugeimpactontheoveralleconomy(MoFPED2016).ThePDMS2016­2021includesanassessmentofthecostandriskcharacteristicsof thecurrentdebtportfolioand compares the respective indicatorswith thebenchmarkobjectivevalues (seeTable 4­4). Finally, itpresents the medium­termguidelinesforpublicdebtmanagement.

Table 4-4: Uganda - Cost and Risk Indicators of the Government’s Debt Portfolio

Type of risk Risk indicator June 2015

June 2016 (estimated)

2020 (projections)

Indicative Constraint

Solvency PVofdebt(%ofGDP)23.6% 27.2% 34.5%

Lessthan50%

PV of external debt (% ofGDP)

10.3% 16.3% ­Lessthan30%

PV of domestic debt (% ofGDP)

13.4% 10.9% ­Lessthan20%

Cost of debt WAIR(%) 4% 4% ­ Max.6%ExternaldebtWAIR(%) 1% 1% ­ Max.2%DomesticdebtWAIR(%) 8.3% 8.3% ­ Max.16%Interest payments (% ofGDP)

1.3% 1.2% 2% Lessthan2%

Refinancing risk

Debt maturing in 1 year(%oftotal)

22.4% 14.1% 9.3% Max.15%

ATMexternaldebt(years) 18.7 16.8 13.2 Min.15­yearsATMdomesticdebt(years) 2.8 3.9 3 Min.3­yearsATMtotaldebt(years) 12.2 11.9 11.3 Min.3­years

Interest rate risk

ATR(years)12.2 11.6 11.1 Min.10­years

Exchange rate risk

FXdebt(%oftotal)59.2% 62.1% 80.8%

Lessthan80%

Note: ATM = Average Time to Maturity; ATR = Average Time to Refixing; PV = Present value; FX = Foreign exchange; ST = Short-term; WAIR = Weighted average interest rate. Source: MoFPED (2016, p. 24).

ImprovingPublicDebtManagementIntheOICMemberCountries

95

The average time to refixing (ATR) is expected todecrease from 12.2 years in 2015 to 11.6yearsin2016,mainlyduetonewexternaldebtcontractedonvariableinterestrates.Interestratesremainmoderateastheportfolioisconstitutedofalargeshareoflong­termconcessionalloans with fixed interest rates (MoFPED 2016). Higher concerns arise with respect torefinancingrisk.Theaveragetimetomaturity(ATM)isexpectedtodeclinefrom12.2yearsin2015to11.9yearsin2016(seeTable4­4).Thisfollowsfromthechangesintheexternaldebtportfolio, too.Another indicator for a slightly increased refinancing risk is the shareofdebtwhichmatureswithinoneyear.With22.4%in2015,thisshareliesfarabovethebenchmarkof15%.However,itisonlyconsideredtobeashort­livedproblem,asthecountryfacesasinglepeakofdebtwhichmaturesin2016.Duetotherelativelyhighshareofdebtdenominatedinforeigncurrencies,theexchangerateriskremainspresent.ThePDMSmentionsexplicitlythevulnerabilityconcerningU.S.Dollardenominateddebt,whichrepresents the largestshareofexternaldebt(seealsoFigure4­10).

Forthenextyears,thePDMSoutlinesanexpansionaryfiscalpolicytofinancethelargeamountof infrastructure projects, which are expected to drive growth in the medium and long­run(MoFPED 2016). Most of the investments will be financed by foreign sources. Althoughconcessional loans are preferred, non­concessional loans are probably necessary in themedium term given the external finance constraints of Uganda. However, they will be onlyusediftheexpectedreturnonthefinancedprojectssubstantiallyoutweighsthefinancingcostsof the loan (MoFPED 2016). Other restrictions indicate that loans for social service deliveryanddevelopmenthavetobecontractedonhighlyconcessionalterms(grantelement<50%),whileproductivityenhancinginvestmentscanbecontractedonlessconcessionalterms(grantelement<35%).

BorrowingandRelatedFinancialActivities

Operations (incl. Islamic finance)

Currently, the BoU issues T­Bills with maturities of 91, 182 and 364 days (AFMI 2016).Treasury securities are issued for the purpose of cash and liquiditymanagement, which notonly helps to separate monetary from fiscal policies, but also encourages the overalldevelopment of the domestic financial sector (MoFPED 2013). Treasury securities are heldpredominantly by commercial banks (45.8% at the end of 2014) followed by pension funds(24.8%)andoffshoreinvestors,whichaccountfor13.2%(AFMI2016).T­Bondsareavailablewithmaturitiesoftwo,three,fiveandtenyears(AFMI2016).In2013,afirst15­yearbondwasissued, which reflects the goal of the government to lengthen maturities (Ojambo 2013). In2014, there wereconsiderations to issuea $1 billionbond in theEurobondmarket(Giokosand Ojambo 2014). However, these plans were suspended due to the stronger U.S. Dollar,whichhasmadeitmoreexpensiveforUgandatoborrowinDollar­denominateddebt(Ojambo2015). However, there are no restrictions for the participation of foreign investors in thedomesticbondmarket(AFMI2016).

The yields on T­Bonds and T­Bills have been on an upwards sloping trend since 2006 (seeFigure4­11).Forinstance,theyieldontheone­yearT­Billincreasedfromaround10%in2006to14.9%inAugust2016.Thisraiseininterestratescanbeattributedtotheincreasinggeneralgovernment debt levels (see Figure 4­10). During the first quarter of the financial year2015/16, some issuances were highly undersubscribed, which forced the government toborrowcautiouslyfromthedomesticmarketandmighthavebeenthetriggerfortheincreaseinyieldsin2015(MoFPED2016).AsofAugust2016,boththeyieldcurveofT­BondsandT­Billsexhibitedtheclassicalexpectedform,whichmeansthatdebtwithlongermaturitieshashigheryields(seeFigure4­12).

ImprovingPublicDebtManagementIntheOICMemberCountries

96

Figure 4-11: Uganda - Yields on T-Bonds and T-Bills

Source: Investing (2016), calculations by the Ifo Institute. Note: Due to missing data some graphs might not be continuous.

Figure 4-12: Uganda - Yield Curves of T-Bonds and T-Bills (2016)

Source: Investing (2016), calculations by the Ifo Institute.

Although the history of larger­scale Islamic banking in Uganda can be traced back to 2008,when the BoU first received anapplication froman institution thatwanted tooperate as anIslamic bank, the BoU legalized the roll out of Islamic banking products only recently (TheEastAfrican2016).WiththeFinancialInstitutions(Amendment)Bill,UgandasettherulesforIslamic banking in Uganda, for instance the creation of key governance structures such as asharia advisory board (The EastAfrican 2016). The Bill also allows the government to issueshariah­compliant bonds and the creation of a special Islamic index on the Uganda StockExchange (Mugerwa 2016). As part of the Rural Income and Employment EnhancementProject,thestate­runMicrofinanceSupportCentre(MSC)planstostartIslamicMicro­FinanceLoansby2017(Ojambo2016).

Domestic debt market

Between 2006 and 2015, domestic debt represented less than 50% of total generalgovernmentdebt(seeFigure4­10).DuetotheHIPCandMDRIdebtrelief,whichcancelledalarge amount of external debt, the share of domestic debt increased from 16.9% in 2006 to48.4% in 2007. Between 2007 and 2011, however, the share of domestic debt decreasedsteadilyto24.2%whichcanbeattributedtonewexternalborrowingusedtofinanceseveralinfrastructureprojects(IMF2015a).Theshareofdomesticdebthas increasedonceagainto

0

5

10

15

20

25

Mar

­06

Sep

­06

Mar

­07

Sep

­07

Mar

­08

Sep

­08

Mar

­09

Sep

­09

Mar

­10

Sep

­10

Mar

­11

Sep

­11

Mar

­12

Sep

­12

Mar

­13

Sep

­13

Mar

­14

Sep

­14

Mar

­15

Sep

­15

Mar

­16

Yie

ld (

in %

)

10Y

5Y

4Y

3Y

2Y

1Y

6M

3M

14

15

16

17

3M 6M 1Y 2Y 3Y 4Y 5Y 10Y

Yie

ld (

in %

)

Maturity (in years)

GovernmentBonds

TreasuryBills

ImprovingPublicDebtManagementIntheOICMemberCountries

97

39.4% in 2015. This increase reflects the efforts of Uganda to diversify funding sourcesthrough the development of the domestic debt market, which has been accompanied by theissuanceofmarketablesecuritiesforcentralbankrecapitalization(IMF2015b).Increasingly,foreign investors have participated in the domestic debt market. They held around 13% oflocal­currencydenominatedgovernmentsecuritiesin2014(IMF2015b).T­Billsaccountedfor34%andT­Bondsfor66%ofthedomesticdebtstockin2015.

Foreign borrowing

Externaldebtconsistsmainlyofconcessional long­termloans(MoFPED2016).Newexternalpublicdebtcommitmentshaveanaveragetimetomaturity(ATM)ofaround36years.Asofend2015,themajorexternalcreditorofUgandaistheInternationalDevelopmentAssociation(IDA), which accounted for 56% of total external public debt (MoFPED 2016). The AfricanDevelopmentFund(ADF)wasthesecond­largestcreditorwitharound21%followedbyChina(10%),whose share has increased significantlysince 2006(MoFPED 2016, IMF2015b). TheInternational Fund for Agricultural Development held 4% of the external debt, while othermultilateral creditors also accounted for a share of 4%. The remainder consisted of otherbilateralcreditors(3%)andtheJapanInternationalCooperationAgency(2%).

The currency composition of external debt, which had remained relatively stable between2006 and 2014, is dominated by the U.S. Dollar (see Figure 4­10). Its share accounted for48.7% of total external debt in 2014. Due to the high share of IDA debt, the share of SDRshoveredaround20.8%.TheremainderconsistedofothercurrenciessuchasEuro(1.8%)andJapaneseYen(1.5%).

C) Policy Recommendations

Although Uganda managed to improve its legaland institutional frameworkconcerningdebtmanagement, the MoFPED still encounters itself in the process of restructuring. Apart frombringingthisprocesstoanend,itisimportanttostrengthentherevenuesidetotakepressurefrompublicborrowing.Thetaxperformanceremainsimprovable.Thus,Ugandaisadvisedtocontinue working on an effective tax policy and remove deficiencies in data integrity (IMF2015a).

In order to improve competition and the growth of the secondary market, Uganda mightintroduce a real­time reporting of bid and offer prices, and foster a greater incorporationofelectronictrading(OAG2015).Itisimportanttobroadeninvestor’sparticipationbyloweringbarriers(OAG2015).

Domesticarrearsarerecommendedtobeconsideredinthedebtmanagementstrategyandinthe detection of contingent liabilities (MoFPED 2016). With respect to guaranteed loans,Uganda is advised to strengthen monitoring and compliance systems to mitigate the risk ofdefault(OAG2015).

With respect to the debt portfolio, Uganda might intensify its effort to stay within the setparameterlimits.Inparticular,therelativelyshortaveragematurityofdomesticdebtandtherelatively high debt service­to­revenue ratio is important to be monitored carefully (IMF2015a). Moreover, the government is advised to ensure that external public debt does notexceed 80% and could prefer longer­term debt instruments over T­Bills to even out thematurityprofileandreducetheriskforrefinancing(OAG2015,MoFPED2016).

ImprovingPublicDebtManagementIntheOICMemberCountries

98

4.1.5 Arab Republic of Egypt

A) Public Debt Dynamics

TheArabRepublicofEgypthasexperiencedrelativelyhighlevelsofgeneralgovernmentdebtin the last decades. While the government managed to reduce the debt level before theoutbreakoftheglobalfinancialcrisis,generalgovernmentdebthasincreasedfrom66.8%to87.7% of GDP between 2008 and 2015. The increase in debt is expected to slow down,bringingthedebt­to­GDPratio to88.8%in2017.Netgeneralgovernmentdebtamountedtoabout78%ofGDPin2015(seeFigure4­13).

Since 2006, Egypt’s budget balance has been negative (see Figure 4­13). Increasingexpenditures for public wages, interest payments, subsidies and public investmentsaccompaniedbyfallingtaxrevenuesaftertheoutbreakoftherevolution,gaverisetoastrongincrease in deficits between 2011 and 2013. In 2013, net borrowing amounted to 13.4% ofGDP because of a revenue shortfall in the petroleum sector and two economic stimulusprograms including public spending for infrastructure and social welfare. Interest paymentsarehigh,amountingtoabout6.8%ofGDPin2015.Since2014,thegovernmenthasintroducedfiscalconsolidationmeasurestoreducethedeficit,suchassubsidycuts, taxreformsandthereduction of public wages (IMF 2015). Since 2013, Egypt has received support from SaudiArabia,theUnitedArabEmiratesandKuwaittostabilizetheeconomy.Aidcamebothinkind,mainly oil shipments, as well as in cash grants and deposits in the Central Bank of Egypt(Reuters2015).InAugust2016,theEgyptiangovernment,theCentralBankofEgyptandtheIMFreachedanagreementonathree­yearExtendedFundFacility(EFF)ofabout$12billion.The EFF supports the government in its economic reform program, including measures toreducethebudgetdeficitandgeneralgovernmentdebt(IMF2016).

ImprovingPublicDebtManagementIntheOICMemberCountries

99

Figure 4-13: Egypt – Public Debt Dynamics

Source: WEO (2016), IMF (2010, 2015), calculations by the Ifo Institute.

02

04

06

08

01

00

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Gross Net

Projections

Public Debt

02

55

07

51

00

% o

f to

tal p

ub

lic d

eb

t20

0620

0720

0820

0920

1020

1120

1220

1320

1420

15

Creditor Structure of Public Debt

Domestic External

-15

-10

-50

51

0

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Net lending

Primary net lending

Net interest payments

Net Lending

02

04

06

08

01

00

% o

f e

xt.

pu

blic

de

bt

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Currency Structure of Ext. Public Debt

USD EUR GBP

CHF JPY Mult.

Other SDR

ImprovingPublicDebtManagementIntheOICMemberCountries

100

B) Public Debt Management

GovernanceandStrategyDevelopment

Legal framework

The legal basis of the government of Egypt’s borrowing activities is the annual budget lawformallyapprovedbytheparliament.Drawingupthebudgetisregulatedinlawno.53/1973asamendedbylawno.87/2005andlawno.109/2008.TheMinistryofFinance(MoF)hastheresponsibility for issuing T­Bills and T­Bonds according to Article no. 127 of the EgyptianConstitution.

In2016aPublicFinancialManagementReformUnitwasestablishedtoensurethemonitoringof fiscal risks emerging from public entities. Furthermore, the unit will consider theintroductionoflimitstogovernmentguarantees.ThesocalledContingentLiabilityCommittee(CLC)hasthemandatetocontrolthegeneralgovernmentportfolioandtransactionsthatresultincontingentliabilities(MoF2016b).

Managerial structure (incl. coordination with other policies)

The Debt Management Unit (DMU) within the MoF is responsible for carrying out the debtmanagementstrategy,inparticularplanningfundingrequirementsandrestructuringofpublicdebt.Aworkinggroupreviewsdebtmanagementpoliciesandapprovesthedebtmanagementstrategy(MinisterialDecreeno.515).TheCentralBankofEgypt(CBE)actsasafiscalagentfortheMoFmanagingforexampletheauctionprocessofgovernmentsecurities.TheCBEisalsoresponsibleforrecordingandkeepingtrackofEgypt'sexternaldebt.

Debt reporting

The MoF monthly publishes a report on the Egyptian economy (“The Financial Monthly”),which also contains statistics on the public debt profile. The debt management strategydocument further includes a cost and risk analysis of the debt. Both documents are alsopublished online. Furthermore, it is planned to publish a quarterly report showing recentdevelopmentsofcontingentliabilitiesandotherfiscalrisksarisingfrompublicentities(MoF2016b).

Debt management strategy (incl. risk management)

PublicdebtmanagementinEgypthastheobjectivetosatisfythefinancingneedsofthestate“atthelowestlong­termcostrelativetogenerallevelofinterestrates,atanexamineddegreeofriskconsistentwithprudentfiscalandmonetarypoliciesframeworks”(MoF2006,p.1).TheMoFconsidersvarioustypesofriskconnectedtotheissuanceofdebtsuchasrefinancingrisk,currencyrisk,interestraterisk,andliquidityrisk(seealsoTable4­5).

TheDMUhasseveralgeneralprinciplesregardingdebtmanagement, including(i)amarket­orientedfundingstrategybasedonprojectedbudgetaryrequirements,determiningfrequency,volume, timing and maturities for all debt issues to ensure a prudent government debtstructure,and(ii)adebtissuancepolicythatpromotesthedevelopmentoftheprimarydealermarket,expansionofcustomerbaseandthecreationofliquidgovernmentsecuritiesmarket.

The objectives of public debt management are specified in the Medium­Term DebtManagement Strategy (MTDS), which covers a time period of three years (currently 2015­2018).Debtmanagementissupposedtoensurethat“thetreasuryfundingrequirementsandpayment obligations are met at a relatively low cost over the plan’s term, consistent with aprudent degree of risk” (MoF 2015, p.5). An additional objective is the development of the

ImprovingPublicDebtManagementIntheOICMemberCountries

101

domestic securities market. One of the key objectives is reducing the refinancing risks bylengtheningthematuritystructureofthedomestictradabledebtandconsolidatingadomesticyieldcurve.

Regardingmarketdevelopments,thefollowingchallengesaredescribed(MoF2015,p.8):

Focusingonalimitednumberofbenchmarkmaturities,namelythree,five,sevenandtenyears,possiblyissuinglongermaturityasnewbenchmark;

Increasingthenumberofre­openingsofeachsecurityinordertoraisethetargetamountoutstanding to approximately EGP 12­15 billion perT­Bond life time. This may increaseliquidityenhancingactivityinthesecondarymarket;

Organizing the issuance schedule to avoid the crowding out of securities throughalternatingtheissuanceweeksforT­BillsandT­Bondswithdifferentmaturities.

Regardingsourcesoffinancing,thefollowingchallengesaredescribed(MoF2015,p.11):

Diversifyingtheinvestorbaseandaddingnon­bankingfinancialinstitutions; Developing the secondary market, increasing the issuance of longer­term bonds and

addingnewinstrumentstodeepenthemarket; Paying more attention to the effects of government borrowing on the private sector in

ordertolimitthecrowdingouteffect,withinthecontextofthegovernment’sneedtoraisefundsfromthedomesticmarket.

Based on a macroeconomic baseline scenario, various risk assumptions on different shockscenarios are considered in the MTDS and multiple financing options are presented andevaluatedusingacost­riskanalysisframework.

Table 4-5: Egypt – Cost and Risk Indicators for the Government's Debt Portfolio (Mid 2015)

Type of risk Risk indicator Domestic debt

External debt

Total debt

Targets (tot. debt)

Cost of debt Interestpaymentsas%ofGDP 5.4 0.2 5.6 Weightedavg.interestrate(in%) 12.3 3.3 11.3

Refinancing risk

ATM(years) 2.2 2.5 2.2 2.5Debtmaturingin1year(%oftotal) 55.1 56.3 55.2 50.0Debtmaturingin1year(%ofGDP) 24.1 3.2 27.3

Interest rate risk

ATR(years) 2.2 2.5 2.2 Debtrefixingin1year(%oftotal) 55.1 56.3 55.2 Fixedratedebt(%oftotal) 100. 100.0 100.0

Exchange rate risk

FXdebt(%oftotal) 11.3 15.0STFXdebt(%ofreserves) 56.7

Note: Classification of domestic and external debt based on currency denomination.Note: ATM = Average Time to Maturity; ATR = Average Time to Refixing; FX = Foreign exchange; ST = Short-term. Source: MoF (2015, p. 10).

Borrowingandrelatedfinancialactivities

Operations (incl. Islamic finance)

In 2015, 28.5% of outstanding government debt consisted of T­Bills denominated mainly inEgyptian Pound (25.4%) and to some extent in Euro and U.S. Dollars (3%). T­BondsdenominatedinEgyptianPoundaccountedfor28.5%andEurobondsfor1.4%ofoutstandingdebt. The remainder (41.7% of outstanding debt) is non­tradable debt (notes issued for the

ImprovingPublicDebtManagementIntheOICMemberCountries

102

CBE,pensionfundnotes,facilitiesfrombankingsystemaccountsandTreasurySingleAccount,actuarial deficit notes, Barwah company notes, pension funds time deposits and housingnotes).

T­Billshavematuritiesof91,182,273and364days.T­Bondshaveanaveragematurityof3.48years(asofMay2016).Theaveragetimetomaturityofdomesticdebtwas2.20yearsin2015(comparedto0.34yearsin2004)andisonanincreasingpath.Theaveragetimetomaturityofexternaldebtisslightlyhigherat2.50years.Theshareofdebtmaturinginlessthanoneyearishighat55%oftotalpublicdebt(seealsoTable4­5).

Interest rates on T­Bills started to increase in 2011 because of political and economic risks(seeFigure4­14).In2013interestratesdeclinedbecauseofinflowsofaidfromGulfcountries.In 2014, however, interest rates started to increase again because of the government’s highborrowingneedsandthedevaluationoftheEgyptianPound(Alexbank2015).InApril2016,interestratesonT­Billswerebetween13.0%and14.1%,dependingonthematuritystructure.

Figure 4-14: Egypt - Interest Rates on Government Securities

Note: 1/ Monthly average in Primary Markets, 2/ Secondary market rates. Source: MoF (2016a, p.42).

Egypt has not issued sukuk so far. However, the MoF plans to diversify “the sources offinancingthroughtheissuanceofnewinstrumentssuchassukuktofinancedevelopmentandinfrastructureprojectsaswellasenlargingtheinvestorbasebyattractingretailinvestorsandincorporating more non­banking financial institutions” (MoF 2015). Sukuk issuance by boththegovernmentand theprivatesector isregulated ina law from2012.Egyptplans to issuesovereignsukukwithijaracontractsin2016.Sukukijaraarelease­basedfinancialinstruments,i.e. bondholders are owners of the asset and are entitled to receive revenues from leasing(Abaza 2015). The government is currently working on amending the sukuk law in order toattractnewinvestorsdomesticallyandinternationally.Moreover,thegovernmentplanstotapnew sources of financing (particularly from the informal sector) by issuing other newinstrumentssuchasprojectbondsandsukuktofinancedevelopmentandlargeinfrastructureprojects(EgyptEconomicDevelopmentConference2015).

Domestic debt market

The major part of Egypt‘s public debt is held by domestic creditors (about 90%). Tradabledomestic debt is financed through T­Bills (54%) and T­Bonds (46%). The largest domesticcreditors of the government are Egypt’s three state banks, holding about 50% of the T­Bills

ImprovingPublicDebtManagementIntheOICMemberCountries

103

(Alexbank 2015). Private banks and foreign bank branches hold about 29% of the T­Bills.RegardingT­Bonds,75.1%areheldbybankinginstitutions.Highinterestratesongovernmentdebtandpreferencesforsafelendingreducethe incentivesofbankstoprovidecredittotheprivatesector,leadingtoacrowding­outofbankloanstotheprivatesector.Whilenetclaimson the general government have steadily increased since 2009, claims on the private sectorhavedeclined(seeFigure4­15). Bankstendtoinvestininstrumentswithshortermaturitiestoavoidassetandliabilitymismatcheswithshort­termbankdeposits.

Figure 4-15: Egypt - Credit to the Economy

Source: IMF (2015, p. 10).

Toimprovethedomesticdebtmarketthegovernmentiscarryingoutseveralreforms.Ontheprimarymarketanewissuancestrategyisbeingdeveloped,FloatingRateNotes(FRNs)willbereintroduced and investments banks will be included as primary dealers. On the secondarymarket, the government is establishing new electronic trading and auction platforms,constructinganofficialyieldcurveforgovernmentsecurities,usingmarketmechanismssuchas Repos and Short­Term Liquidity Facilities, and including market players such as non­primarydealerbanksandbonddealers.Furthermore,thePrimaryDealersDecreereviewsthecodeofconduct(dutiesandincentives)andmarketmakingactivities,andquotesobligations.

Foreign borrowing

Externalpublicdebtamountedtoabout7.9%ofGDPin2015.Creditorsofexternaldebtareforeign governments (mainly Paris Club bilateral debt) and regional and internationalorganizationssuchastheIMF,theWorldBank,theIslamicDevelopmentBankandtheAfricanDevelopment Bank. These organizations provide loans with to finance specific investmentsand development projects. External debt also includes deposits held by the Egyptian centralbank (Alexbank 2015). The MTDS envisages raising funds from the international capitalmarketsintheamountof$3­5billiononayearlybasisovertheperiod2015­2018(MoF2015).

ExternaldebtismainlydenominatedinU.S.Dollars(56.1%),Euro(21.4%)andJapaneseYen(6.6%).TheshareofexternaldebtinU.S.Dollarshasincreasedoverthelastdecade,whilethesharedenominatedinEuroandJapaneseYenhavedecreased(seealsoFigure4­13).

ImprovingPublicDebtManagementIntheOICMemberCountries

104

C) Policy Recommendations

TheinstitutionalframeworkofpublicdebtmanagementinEgyptgenerallyfollowsguidelinesproposedbytheWorldBankandtheIMF.ThereisadebtmanagementagencyresponsiblefordebtmanagementlocatedattheMoF.Themedium­termdebtmanagementstrategyconsidersseveral risk indicators and has identified challenges for market development and sources offinancing.Thedebtmanagementstrategyistransparentasthedocumentispublishedonline.The MoF also monthly publishes information on the public debt profile. Some data in themonthlyreportis,however,notup­to­date.

Despitetheformallysounddebtmanagementframework,Egypt’shighlevelofdomesticpublicdebtisworrying.Thelargeamountofoutstandingdebtandhighinterestratesgiverisetohighinterestexpenseandimpedebudgetconsolidationefforts.Withoutthehighdebtservicecosts,more money could be spent on education, health and social welfare programs, as well asinfrastructureprojects,wherecurrentinvestmentsareconsideredtobeinsufficient(seealsoAlexbank2015).

Twomainchallengesregardingtheriskprofileofthepublicdebtportfoliocanbeidentified:

First,therefinancingriskofEgypt’sdebtportfolioishigh.Theaveragetimetomaturityislowamountingto2.2yearsandtheshareofdebtmaturinginoneyearishighat55.2%.Thedebtmanagement strategy has already identified lengthening the average time to maturity andloweringtheshareofshort­termdebtasakeypriorityandimprovementshavebeenachievedinthelastyears.However,withoutmoreambitioustargetsregardingthematuritystructure,refinancingriskislikelytoremainhigh.

Second,thegovernmentstronglydependsonthedomesticbankingsector.Thehighborrowingneedbythegovernmentgivesrisetoacrowdingoutoftheprivatesectorinthedomesticdebtmarket.Whencorporationsandsmallandmediumenterpriseshavedifficultiesgettingcredit,this may negatively affect the economy and weaken economic growth. The high share ofdomestic debt held by commercial bank indicates relatively low efficiency of the financialsystem(AbbasandChristensen2007).Asthegovernmenthasalreadyrecognizedinthedebtmanagementstrategy,itisimportanttofurtherdiversifythecreditorbaseofdomesticpublicdebt. The government currently carries out several reforms to improve the domestic debtmarket.

External debt is low and manageable (see also Sakr 2016). Because external debt mainlyexhibits medium­ to long­term maturities, it is unlikely that the government will facedifficultiesinrefinancingexternaldebt.Interestratesonexternaldebtarelowerthaninterestratesondomesticdebt.Generally,Egyptisadvisedtoseekformoreexternalfundingtoreducethedependencyonthedomesticbankingsector.Toattractforeigninvestors,confidenceintheeconomicstabilityandfiscalpolicyreformsareimportant.TheIMFhasurgedthegovernment,for example, to reform subsidies, to introduce exchange rate flexibility and to improve thebusinessenvironment(Jarvis2015).

ThegovernmentmayincreasetheuseofEurobondstoattractexternalinvestors.Additionally,issuing sukuk may help diversifying the government’s debt portfolio. Such Islamic financeinstruments are also likely to attract investors from other (Islamic) countries, therebydiversifying the investor base and increasing the share of external financing. Hence, it isrecommended to accelerate the amendment of the new sukuk law, which would provideadditional foreign investment opportunities and thereby relieve the government from itsdomesticfinancingdependency.

ImprovingPublicDebtManagementIntheOICMemberCountries

105

4.1.6 Republic of Indonesia

A) Public Debt Dynamics

AftertheAsianFinancialCrisisin1997/98,duringwhichthedebt­to­GDPratiohadshotuptomorethan70%(WorldBank2016a),relativedebt levelshad fallenquicklyandsignificantlyafter the relatively swift recovery of the Indonesian economy. They continued to decreasethroughoutthefirstdecade inthe2000sandreachedtheirtrough in2011and2012at23.1and23%respectively(seeFigure4­16).Sincethen,generalgovernmentdebthasrisenfasterthanGDPwiththedebt­to­GDPratioreaching27.4%in2015andbeingprojectedat27.7%in2016(DirectorateGeneralofBudgetFinancingandRiskManagement2016a).

This has several reasons. First, commodity prices which had rebounded after the GlobalFinancial Crisis started to decline in 2011, which reduced export proceeds in particularbecausealargepartofmanufacturinghasbeenresource­based.Growthslowedfromaround6%in2010toaround5%thereafter.Oilpricesstartedtodeclinefromaround$110perbarrelinMarch2014toaround$45 inthesecondhalfof2016,whichfurtherreducedgovernmentrevenues. While these developments would have reduced tax and non­tax revenues in anycase, a second factor is that expeditious restructuring of the economy towards sectors thathavegainedcomparativeadvantageasaconsequenceofalteredrelativepricesishamperedbyinadequate infrastructure and rigid labor markets (Hamilton­Hart and Schulze 2016, IMF2016,WorldBank2016b).Thus,thedeclineingrowthandinrevenueismorepersistentthanit otherwise would have been. Third, since mid­2011 the Indonesian Rupiah (IDR) hasdepreciatedsubstantiallyfrom8500IDR/$inearlyAugust2011to13500IDR/$attheendof2016, thereby raising the domestic value of the foreign currency­denominated part of theoutstandingdebt.Atthesametimetaxrevenueswerefallingduetodeclininggrowthratesanddecreasing commodity export proceeds. Fourth, tax administration has traditionally hadsubstantial unrealized efficiency potentials and, in relation to this, tax compliance has beenrelatively low. As a consequence, revenue­to­GDP figures have been low in internationalcomparison; in 2014 it was below 11% (IMF 2014). Even though multiple efforts are underway to enhance revenues, notably a tax amnesty and various initiatives to improve taxcompliance,taxadministrationandthetaxsystem,reformswillbearfruitonlyinthemediumterm.Fifth,thenewadministration,whichtookofficeinOctober2014,hasplacedemphasisonoverhaulingtheinsufficientinfrastructure,whichhasputfurtherpressureonthebudget.ThebudgetdeficitasashareofGDPhasbeen2.6%in2015anditisprojectedbythegovernmenttobe2.41%in2017(MinistryofFinance2017).

Althoughthebudgetdeficithaswidenedandtheoutstandingdebtincreased,theoveralldebtlevelsarenotyetalarming.IftheincreaseindebtoverGDPistemporaryandmighteventuallybebroughtdownagain, inparticularif fundsareinvestedproductivelyandspurgrowth,therecentincreaseinIndonesia’sindebtednessisnoreasonforconcern.

ImprovingPublicDebtManagementIntheOICMemberCountries

106

Figure 4-16: Indonesia – Public Debt Dynamics

Sources: WEO 2016, IMF Country Reports, calculations by the Ifo Institute.

ImprovingPublicDebtManagementIntheOICMemberCountries

107

B) Public Debt Management

GovernanceandStrategyDevelopment

Legal framework

Thelegalframeworkforthedebtmanagementislaiddowninanumberoflaws,inparticularLaw24/2002onGovernmentSecurities,Law17/2003onStateFinances,Law1/2004ontheState Treasury, Law 15/2004 on Management Oversight and Fiscal Responsibility, Law19/2008 on Sharia Securities and a number of governmental regulations. Debt can only beissuedthroughthebudgetaryprocessandthusneedsparliamentaryapproval.Forthelasttwofiscalyears,thebudgetlawalreadygivesthegovernmentflexibilitytoraisemorefunds(usingaccumulatedcashsurplusand/ordebtinstruments)ifthestatebudgetdeficit isprojectedtoexceed the target as in the budget. Such additional financing is then reported in CentralGovernmentFinancialReportfortherelevantfiscalyear.Yet,thedeficitmustnotexceedthelimitof3%ofGDPasstipulatedinLaw17/2003.

Managerial structure (incl. coordination with other policies)

Debt is issued and managed by the Directorate General of Budget Financing and RiskManagement(DGBFRM),whichisapartoftheMinistryofFinanceoftheRepublicofIndonesia.TheDirectorGeneralresponsibleforBudgetFinancingisboundbyparliamentaryapprovalondebt uptaking and by instructions from the minister of finance and the president. Hecoordinates policies with the Ministry of Planning and the Bank of Indonesia in regularmeetingsinordertoavoidrepercussionsinotherpolicyareasandtocoordinatemonetaryandfiscal policies. The DGBFRM is a first­echelonunit directly below the minister; it underwentseveral institutional changes and has been established in its present form in 2015 by theMinister of Finance through regulation no. 234 of 2015 (Directorate General of BudgetFinancingandRiskManagement2015).

TheDirectorateGeneralofBudgetFinancingandRiskManagementhassevendirectoratesandasupportunit.Frontoffice functionsarecarriedoutbytheDirectorateofLoansandGrants,the Directorate of Government Debt Securities, the Directorate of Sharia Financing, theDirectorate of StateFinancialRiskManagement,and the Directorate of GovernmentSupportandInfrastructureFundingManagement.TheDirectorateofFinancingStrategyandPortfolio,the Directorate of Evaluation, Accounting, and Settlements and the Secretariat of theDirectorateGeneralassupportingandcoordinatingunitcomplementthefrontofficeunits.

TheDirectorateGeneralisgivenmanagementtargetsinaperformancecontractbetweentheministerof financeandtheDirectorateGeneral,whichformulatesstrategicobjectives.Thesearemeasuredthroughkeyperformanceindicatorsusingthebalancedscorecardmethodology.

Debt reporting

Public debt is reported in much detail and very transparently. All important documents areavailable online at the DGBFRM’s homepage (Ministry of Finance 2017), most of them areavailable also in an English version. Specifically, DGBFRM publishes an annual report, themedium­term State Debt Management Strategy, the annual debt strategy, and monthly thegeneral government debt profile. It annually provides information on domestic governmentsecurities trading per month, ownership of domestic tradable government securities, debtmaturity profile, external debt statistics, public sector debt statistics and additionalinformation.ThedisclosureofinformationisinaccordancewithLawNo.14of2008onPublicInformation Disclosure that mandates state and non­state public institutions to providetransparentinformation.

ImprovingPublicDebtManagementIntheOICMemberCountries

108

Debt management strategy (incl. risk management)

Twodocuments layoutthedebtmanagementstrategy:theMedium­TermDebtManagementStrategy document and Annual Debt Financing Strategy document. The Medium­Term DebtManagementStrategyfortheperiod2014­2017wasdetailedinMinistryofFinanceDecreeno.113/2014 dated 23. April 2014 and has been published as Directorate General of DebtManagement (2014). The annual debt management document is issued by a decree of theDirector General of Budget Financing and Risk Management and has been published since2014.

Debt management has to make three fundamental choices, after the decision on budgetsizeandthefinancingofthebudgetthroughtaxes,non­taxrevenueanddebthasbeenmade,i.e.thesizeofthebudgetdeficithasbeendetermined.Thefirstcentralchoicepertainstothecurrencydenomination of the debt issued. Foreign currency debt (mostly global bonds) is lessexpensive, the market is more liquid than the domestic market for government debt, andforeign borrowing prevents a possible crowding out in the domestic bond market. Yet,increased foreign currency exposure increases the exchange rate risk; in particular if theexchangeratedepreciatesthedomesticvalueofthedebtisincreased.Themedium­termdebtfinancingstrategytargetsfortheissuanceofnewdebtaforeigncurrencyshareof25%fortheyears 2015 to 2017 with a priority of dollar denominated loans and securities (DirectorateGeneralofDebtManagement2014,p.22).

Thesecondcentralchoice iswhatshareof newly issueddebt instrumentsshouldhave fixedinterest. Obviously, the fixed interest rate debt makes calculation of future debt obligationseasierandthus reduces interest raterisk;yet thisoftencomesat the cost ofhigher interestrates.Variable interest rate debt ischeaper in timesofdeclining interest rates;howeverthedemandforvariableratedebt is lowerand itssecondarymarket is less liquid.At theendof2015, the coupon on tradable (fixed interest) government securities was 8.69% while thevariableratesecuritieshadaninterestrateof5.71%(DirectorateGeneralofBudgetFinancingandRiskManagement2015,p.47andpersonalcommunication).ThesharesofnewdebtwithfixedinteresttargetedintheState Debt Management Strategy 2014-2017 are95.5%for2015and94%for2016­17.

Thethirdcentralchoicerelatestothematuritystructureofpublicdebt.Thematuritystructureindicatestherefinancingrequirementatanypointintimeandthustheneedtoissuenewdebtbeyondthecurrentbudgetdeficit.Alternatively,thematuritystructurecanbealteredthroughdebt switching and buy­back operations, both of which the Ministry of Finance undertakes.TheState Debt Management Strategy 2014-2017stipulatestheshareofnewdebtwithtenorsuptothreeyearsnottoexceed15%fortheperiod2015­17.

Whiletheabovetargetsrefertotheissuanceofnewdebt,themedium­termstrategydocumentalsostipulates goals for the overall debt portfolio (Directorate General of Debt Management2014,p.22,Table4.2).TheyarereportedinTable4­6below:

Table 4-6: Indonesia - Target indicators for debt portfolio risk

Target Indicator 2014 2015 2016 2017 Range FX Debt to Total Debt Ratio (%) 42.0 41.0 40.0 39.0 ±2.0Fixed Rate Debt to Total Debt Ratio (%) 86.0 87.0 88.0 89.0 ±2.0Debt Mature in 3 Years to Total Debt Ratio (%)

22.0 22.0 22.0 22.0 ±2.0

Average Time to Maturity (ATM) (yr) 9.5 9.5 9.0 9.0 ±0.5Source: Directorate General of Debt Management 2014, Table 4.2.

ImprovingPublicDebtManagementIntheOICMemberCountries

109

The actual values for these and related indicators for the three major risk types – exchangerate risk, interest rate risk and refinancing risk – as well as the cost of debt are detailed inTable4­7below.

Table 4-7: Indonesia - Cost and Risk Indicators of the Government’s Debt Portfolio Type of risk Risk indicator 2011 2014 2015 Nov 2016

(provisional) Solvency Debt(%ofGDP) 23.1 24.7 27.4 27.7cCost of debt Interestpayments(%revenues) 7.5 8.4 9.9 10.2a

Interestpayments(%totaldebt) 5.2 5.3 5.2 5.0Interestpayments(%ofGDP) 1.2 1.3 1.4b 1.5c

Refinancing risk ATMtotaldebt(years) 9.32 9.73 9.40 9.02d

Debtmaturinginlessthan1year(%oftotal)

8.2 7.7 8.4 6.6d

Debtmaturinginlessthan3years(%oftotal)

22.7 20.1 21.4 23.0x

Debtmaturinginlessthan5years(%oftotal)

34.6 33.9 34.7 36.5d

Interest rate risk Variablerateratio 18.8 14.8 13.7 12.3d

Refixingrate 25.9 21.0 20.7 17.5d

Exchange rate risk FXdebt(%oftotaldebt) 45.1 43.4 44.5 41.8d

FXdebt(%ofGDP) 10.4 10.7 12.2 11.6Externaldebtinterest(%totalinterestpayments)

29.2 11.2 9.4b 9.8c

Note: ATM = Average Time to Maturity; FX = Foreign exchange; a: third quarter 2016, b: provisional, c: based on budget projections for 2016.d:based on realization at 31 December 2016 Source: Directorate General of Budget Financing and Risk Management 2016b, pp. 33, 42, 46, 47.

Four short­term trends are discernible. In the past five years, debt levels have increased inoverallvalues,butalsosignificantlyasashareofGDP(seeabove).In2011overalldebtstoodat23.1%ofGDPandisnow27.7%.Thecostofdebthasthusriseninthisperiodaccordinglyfrom1.2%ofGDPto1.5%.Refinancingriskhaslargelybeenunaltered;thetermstructureofthe debt seems solid. Interest rate risk has been reduced substantially, which may in partexplaintheincreaseinthecostofdebt.TheshareofexternaldebtintotaldebthasdecreasedwhiletheamountofexternaldebtasashareofGDPhasslightlyincreased.

BorrowingandRelatedFinancialActivities

Operations (incl. Islamic finance)

The government finances its debt through loans and securities. As of December 31st 2016,loansmakeup21%oftotalgovernmentdebt,while79%areinsecurities.Basicallyall loansarefromforeigncreditors,whilearoundthreequartersofthesecuritiesaresolddomestically.ThisisdetailedinFigure4­17.Thestructureofthedebthasshiftedsubstantiallyfromloanstosecuritiesinthepast;in2011onethirdofthecentralgovernmentdebtwasstillinloans.

ImprovingPublicDebtManagementIntheOICMemberCountries

110

Figure 4-17: Indonesia - Structure of Central Government Debt by Instrument

Source:MoF(2017b)

ThechangeinstructureisdetailedinTable4­8below.

Table 4-8: Indonesia - Outstanding Central Government Debt 2011-2016 (in billion USD)

2011 2012 2013 2014 2015 2016a Loans 68.5 34% 63.0 31% 58.7 30% 54.5 26% 54.6 24% 54.2 21%Securities 131.0 66% 138.9 69% 136.5 70% 155.2 74% 174.2 76% 202.2 79%Total 199.5 100% 201.9 100% 195.2 100% 209.7 100% 228.8 100% 256.4 100%Source: Directorate General of Budget Financing and Risk Management (2016b, p. 20) a: provisional figures, refer to 31 December 2016.

Table 4­8 shows that while loans have only slightly increased in nominal terms, theaccumulatingdebthasbeenfinancedlargelybyanincreaseinsecurities.Thestructureoftheloansexplainswhy:outofthe733trillionIDR($54.2billion)loansoutstandingattheendof2016, 728 trillion IDR ($53.8 billion) were external; of that amount 313 trillion IDR ($23.1billion)werebilateral loanswithJapanaccountingforalmosttwothirdsthereof.370trillionIDR ($27.4 billion) were multilateral loans, of which the World Bank held 63%, the AsianDevelopmentBank34%,andtheIslamicDevelopmentBank1.3%.Only45.6trillionIDR($3.4billion) were held by commercial banks, and 5 trillion IDR ($0.4 billion) by suppliers(Directorate General of Budget Financing and Risk Management 2016b, p. 24 and personalcommunication). In other words, the bulk of loans consist of bilateral or multilateralintergovernmental loans, partly under concessionary terms, which cannot accommodate thegrowingneedstofinancerisingbudgetdeficits.

65% of all securities are IDR denominated and tradable, 9% are non­tradable, and 26% areforeign currency denominated and tradable. In the latter category, 88% are dollardenominated,therestissplitbetweenYenandEuro.TheincreasinguseofsecuritieshasmadeIndonesialessreliantonafewinternationalinstitutionsandgovernmentsasmultilateralandbilateral creditors and thus has reduced political risk; at the same time it has made debtfinancingmoreresponsivetomarketforcesandinternationalsovereigncreditratings.

Shariagovernmentsecuritieshavebeenissuedsince2008onthebasisofLawNo.19/2008.Following the Ministry of Finance Regulation 206/PMK.01/2014, the Directorate of ShariahFinancinghasbeenestablishedwithintheDGBFRM.Shariabondsare issuedinthedomesticmarketincludingtheretailmarket,butalsoasGlobal Sukukdenominatedinforeigncurrency.SinceMay2015theGlobal SukukhasbeenlistedattheDubaiNASDAQexchange(DirectorateGeneral of Budget Financing and Risk Management 2015). The Islamic Government Bonds(Surat Berharga Syariah Negara, SBSN), including a number of subgroups such as theIndonesianHajFundsSukuk(Sukuk Dana Haji Indonesia, SDHI)orIslamicTreasuryBills(Surat Perbendaharaan Negara-Syariah),accountfor%ofallgovernmentsecuritiesoralmost12%of

149.953.57

0.38

54.19

in billion US $ equiv. , as of 31.12.2016

Gov.Securities,domestic

Gov.Securities,external

Loans,domestic

Loans,external

ImprovingPublicDebtManagementIntheOICMemberCountries

111

allgovernmentdebtasofNovember30,2016.21Inthepastfiveyearstheirvolumehasmorethanpentadrupledwhiletotaldebtinsecuritieshasrisenbyfactor2.1(DirectorateGeneralofBudgetFinancingandRiskManagement2016bandpersonalcommunication).

In addition, the government provides credit and investment guarantees for projects ininfrastructure, includingbutnot limitedtowaterprovision,electricity, tollroadsandenergyprojects.

Thelimitoncumulativeguaranteeliabilityisstipulatedbythemediumdebtstrategyplantobe2.57%ofGDPattheendof2017.In2015itstoodat0.25%ofGDP(DirectorateGeneralofBudgetFinancingandRiskManagement2015).

Domestic debt market

Thedomesticmarket inthenarrowsenseconsistsofthetradabledomesticsecurities,whichmakes up half of the total outstanding government debt.22 It is held by commercial banks(23%), the central bank (8%), institutional investors such as insurances, mutual funds orpension funds (23%) and non­residents including foreign governments and central banks(38%). Nine percent are held by individuals and others (Directorate General of BudgetFinancingandRiskManagement2016b,p.56andpersonalcommunication).Whileitmaybedesirabletoraisetheshareofdomesticcurrency­denominateddebtfurtherinordertoreducethe exchange rate risk, given the development stage of Indonesia and the growth of thedomesticfinancialmarketthepotentialtodosowithoutrepercussionsmaybelimitedintheshortrun.

Foreign borrowing

42% of the outstanding government debt at the end of 2016 was denominated in foreigncurrency(seeFigure4­18).Thisratiohaslargelybeenunalteredinthepastfiveyears,butthedollar denominated debt instruments have gained in importance at the expense of Yendenominated instruments. Notably, more than one third of IDR denominated tradablesecurities is held by non­residents, indicating that IDR denominated bonds are increasinglyattractivetonon­residents.

Figure 4-18: Indonesia - Currency Composition of Central Government Debt

Source:MoF(2017b)

21 See Directorate of Islamic Financing (2015) for an excellent review of Sharia­compliant Government Financial

Instruments.

22Inadditiontherearenon­tradablesecurities(7%oftotaldebt)anddomesticloans(lessthan0.1%oftotaldebt).

58%30%

7%4% 1%

IDR

USD

JPY

EUR

SDR

AUD

Other

ImprovingPublicDebtManagementIntheOICMemberCountries

112

C) Policy Recommendations

Debt management and debt policy cannot be assessed in isolation. The size of the debt is aresult of decisions made on the size of the expenditures and the size of the revenues. Theassessmentofthesizeofthedeficitisinadditiondependentonthestructureofspendingandtaxation. A higher government deficit may be acceptable if the additional funds are put toproductive use such as transport infrastructure or education which may have high returns,while a deficit of the same size would be a reason for concern if it was used for ratherinefficientinvestmentssuchasenergysubsidiesorunproductivegovernmentconsumption.Asthe government of Indonesia has focused on improving infrastructure a possible increase inbudgetdeficitinthefuturemaybeareflectionofincreasedproductivepublicinvestment.

Firstofallthecentralgovernmentdebtismanagedcompetently,effectivelyandtransparently.NeverthelesstherearecertainrecommendationsfortheIndonesianGovernment.

The share of foreign currency denominated debt might be reduced as the domestic capitalmarketfurtherdevelops.Thiswouldreduceexchangeraterisk;yetitrequiresthatdomesticindustries have sufficient funds available and are not unduly crowded out. Thus, a gradualapproach is called for. It is central to fiscal policy to keep the government budget deficit incheckwhilespendingeffectivelyandproductively.Thishasmajorimplicationsfortherevenue,expenditureanddebtdimension.

Additionally overall government revenues should be enhanced as Indonesia has a lowrevenue­to­GDP ratio in international comparison. This requires an improved taxadministrationandabroadeningofthetaxbaseastaxcomplianceissuboptimal.Keyelementsinclude a simpler tax system with fewer exemptions and lower thresholds, in particular areductioninexemptionsforVATandcorporateincometax,andasimplifiedtaxcode,amovetowards risk­based auditing, electronic tax filing and cross checks between VAT statements,possiblya moderate increase intheVATrate,and achange inattitude towards a regulatorypartnershipbetweentaxauthoritiesandtaxsubjects.Thegovernmenthaslaunchedmultipleinitiativestothateffectalreadyincludingataxamnestyprogramandthecentralchallengewillbe to implement these changes effectively (Hamilton­Hart and Schulze 2016). Furthermore,regulatorypolicies thoseare likely to increaseeconomic growth mayalso increase revenuesandtherebyreducethesizeofthebudgetdeficit.Suchpoliciesincludemoreliberaltradeandinvestment policies, the abolition of the remaining energy subsidies and an effectivecompetitionpolicy.

Moreover, the public expenditures that enhance productivity and competition should beprioritized.Thecurrentgovernment’sfocusonimprovingphysicalinfrastructureinkeyareasis very sensible as Indonesia’s infrastructure is ailing compared to its regional competitors(World Bank 2016). The increase in expenditures that this implies could be mitigated byreducingnon­essentialspendinginothersectorsandbyimprovingrevenuegeneration.

Lastly, since revenue­improvingmeasures willbeeffectiveonlywitha time lag,a temporaryincrease in the deficit is acceptable. However, in order to maintain investors’ confidence inIndonesia’smacroeconomicstability it isadvisabletostrictlyhonorthethreepercentdeficitceiling laid down in Law No. 17/2003. Hence, term government deficit should be reducedagaininthemedium.

ImprovingPublicDebtManagementIntheOICMemberCountries

113

4.1.7 The Federal Republic of Nigeria

A) Public Debt Dynamics

GeneralGovernmentDebtoftheFederalRepublicofNigeriahasbeenrelativelylowcomparedtootherOICcountries, fluctuatingbetween9.6%ofGDPin2009and11.5%ofGDPin2015.Theoilpricedeclinesince2014hasgivenrisetoanincreaseinnetborrowingandfor2017adebt ratio of about 14% is expected (see Figure 4­19). 23 Since oil and other resources aremainlytradedinU.S.Dollar,NigeriaalsodependsheavilyontheU.S.Dollar.Evenifoilpriceswill recover, the latest events show the need for economic diversification, e.g. in theagricultureandenergysector.Eventhoughthecountryisaleadingcrudeoilexporter,ithastoimportpetrolbecauseofalackofrefineries.Oneobstacleforinvestmentshasbeenthefixedforeign exchange rate, which was implemented in 2015. Until June 2016 the central bankpegged the currency at 198 Naira/U.S. Dollar to promote non­oil industries. Although beingstillcontrolledbytheNigeriancentralbank,theNairafluctuated,however,inthelastmonths(Mitchell2016).

Although Nigeria has relatively low general government debt, the interest payments torevenue ratio has increased to about 32%. To ensure medium­term debt sustainability, theNigerian government needs a fiscal adjustment of 3% of GDP. This task has become morechallengingsincethecountryhasslippedintorecession.Thecentralbankreactedbyreducingthe domestic real interest rates, but the overall primary balance lies at ˗1% of GDP. TheNigeriangovernmenthasalreadymadeeffortsforfiscalconsolidation,butitshouldgofurther(IMF2016,Patience2016).

23Theoilandgassectoraccountsforabout35%ofGDPandover90%ofexportrevenue(OPEC2016).

ImprovingPublicDebtManagementIntheOICMemberCountries

114

Figure 4-19: Nigeria - Public Debt Dynamics

Source: WEO (2016), IMF (2016), calculations by the Ifo Institute.

05

10

15

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Gross Net

Projections

Public Debt

02

55

07

51

00

% o

f to

tal p

ub

lic d

eb

t20

0620

0720

0820

0920

1020

1120

1220

1320

1420

15

Creditor Structure of Public Debt

Domestic External

-50

51

0

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Net lending

Primary net lending

Net interest payments

Net Lending

02

04

06

08

01

00

% o

f e

xt.

pu

blic

de

bt

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Currency Structure of Ext. Public Debt

USD EUR GBP

CHF JPY Mult.

Other SDR

ImprovingPublicDebtManagementIntheOICMemberCountries

115

B) Public Debt Management

GovernanceandStrategyDevelopment

Legal framework

AccordingtoSection4Subsection2oftheConstitutionofNigeria,theNationalAssemblyhasthe exclusive legislative power about the federal governments’ borrowing, and has in thiscapacity adopted the following laws governing public debt management in Nigeria: (1) TheDebtManagementOffice (Establishment,etc.)Actof2003 established the Debt ManagementOffice(DMO),asingle,semi­autonomousandprofessionallyrunagencywhereallpublicdebtmanagement functions are centralized, with retroactive effect to August 2000. (2) TheInvestmentsandSecuritiesActof2007,initsPartXVregulatestheprocedurefortheissuancedebt by federal, state, and local governments on national capital markets, and Part X of theFiscal ResponsibilityAct of 2007 contains general restrictions on public debt aimed at fiscaldiscipline.Forexample,undertheFiscalResponsibilityActof2007,Section41Subsection1a),all tiers of government are required to borrow at concessional terms and long maturities.However,accordingtoSection41Subsection2oftheAct,theGovernmentmayborrowfromcapitalmarketsifapprovedbytheNationalAssembly.Furthermore,Section42Subsection1oftheActprovidesforagenerallimitonpublicdebt.(3)OtherrelevantlegislationincludestheTreasury Bills Act, the Treasury Certificate Act, the Government Promissory Notes Act, CAP164,andtheCentralBankofNigeria(CBN)Act2007(seeDMO2008fordetails).ThelawinNigerialawrequiresthebudgettoaccompanyanappendixoncontingentliabilitiesintheformoftaxrisksandprovideinformationonhowtomanagethem(MoFandPublicCredit2011).

Managerial structure (incl. coordination with other policies)

Before 2000 several departments in the Ministry of Finance, the Office of the AccountantGeneral of the Federation and the Central Bank were responsible for debt managementfunctionsandcoordinationbetweenthesedepartmentslackedefficiency.Asaresultofahugeexternaldebtoverhang(externaldebtamountedtoabout86.4%ofGDPin2000),publicdebtmanagement was professionalized and centralized at the DMO in2000 (Nwanko 2011). TheDMO is separated into front, middle and back offices designed to fulfill different functions,distinguishingthoseofficesresponsibleforexecutingtransactionsfromthoseresponsibleforcheckingcompliance:Thefrontofficeexecutes market transactions, themiddleofficecheckscomplianceandthebackofficeadministerstheaccountingsystem.

Debt reporting

The DMO also established new standards in terms of transparency. The agency regularlypublishes several documents: each year, it publishes an “Annual Report and Statement ofAccounts”, which contains an appraisal of the government’s debt management strategy, adetaileddecompositionofdomesticandexternalpublicdebt,aswellassustainabilityandriskanalyses.Inaddition, itpreparesanannual“DebtSustainabilityAnalysisReport,” inwhich itreviews the current debt portfolio using simulation techniques. As part of this analysis, theDMO also derives a recommendation with regard to the borrowing limit for the upcomingfiscal year in order for debt to stay consistent with the overall limit on the federalgovernment’sdebt. Moreover, the DMOprepares a quadrennial “debt managementstrategy”and a quinquennial “strategic plan,” both of which outline the medium­term debt strategy.Lastly, it also issues borrowing guidelines for all tiers of government. Nigeria has not yetdevelopedaframeworkforassessing,recordingandtrackingcontingentliabilities.

Debt management strategy (incl. risk management)

ImprovingPublicDebtManagementIntheOICMemberCountries

116

TheNational DebtManagementFrameworkfortheyears2013­2017sets the followingdebtmanagementobjectives(DMO2013,p.3):

Efficiently managing the nation’s public debt in terms of well­diversified and sustainabledebtportfolio,supportiveofgovernmentandprivatesectorneeds;

Meetingthegovernment’sfinancingneedsatminimalcostandwithprudentdegreeofriskoverthemediumtolong­term;

Ensuring the growth and development of the country’s domestic and internationalsecuritiesmarkets.

The DMO prepared the first medium­term debt management strategy (MTDS) for the years2012­2015(DMO2012).In2016,theDMOandotherstakeholders24developedtheMTDSfortheyears2016­2019(DMO2016).TheMTDSdescribeshowthegovernment’sprimarybudgetbalance should optimally be financed, with respect to macroeconomic developments andmarketconditionssuchasinterestandexchangerates,inflation,outputandexternalreserves.Publicdebtmanagementfacesthreemainchallenges(seealsoTable4­9):

Costofdebt:theweightedaverageinterestratewashighat10.77%,causedmainlybythehighinterestratesondomesticdebt;

Refinancingrisk:morethan30%ofdomesticdebtmatureswithinoneyear; Interestraterisk:morethan30%ofdomesticdebthastoberefixedwithinoneyear.

Table 4-9: Nigeria - Risk Indicators for the Government's Debt Portfolio (2015)

Type of risk Risk indicator Domestic Debt

External Debt

Total Debt

Targets (tot. debt)

Solvency Nominaldebt(%ofGDP) 8.91 2.20 11.11 NPVofdebt(%ofGDP) 8.91 1.44 10.35

Cost of Debt Interestpayment(%ofGDP) 1.16 0.04 1.20 WAIR(%) 13.00 1.74 10.77

Refinancing risk

ATM(years) 5.35 14.39 7.15 Min:10Debtmaturingin1year(%oftotal) 36.08 1.16 29.15 Max.20Debtmaturingin1year(%ofGDP) 3.21 0.03 3.24

Interest rate risk

ATR(years) 5.35 13.86 7.04 Min:10Debtrefixingin1year(%oftotal) 36.08 6.40 30.19 Fixedratedebt(%oftotal) 100.00 94.77 98.96

Exchange rate risk

FXdebt(%oftotal) 19.84 40STFXdebt(%ofreserves) 0.44

Note: ATM = Average Time to Maturity; ATR = Average Time to Refixing; FX = Foreign exchange; NPV = Net present value; ST = Short-term; WAIR = Weighted average interest rate. Source: DMO (2016).

24Stakeholders includetheFederalMinistryofFinance,theFederalMinistryofBudgetandNationalPlanning, thecentral

bank,theBudgetOfficeoftheFederation,theNationalBureauofStatistics,andtheOfficeoftheAccountant­GeneraloftheFederation.

ImprovingPublicDebtManagementIntheOICMemberCountries

117

The preferred debt management strategy based on current economic conditions can besummarizedasfollows(DMO2016,p.8f):

(1)Increasingexternalfinancingfocusingonissuingmorelong­termexternaldebtinordertoreducecostofdebtandtolengthentheaveragematurity.Toachieveasignificantreductionindebtcostrequiresthatthegovernmentaccessesrelativelycheaplong­termexternalfinancing.The DMO therefore plans to maximize available funds from concessional and semi­concessionalsources,takingintoaccountwhatmaybereadilyavailablewithinagivenperiod,andlateraccessingotherexternalsources.

(2) Further lengthening the maturity profile of the domestic debt portfolio by reducing theissuanceofnewshort­termdebtinstrumentsand/orrefinancingmaturingNigerianTreasuryBills (NTBs) with external financing. The introduction of new debt instruments into thedomesticdebtmarketisexpectedtohaverelativelylowimpactondebtcost,whiletheimpactonthematurityprofileoftotaldomesticdebtcouldbesignificant,hencereducingtheriskofbunching,roll­overrisk,andtheassociateddebtservicingcosts.

BorrowingandRelatedFinancialActivities

Operations (incl. Islamic finance)

Nigeria’stotalcentralgovernmentdebtiscomposedofFederalGovernmentofNigeriaBonds(FGN),NigerianTreasuryBills(NTB),TreasuryBonds(T­Bonds),Eurobonds,externalbilateraldebtandexternalmultilateraldebt.FGNsconstitutemorethan50%oftotaldebt(seeFigure4­20).

Figure 4-20: Nigeria - Public Debt Composition by Instruments (June 2016)

Source: DMO (2016).

FGNcomewithmaturitiesofthreeto20years.WhiletheyieldcurveofFGNwasnearlyflatin2014, the yield curve in 2015 exhibited the classical expected form, which means that debtwithlongermaturitieshashigheryields(seeFigure4­21).

IslamicfinanceinstrumentsarenotyetusedintheNigeria’spublicdebtmanagement,astheframework is currently being finalized. Currently, two major laws regulate the issuances ofsukukinNigeria:theInvestmentsandSecuritiesAct2007andtherulessetbytheSecurityandExchange Commission of Nigeria (SEC). They specified its rules on Islamic financing inFebruary 2013 (SEC 2013). According to these rules state governments and agencies on alllevels are entitled to issue sukuk after having seeked the SEC’s approval (Oladunjoye2014).The first corporatesukukwas issued byNigeria’sOsun Stateandhad a volume of10 billionnaira(or$62million).ThefirstNigerianbankswithIslamicBankingServicesweretheStanbic

54%21%

2%

3%4% 16%

FGNs

NTBs

T­Bonds

Eurobonds

External­bilateral

External­multilateral

ImprovingPublicDebtManagementIntheOICMemberCountries

118

IBTCPlc.andtheJaizBankPlc.(Sapovadia2015,Oladunjoye2014).Atthebeginningof2016theSECandtheDMOagreedtocooperateinordertoissueNigeria’sfirstsovereignsukukandinOctober2016theNigeriancentralbankpublishedguidelinestospecifythegrantingofsukuk(SEC2016,CBN2016).TheDMOplansafirstissuanceofasovereignsukuk in2016/2017,inlinewiththeMTDS2016­2019.

Figure 4-21: Nigeria - Yield Curve of FGNs

Source: DMO (2015, p. 56).

Domestic debt market

Since2005,governmentbudgetdeficitshavebeenmainlyfinancedbydomesticborrowinginthebondmarket(CentralBank2013).Domesticcreditorsarethecentralbank(holding9.9%ofdomesticdebt),banks(37.2%),non­bankpublic(51.1%)andtheSinkingFund(1.8%).Non­bank public creditors are mainly pension funds, government agencies, non­bank financialinstitutionsandinsurancecompanies.

The government plans to introduce Retail Bonds, Inflation­linked Bonds and sukuk on thedomesticdebtmarket.

Foreign borrowing

Theshareofexternaldebt(definedasdebtdenominatedinforeigncurrency)intotaldebtwaslowat19.8%in2015.Theexternaldebtportfolioiscomposedof73.5%ofU.S.Dollars,16.9%ofSDRs,1.1%ofEuro,8%ofothercurrenciesin2014(seeFigure4­19).25MaincreditorsareIDA/AfDBholding65%ofexternaldebtandIBRD/ADBholding4%ofexternaldebt.Bilateralcreditors (China EXIM Bank, French Development Agency, Japan International CooperationAgencyandKreditanstaltfuerWiederaufbau)hold15%ofexternaldebt.Eurobondsconstitute14%ofexternaldebt(seeFigure4­22).82.2%ofexternaldebtisconcessional(DMO2015).

25ValuestakenfromtheWorldBank.TheMTDSdescribesthefollowingcurrencycompositionin2015:38.3%U.S.Dollars,

59.6%SDR,1.2%Euro.

ImprovingPublicDebtManagementIntheOICMemberCountries

119

Figure 4-22: Nigeria – Creditor Structure of External Public Debt (2015)

Source: DMO (2016, p. 5).

The government plans to increase the share of external debt in total debt by maximizingavailable funding from concessional and semi­concessional external sources. Foreign debtinstruments to be used are issuing Eurobonds, Diaspora Bonds and International sukuk. Toreduce the exchange rate risk the government intends to issue long­term foreign debtinstrumentsforfundinginfrastructureprojects.

C) Policy Recommendations

Nigeria has established a very professional public debt management. The DMO acts as anindependentagencyresponsiblefordebtmanagement.TheDMOisevensharingitsexperienceofdebtmanagementandiscurrentlyadvisingSouthSudanindevelopingadebtmanagementoffice(Emejo2015).TransparencyishighastheDMOpublishesvariousanddetailedreportsaboutallrelevantaspectsofthegovernment’sdebtportfolioandalsootherinstitutionssuchasthe SEC and the central bank adhere to these standards. There could be, however, moreinformationaboutthestructureofdomesticcreditors(forexampleaboutthecompositionof“non­bankpublic”creditors).

The share of Nigeria’s domestic debt in total debt is high (about 80%). Domestic debt ischaracterizedbyhighinterestrates,andahighshareofdebtmaturingandrefixingwithinoneyear.TheDMOthustargetsadebtcompositionof60%domesticand40%externaldebtandaims at accessing long­term external borrowing to reach this target. Nigeria has, however,attained the status of a middle­income country and is therefore less likely to have access toconcessional funding in the future (Uwalek 2016). The expected limited account toconcessional funding and the recent exclusion from the J.P. Morgan local government bondindexesmightmakeitdifficulttoachievethecurrenttargetsofdebtcomposition,eveninthemediumterm.Nigeriaisrecommendedtodiversifyandexpandthesourcesofforeignlending(see also Oladunjoye 2014). Nigerian authorities are currently expending the institutionalinfrastructure for the issuance of Islamic bonds which might attract foreign lenders and cansupportthegeneralefforttoexpandforeignborrowing(seealsoIMF2016).

As theDMOpointedoutNigeriastill isrecommendedtodiversifytheeconomytoreduce itsdependencyonoilexportsandforeignexchangerisks.DuringthelastyearstheproportionofU.S. Dollar in external debt increased constantly. This is aligned with the dominant role ofNigeria’soilexports, butmaybereducedwhen itcomestoa diversificationof the country’seconomy.Inparticularstrengtheningtherevenuesideofthebudgetmightreducerisksofthegovernment’sdebtportfolio.

65%15%

14%

4% 2%

IDA/AfDB

Bilateral

Eurobond

IBRD/ADB

Others

ImprovingPublicDebtManagementIntheOICMemberCountries

120

4.1.8 Republic of the Sudan

A) Public Debt Dynamics

Between 2006 and 2011, the debt­to­GDP ratio of the Republic of the Sudan remainedrelativelystablebetween69%and75%ofGDP(seeFigure4­23).However,therewasasharpincrease in general government debt from 70.6% of GDP in 2011 to 94.2% of GDP in 2012,someofwhichmaybeattributedtothesecessionofSouthSudaninJuly2011.Asaresultofthesecession,Sudanlostabout75%ofitsoiloutputand60%ofitsfiscalrevenue.Moreover,the country had to struggle with expensive armed conflicts and increased security threats(AEO2012,IDAandIMF2013a).

Aftertheadoptionofbroadpoliticalandeconomicreforms(ADB2014p.IV),Sudanmanagedto decrease its general government debt level steadily. In particular, a financial austeritypackage, which was introduced in June 2012 and which contained expenditure cuts, taxincreases, and the reduction of subsidies on fuel, sugar and wheat, helped to achieve thisdecline (UNDP 2014). In 2015, the debt level increased to 69% of GDP. The decline of thegeneral government debt­to­GDP ratio is estimated to continue towards 52.4% in 2017.However,theexpecteddeclineingeneralgovernmentdebtwaslesstheresultofstrongeffortstopaydowndebt,thanrathertheresultofthesubstantiallyovervaluedexchangerateandhighinflation(seealsoFigure4­24),which inflatestheDollarvalueofGDP(EIU2016).Thus, thecountry'sdebtpositionremainscritical,althoughtheplainfiguresseemtosignalaneasingofthe general government debt situation at first sight. The EIU Credit Rating Agency ratesSudan’s sovereign risk at the second­lowest rating C, indicating a weak capacity andcommitmenttohonor itsobligations,andgivesanegativeoutlookduetopolitical instabilityandtheweaknessoftheSudaneseeconomy,whichfacesa transformationawayfromanoil­based economy towards a more diversified economic structure, including the promotion ofothernaturalresourcesandagriculture(UNDP2014,EIU2016).

FollowingthesecessionofSouthSudan,thegovernmentsofSudanandSouthSudanagreedinSeptember 2012 to the so­called “zero option”solution,wherebySudanwouldretainall theexternal liabilities after the secession under the condition that the international creditorsmake clear commitments with respect to debt relief measures (IMF 2012). Previouslydetermined to be settled in 2014, the two countries agreed to extend the deadline of thissolutionuntilOctober2016(IMF2014a).Althoughsomecountries, includingFranceandtheNetherlands, announced their support of a debt relief program, Sudan has yet to seek thesupport of more Paris Club Creditors, which represent an important amount of public debt(UNDP2014,EIU2014).TheIMFandtheWorldBanksupportthe“zerooption”solutionandconsider Sudan currently as a Pre­Decision­Point Country within the Heavily Indebted PoorCountries Initiative (HIPC) (IMF 2014b, 2016b). Sudan made good progress in political andeconomicreformsasitadoptedtheInterimPovertyReductionStrategyPaper(I­PRSP)andanewStaffMonitoredProgrambytheIMF(ADB2014p.IV).Moreover,Sudanhasstrengthenedits efforts with respect to payments to new creditors for project financing. However, thegeneralpoliticalrequirementsforadebtreliefarestillnotmet.

ImprovingPublicDebtManagementIntheOICMemberCountries

121

Figure 4-23: Sudan – Public Debt Dynamics

Sources: WEO (2016), IMF (2007, 2010, 2012, 2013b, 2014a, 2016a), calculations by the Ifo Institute.

Sudan’sprimarybudgetbalancefluctuatedstronglybetween2006and2012(seeFigure4­23).Majordisruptionswerecausedbytheglobalfinancialcrisis,whenthegeneralgovernmentnetlendingdeclinedto­5.08%in2009.Althoughtherewasashort­livedrecoveryinthefollowingyears, the secession of South Sudan and the subsequent decline of oil revenues, down from11.5%ofGDPin2010toonly1.5%ofGDPin2012(IMF2014a),gaverisetoanothersharpdeclineofthebudgetbalance.DuetoresoluteeffortsoftheSudanesegovernmentwithregardsto macroeconomic stability and growth following the shock of the secession, the budgetbalance improved and is expected to stabilize around ­1.7% of GDP in 2015. Policyadjustments,growthandpovertyreductionprogramsaswellas institutionalreformshelpedtoachievethisnarrowingoffiscaldeficit,whichisalsoestimatedtoberelativelystableevenbeyond2015(IMF2016a).

02

04

06

08

01

00

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Gross Net

Projections

Public Debt

02

55

07

51

00

% o

f to

tal p

ub

lic d

eb

t

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Creditor Structure of Public Debt

Domestic External

-6-4

-20

2

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Net lending

Primary net lending

Net interest payments

Net Lending

02

04

06

08

01

00

% o

f ext.

public

deb

t

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Currency Structure of Ext. Public Debt

USD EUR GBP

CHF JPY Mult.

Other SDR

ImprovingPublicDebtManagementIntheOICMemberCountries

122

B) Public Debt Management

GovernanceandStrategyDevelopment

Legal framework

TheHighCommitteeforBudgetPreparation,consistingofrepresentativesfromtheMinistryofFinance and National Economy (MoFNE) and the Central Bank of Sudan (CBoS), as well asrepresentatives from academia and the private sector, is responsible for the coordinationofpublicdebtmanagementinSudan.Thecommitteedecidesontheborrowingcompositionandthe borrowing limits of the year, based on proposals by the Domestic Debt Unit within theMoFNEandtheExternalDebtUnitoftheCBoS(Osman2013).ThepresentedborrowingmixhastobesubmittedandapprovedbytheNationalAssembly.AccordingtotheBankofSudanAmendmentBillfromtheyear2005,theCBoSisinadditionresponsiblefortheissuanceandmanagement of government securities. Apart from that, the CBoS is allowed to granttemporaryfinancingtothegovernmentupto15%of thetotalprojectedpublicrevenuesforthefiscalyear(Osman2013).

Managerial structure (incl. coordination with other policies)

Several international institutions have supported the development of more efficient debtmanagementpracticesinSudan.Forinstance,theWorldBankconductedaDebtManagementPerformance Assessment (DeMPA) in 2012. Furthermore, Sudan developed an “ArrearsClearance and Debt Relief Strategy” (ACDRS) under the technical assistance of the AfricanDevelopment Bank in 2013 and benefitted from training with respect to debt sustainabilityanalysis (DSA) and debt management performance assessment (DeMPA) (ADB 2014).Additionally,aWorldBankmissionvisitedthecountryin2013inorderto“developareformplan for building debt management capacity and improving performance over the mediumterm” (World Bank 2013, p. 2). This included areas such as the legal framework of debtmanagement,theorganizationalstructure,operationalmanagementanddomesticdebtmarketdevelopment. In the latter case, the reforms specifically attempt to enhance options fordomesticfinancingthroughtheintroductionofsharia­compliantshort­termdebtinstruments(WorldBank2013).AsecondWorldBankmissionin2015reviewedthereformprocessinthelightofchangesinregulatoryandmacroeconomicconditions(WorldBank2015).

InlinewiththeevaluationoftheWorldBank,Sudancurrentlyseekstoreviewandstrengthentheinstitutionalsettingofdebtmanagement,whichcontinuestobehighlyfragmented(WorldBank 2013). In 2015, Sudan created the new Debt Management General Directorate at theMinistry of Finance and Economic Planning (MoFEP), which is designated to bundle alloperationsregardingbothexternalanddomesticpublicdebtmanagement.Moreover,UNCTADand Sudan have agreed on a new technical debt management assistance project (DMFAS2015).Themainpartoftheproject,whichisfundedbytheAfricanDevelopmentBank(ADB),representsthe installationofthe latestDMFASsystem(DMFAS6)at theMoFEP.Theprojectattemptstodeliveradvisoryandcapacity­buildingsupport, for instancetrainingsessions forSudan’sdebtofficersinvariousaspectsofdebtmanagement(DMFAS2015).

TheSudanFinancialServicesCo.LTD(SFS)supports theCentralBank inregulating liquidityandinraisingspecialfundsinthefinancialsector.Forinstance,theSFSorganizestheauctionsrelevant to the selling and buying of the Government Musharakah Certificates (GMCs),Government InvestmentCertificates (GICs)and theCentralBankofSudan IjarahCertificates(shihab)(AFMI2016).ThelargenumberofinstitutionsinvolvedinpublicdebtmanagementinSudanmakesitdifficulttoevaluatethedegreeofaccountabilityoftherespectiveinstitutions.

ImprovingPublicDebtManagementIntheOICMemberCountries

123

Debt reporting

Although the MoFNE already introduced a computerized Government Resource Planningsystem(GRP),theDomesticDebtUnitattheMoFNEstillstrugglestokeepthedomesticpublicdebt on record. The collected data is issued monthly, quarterly and annually as part of therespectivebudgetreports,whereastheexternalpublicdebtistrackedseparatelybytheCBoSandhasbeenpublishedinanannualreportsince2000(Osman2013).TheCBoSalsopublishesadetailedoverviewofthecreditorstructureofSudaneseexternalpublicdebtinitsquarterly“EconomicandFinancialStatisticalReview”.Contingentliabilitiesarenotreported.

Debt management strategy (incl. risk management)

BoththeMinisterofFinanceandNationalEconomyandthegovernorof theCentralBankofSudan avow for the improvement of public debt management policies in Sudan (IMF 2014).TheprincipalobjectiveofdebtmanagementinSudanis“tomeetgovernmentfinancingneedswithin lower possible cost and acceptable level of risk using Shari’s compliant instruments”(Osman 2013, p. 4). Nevertheless, no specific document is published which specifies thisgeneralobjectiveandoutlinestheparticulardebtandriskmanagementindicators.

BorrowingandRelatedFinancialActivities

Operations (incl. Islamic finance)

ThefinancialsysteminSudanreliestoahighdegreeonthebankingsectorandhasoperatedunderIslamicprinciplessince1983(IMF2014a,2016).Thereexistnointerestrates,andratesof return are based on Islamic modes of financing. The government, in particular the CBoS,uses various short­ and long­term Islamic finance instruments for debt and liquiditymanagement. The CBoS uses Central Bank ijarah Certificates (shihab) for open marketoperations. These instruments have a maturity of 10 years and a nominal value of 1000pounds.Returnsarefixedanddistributedmonthly.Furthermore,theCBoSusessukukbondsfor the management of liquidity (AFMI 2016). In order to conduct monetary policy and toachieveitsoperationaltarget(growthinmoneysupply),theCBoScontrolstheprofitmarginrate of the Islamic finance instrument murabaha. This profit margins rate is widely used bySudanesebanksasakindofbaserate(CBoS2016b).

Thegovernmentissuestwotypesofsukukbonds.GovernmentMusharakaCertificates(GMCs),alsocalled shahama, areshort­termsecurities,which are issued by theMoFNE (AFMI2016)andmainlyusedfor liquidityandcashmanagement.Apartfromthat, thegovernment issueslong­term Government Investment Certificates (GICs), which are known as besrah and areavailablewithmaturitiesrangingfromtwotosixyears.Thenominalvalueoftheinstrumentisdistributedinprofitsquarterlyorbi­annually(AFMI2016).ComparedtothemarketforGMCs,which has been growing steadily since 1999 because of the specific characteristics of theseinstruments such as high profitability, low risk, short­term maturity and high liquidity, themarketforGICshasbeenstagnatingsinceitsintroductionin2003(IIFM2016).Thesecondarymarket of government sukuk takes place at the Khartoum Stock Exchange (KSE). Mainregulatingbodies are theSukukRegulationCommittee(SRC), the ShariahSupervisoryBoardandtheHighShariahSupervisoryBoard(IIFM2016).

Between2007and2013,themurabahaprofitsmarginwasstablerangingfrom9.7%in2010to11.5%in2008(seeFigure4­24).However,between2008and2015, inflationwasalwayssubstantiallyhigher,whichledtonegativerealratesofreturn.Forinstance,theaveragerealrate of return on domestic general government debt was ­17.7% in 2014. Only after thegovernmenthasconductedstructuralreforms,theinflationstartedtodecreasein2014andis

ImprovingPublicDebtManagementIntheOICMemberCountries

124

expectedtocontinuetofalltosingledigitsby2017(IMF2014b),whichwouldallowaveragerealratesofreturntoincreaseagain.

Figure 4-24: Sudan - Rates of Return and Inflation

Sources: CBoS (2016a, 2016b), IMF (2007, 2010, 2012, 2013b, 2014a) calculations by the Ifo Institute.

The return on government securities depends on the public finance accounts of thegovernment, whereas the return of securities issued by the CBoS is determined in advance(IMF 2013a). For the year 2015, the average return on GICs was equal to 20% p.a. (CBoS2016b), while the GMCs market yield was 11.8% p.a. (CBoS 2016a). Currently GMCs areexpectedtoachieveayieldof18%p.a.(CBoS2016b).Theaveragenominalrateofreturnonforeigncurrencygeneralgovernmentdebt ismuch lowerandmorestablethanthedomesticmurabahaprofitsmarginandhoversataround4%(seeFigure4­24).

Domestic debt market

The majority of Sudan’s general government debt is external (see Figure 4­23). Domesticborrowing is likely to increase which would lead to additional macroeconomic risks asborrowing from domestic banking sources is expected to increase inflation further (UNDP2014, AEO 2012). In July 2016, the annual inflation rate stood at 16.5% (Abdelaziz andNoureldin2016).

The largest share of government sukuk is held by commercial banks (41%) followed bycompanies and funds (25%) and the Central Bank of Sudan (22%). Only 12% of totalgovernmentsukukisownedbyindividuals(IIFM2016).

Foreign borrowing

Since2008,theshareofexternalpublicdebtintotalpublicdebthascontinuouslygrownfromaround80%tonearly90%today.Ahugepartofthisincreaseistheresultofaccumulatedlate­interestasapproximately86%(2013)ofSudan’sexternaldebt is inarrears(ADB2014,EIU2016).DuetoU.S.sanctions,theunfinished“zero­option”agreementandtherelatedhighdebtofSudan,externalborrowingoptionsarelimited.Inordertofinanceinfrastructureandotherdevelopment projects, the government continues to seek loans from GCC states, as well asChinaandIndia(UNDP2014).AlargeshareofSudan’sexternaldebtisowedtotheArabGulfstates,inparticularSaudiArabiaandKuwait(Leo2010,SudanTribune2012).Asofend2013,these and other Non­Paris Club Creditors represented the largest share of Sudan’s externaldebt (see Figure 4­25). Paris Club creditors hold 32%, while the remainder is held by

-30

-20

-10

0

10

20

30

40

50

20062007200820092010201120122013201420152016

in p

erc

en

t

Murabaha Profits margin (%)

Inflation (%)

Average nominal rate of returnon foreign public debt (%)

Average real rate of return ondomestic public debt (%)

ImprovingPublicDebtManagementIntheOICMemberCountries

125

international financial institutions (14%), commercial banks (12%) and other foreignsuppliers(4%)(ADB2014).

Figure 4-25: Sudan – Creditor Structure of External Public Debt (2013)

Source: ADB (2014).

WithinSudan’s public andpubliclyguaranteeddebt, the largest share isDollar­denominateddebt,whichhasaccountedforanincreasingsharesince2008andwasequalto55.5%in2014.Other currencies which represent substantial shares of external public debt are the SwissFranc (12.9%) and the Euro (7.3%). The remaining 24.3% represent other currencies,including but not limited to Pound Sterling and Japanese Yen. The currency structure isexpected to remain relatively stable, mainly because the debt load is already high and thepotentialfornewexternalloansislimited.Between2013and2033,theIMF(2014)estimatesthatnewexternalloanswillrepresentabout0.4%ofGDP.

C) Policy Recommendations

Facing huge challenges following the secession of South Sudan in 2011 and the unsecureeconomicenvironmentduetothelowoilprice,itisimportantforSudantodevelopacrediblepolicydialogue,inparticularwithrespecttothehighpublicdebtlevels(ADB2014).Overall,itis recommended to reduce the substantial foreign debt overhang. It is thus important todevelopthedomesticdebtmarketanddiversifythedomesticinvestorbase.

In order to reach an agreement concerning debt relief, Sudan has to show the internationalcommunity that it strengthens its efforts both in stabilizing the political environment andimproving macroeconomic conditions (ADB 2014). The IMF has repeatedly encouraged theauthoritiestocontinuetheirengagementwithinternationalpartnerstosecurecomprehensivesupport for debt relief and the lifting of sanctions, which would “pave the way for foreigninvestment and financing for growth and poverty reduction” (IMF 2016a). One importantdeterminantof futureborrowingrequirements isthesettlementofadisputebetweenSudanand South Sudan about fees for the transit of South Sudanese oil, which represents a keyrevenuesourceforSudan(UNDP2014).Duetotheglobaldeclineofoilprices,Sudanisunderpressuretofurtherdecreasethesefees,whichwouldleavethecountrywithhigherborrowingneeds(EIU2016).Itisimportanttoreducethefiscaldeficitandpursueatightmonetarypolicytoachievelowerinflation(IMF2016a).

It would be helpful to strengthen the legal and institutional framework to ensure aprofessionalprocessofborrowingatdifferentlevels,bothdomesticallyandexternally(Osman2013), and to strengthen the public disclosure of economic data. Although the MoFNE has

38%

32%

14%

12%

4%

NonParisClubCreditors

ParisClubCreditors

InternationalFinancialInstitutions

CommercialBanks

ForeignSuppliers

ImprovingPublicDebtManagementIntheOICMemberCountries

126

already introduced a computerized Government Resource Planning system (GRP), theDomesticDebtUnitattheMoFNEstillhasproblemstokeeprecordofthedomesticpublicdebt(Osman2013).Inordertoevaluatethemacroeconomicconditionscorrectlyinstitutionssuchas the MoFNE and the CBoS are advised to regularly publish detailed, up­to­date andconsistentdata(UNDP2014).

WithrespecttoIslamicfinance,Sudanisrecommendedtoreviewanddevelopnewmonetaryand fiscal policy strategies. The prohibition of interest rates poses a challenge for thedevelopment of an efficient interbank market. The central bank cannot use standard debt­based instruments in the interbank money market and government security market toinfluenceliquidityandimplementmonetarypolicyoperations.However,thecentralbankcanuse equity­based instruments such as joint venture (musharaka) or possibly trusteepartnership (mudaraba) facilities, whose trading values reflect market expectations ofeconomicperformanceandratesofreturn.Inanyevent,ex­antecalculatingadequateprofitsand rates of return for equity­based instruments linked to government or central bankingoperationsisaverycomplextask(IMF2013a)andthefinancierisexposedtoasignificantlossrisk.Recentinnovationssuchastheso­calleddeclining mudaraba,inwhichthebank’sshareinthe facility decreases in line with pre­specified returns of investment, might prove useful toaddresstheseissues.

ImprovingPublicDebtManagementIntheOICMemberCountries

127

4.1.9 Republic of Albania

A) Public Debt Dynamics

Intheaftermathoftheglobalfinancialcrisis,economicgrowthintheRepublicofAlbaniawaslow. The country suffered from economic difficulties in key Euro area trading partners andstagnant bank lending of its mostly foreign­owned banks. Low growth combined with highprimarydeficitsincreasedgeneralgovernmentdebtby9%ofGDPbetween2007and2012.In2012,governmenthadtoremovethelegalceilingfortheshareofgeneralgovernmentdebtinGDP,whichhadbeensetat60%.Therecognitionofasubstantialstockofdomesticarrearsandunpaidbillsisresponsibleforaone­timeshiftofgeneralgovernmentdebtbyfivepercentagepointsrelativetoGDPin2013.In2015,generalgovernmentdebtincreasedby2.3percentagepointsrelativetoGDPandpeakedat72.1%(seeFigure4­26),anumberamongthehighestinits peer group of countries in Central, Eastern and Southeastern Europe (CESEE). Publiclyguaranteed debt plays a minor role making up 5.4% of total government debt. It is mainlydevoted to projects for the supply of basic goods (water, energy, transport). Governmentactivity results from the poor technical and financial performance of the sector of energyproduction and distribution. Given government’s interest in an adequate energy supply, thisposesfiscalrisksthatcannotbequantifiedex­ante.

Albaniahasrunpersistentandlargepublicdeficits.Whiletheyamountedto10%ofGDPinthelater1990s, they were reduced to6%ofGDP in the early2000s. Deficitswere the result ofpoortaxcollectionandoveroptimisticrevenueforecastsontheonesideandweakexpenditurecontrolsontheother.Fiscalstimuliduringthefinancialcrisisbeginningin2008contributedtorisinglevelsofgeneralgovernmentdebt.Net interestpaymentshavebeenlargerthan2%ofGDP over the period under consideration starting in 2006. This lowered the generalgovernment balance substantially. While the primary budget balance was almost balancedbetween2010and2012,itamountedto­1.2%in2015.

The Albanian government is pursuing a significant fiscal consolidation (IMF 2016). Inparticular, debt levels areexpected to start declining in 2016. Government aims at reachinglevelsbelow60%by2019.Whiletheprimarybudgetbalanceisprojectedtoturnpositivein2016, the IMF is less optimistic about the future path of budget balances than the AlbanianMinistryofFinance,whichforecastsasteadyincreaseinthebudgetbalancereachingasurplusof2.4%in2018(MoF2016a).

Budgetary risks stem from contingent liabilities in the electricity sector, spendingcommitments in PPPs and government arrears. Additionally, increased borrowing throughSOEs further enhances the risk through the rising number of guarantees. Due to thegovernment’s expansive fiscal policies in transport and energy infrastructure, guaranteesincreasedby1.7percentagepointsto9.4%ofGDPin2015(EuropeanCommission2016).

ImprovingPublicDebtManagementIntheOICMemberCountries

128

Figure 4-26: Albania – Public Debt Dynamics

Sources: WEO (2016), IMF (2016), calculations by the Ifo Institute.

02

04

06

08

0

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Gross Net

Projections

Public Debt

02

55

07

51

00

% o

f to

tal p

ub

lic d

eb

t20

0620

0720

0820

0920

1020

1120

1220

1320

1420

15

Creditor Structure of Public Debt

Domestic External

-6-4

-20

24

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Net lending

Primary net lending

Net interest payments

Net Lending

02

04

06

08

01

00

% o

f e

xt.

pu

blic

de

bt

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Currency Structure of Ext. Public Debt

USD EUR GBP

CHF JPY Mult.

Other SDR

ImprovingPublicDebtManagementIntheOICMemberCountries

129

B) Public Debt Management

GovernanceandStrategyDevelopment

Legal framework

PublicdebtmanagementinAlbaniahasseenmajorreformsandimprovementsinrecentyears.An official public debt management strategy has been formulated in close cooperation withinternationalinstitutionsliketheWorldBankandtheIMF.Thereformincludestheapplicationofnewanalyticaltools,thedefinitionandcommunicationofstrategicobjectivesandimprovedplanning over the medium term. Progress is evaluated continuously and reforms areimplemented on an ongoing basis. A major achievement of the Public Finance ManagementReformof2007­2013wastheintroductionofaMediumTermBudgetProgram(MTBP)asaninstrumenttoadda longerperspectivetopublicfinanceplanningandtopromote long­termsustainability of public finances. This reform has been accompanied and legalised by newlaws.26

Managerial structure (incl. coordination with other policies)

In 2008, government established the General Directorate of Public Debt Management(GDPDM) within the MoF as a major step in the reform process. It is headed by a DirectorGeneralwhoreportstotheDeputyMinisterofFinance.Itmanagescentralgovernmentdebt,prepares a medium­termdebt management strategyand draftsanannualdebtmanagementreport.

The Law on the Bank of Albania from1997 mandates a clear separation between monetarypolicyoperationandpublicdebttransactions.Nevertheless,theBankofAlbaniaisallowedtoextendcredittogovernment,albeittheamountislimitedto5%oftheaverageannualordinarygovernment revenue. Credit has to be denoted in domestic currency and has a maximummaturityofsixmonths.

In late 2010, a World Bank team undertook a Debt Management Performance Assessment(DeMPA)forAlbania(WorldBank2011).Atthattime,havingassessed50countries,Albaniawasamongthefewthathadsounddebtmanagementpractices ina largenumberofDeMPAareasand,inaddition,hadsubstantiallyimprovedsinceanearlierassessmentin2007.Whilegovernance, strategy development and coordination with other economic policies wereidentifiedasstrongareas,externalborrowingandoperationalriskmanagementshowedroomforimprovement.

Accordingtothe2011PEFAassessment(Gustafssonetal.2011),publicfinancemanagementhad improved considerably since 2006 although indicators still show moderate levels. Inparticular, actual revenues and expenditures deviated substantially from those projected.Albania’sreformofthecountry’spublicfinancialmanagementsystemisassistedbyexternalpartners, namely international organizations such as the World Bank and the IMF andgovernments of partner countries. On the one hand, they provide financial support forinvestmentsinITandtrainingofstaff.Ontheotherhand,theyhelpthroughtheirexperienceandtechnicalexpertise.

26 Law no .9965, dated 18.12.2006, “On State Borrowing, State Debt and Guarantees of the Republic of Albania”, for the

centralgovernment,andLawno.9896,dated04.02.2008,“OnLocalBorrowing”,forlocalgovernment.

ImprovingPublicDebtManagementIntheOICMemberCountries

130

Debt reporting

The Albanian MoF publishes indicators on the level, composition and creditor structure ofdomestic and external general government debt on its homepage (see MoF 2016c and linksthereon). The MoF also publishes detailed statistics on the level and evolution of debt in itstriennialMTDMS(see.,e.g.MoF2016a).Reportsontheexactamountofcontingentliabilitiesdo not exist. Quantifications of total public payment arrears and contingent liabilities areavailable.

Debt management strategy (incl. risk management)

Albania’s debt management strategy is based on both, quantitative and qualitative analyses:thequantitativepartcomparescostsandrisksoffouralternativedebtmanagementstrategiesunder different economic scenarios with special focus on refinancing, interest rate andexchange rate risks. Its forecast horizon covers five years. These analyses are based onanalyticaltoolsprovidedbytheWorldBankandtheIMF.Thequalitativepartanalysesspecialtopics,e.g.strategiestodevelopthedomesticfinancialmarketforsovereignbonds.The2009strategy document came up with the following recommendations: reduce the share of debtdenominatedindomesticcurrency(Lek)tobelow60%;increasetheaveragedurationofdebt;haveallexternalborrowingdenominatedinEuro;stoptousetheBankofAlbaniaasasourceoffunding.

In 2014, the MoF published its “Public Finance Management Strategy 2014­2020” (MoF2014a),whichpursuestheobjectiveof long­runsustainabilityofpublicfinances.Theoverallobjective of the public finance management reformstrategy is to “achieve a better balancedandsustainablebudgetwithareduceddebtratiothroughstrongerfinancialmanagementandcontrol and audit processes and where budget execution is properly linked to Governmentpolicies” (MoF 2016a, p.5). The strategy was developed in cooperation with national andinternational institutions as it incorporates targets set by international donors, namely theIMF,theWorldBankandtheEU.Goalsencompassincreasedaccountabilityandtransparencyinpublic finances, fiscaldisciplineandefficientmanagementofresources. Inthisregard, thefollowingstepswillbetaken:

1) RevisionoftheaccountingstandardstomakethemcompliantwiththeEPSASstandards;2) Implementationofanintegratedfinancialmanagementsystem;3) Lawamendmenttopreventgovernmentcorruption;4) Systematictrainingforstaff.

Thesectionondebtandcashmanagementdevelopsastrategytobettermatchrevenueflowswith payment needs aiming at minimizing costs at a given level of risk. In this regard, thegovernment will review the current institutional arrangement, formulate a comprehensivedebt management strategy and develop a strategy for thedevelopment of domestic marketsforsovereignbonds.

ThecurrentMTDMSisalogicalextensionofthereformsinprocessandcontinuestofocusonthe reduction of refinancing and interest rate risk (MoF 2016a). For the objectives in themediumterm,pleaserefertoTable4­10.Inthisregard,thefollowingpoliciesareplannedandstarted:

Financing on the domestic market by long­term securities with fixed interest rates(issuanceof7­yearand10­yearbonds)

Financingonexternalmarketsatconcessionaltermsprovidedbyinternationalinstitutions

ImprovingPublicDebtManagementIntheOICMemberCountries

131

Evaluation of an additional Eurobond issuance, which might have positive spill­overs ondomesticandexternalfinancingconditionsthankstothebuild­upofapositivereputation

Contributetofurtherdevelopthedomesticsecuritiesmarket

Table 4-10: Albania – Cost and Risk Indicators for the Government’s Debt Portfolio (2015)

Risk type Risk indicator Indicator 2015

Objective (2018)

Refinancing risk

ATMofdomesticdebt(inyears) 2.0 Min.2.2ATMoftotaldebt(inyears) 4.9 Min.4.7Domesticdebtmaturedin1year(%oftotal) 55.9 Max.46.0Totaldebtmaturedin1year(%oftotal) 31.6 Max.26.0

Interest rate risk

ATRofdomesticdebt 1.8 Min.2.0ATRoftotaldebt 3.2 Min3.0Domestic debt reevaluated within 1 year (% oftotal)

67.7 Max.60.0

Totaldebtreevaluatedwithin1year(%oftotal) 58.1 Max.55.0Exchange rate risk

FXdebt(%oftotal) 48.5 50.0­55.0

Note: ATM = Average Time to Maturity; ATR = Average Time to Refixing; FX = Foreign exchange; ST = Short-term. Source: MoF (2016b).

During2015,debtmanagementsuccessfullyengagedinoperationstoincreasethematurityofpublicdebt(MoF2016b):first,itfocusedontheissuanceoflong­termbonds(7­yearand10­year bonds). Second, it actively repurchased bonds of low remaining maturities. Concerningforeigndebt,theissuanceofa€450millionfive­yearEurobondinNovember2015anddonorfinancingwiththeIMFandtheWorldBankhaveloweredrolloverriskinthenearfuture.

Debtmanagement,however,misseditstargetforthecurrencycompositionofdebtaccordingto which debt denoted in domestic currency should make up at least 55% of total debt.However, the reliance on foreign debt enabled Albania to further decrease refinancing andinterest rate risks because foreign markets provide financial resources at longer maturitiesthan domestic markets. This highlights the trade­off between the different risk categories.Moreover, given the narrow domestic investor base, refinancing on international marketsmightbe favourable forthedomesticeconomy. Itpreventsthatgovernmentdrainsdomesticfinancial resources and makes it easier for private domestic investors to get their projectsfinancedlocally.

While the average maturity of outstanding debt amounts to 4.9 years, there is an importantdifferencebetweendomesticandforeigndebt: theaveragematurityofdomesticdebtequalstwoyears,whileforeigndebthasanaveragematurityof8.1years.Theshareoflong­termdebt(debtwithamaturityexceedingtwoyears)hasincreasedsteadilyinrecentyears(seeFigure4­27).During2015,theaveragematurityofdomesticdebtincreasedby0.2yearsandthatofforeigndebtby0.5years.

During2015,theshareofdebtwithfixedinterestrateshasslightlydecreasedto68.2%.Theentire domestic debt is contracted at market interest rates, whereas foreign debt is equallydividedbetweendebtatmarketratesanddebtatconcessionalterms.

ImprovingPublicDebtManagementIntheOICMemberCountries

132

Figure 4-27: Albania – Public Debt Composition by Instrument Maturity

Source: MoF (2016a).

BorrowingandRelatedFinancialActivities

Operations (incl. Islamic finance)

Borrowinginthedomesticmarket isundertakenbyissuanceofsovereignbondsindomesticcurrencythroughanauctionprocessmanagedbytheBankofAlbania,whichactsasanagentfor the MoF. The government issues bonds with a variety of maturities: T­Bills with zerocouponsare issuedforthree,six,nineandtwelvemonths.Coupon­bearingT­Bondsexist formaturitiesoftwo,three,five,sevenandtenyears.Only5­yearbondshaveafloatinginterestrate,whichisannuallyre­setdependingonmarketconditions.

The Albanianbankingsystem ischaracterised by thedominance of subsidiaries ofEU­basedbanking groups: in 2015, of a total of 16 commercial banks nine were linked to EU­basedbanks.AccordingtotheWorldBank(2014b)onlyonebankisclassifiedasanIslamicbank:theUnitedBankofAlbaniaisownedbyaSaudi­Arabianfinancialinstitution.

For public finances sovereign sukuk seem to play no role so far. Official documents like thecurrent MTDMS (MoF 2016a) do not mention sukuk financing as an option. In its StabilityReport,loanagreementswithotherIslamiccountriesdidnotmeettheconditionsforIslamicbankingandwerenotshariacompliant.AnexampleisaloancontractwiththeSaudiArabianfundfordevelopment,whichin2011agreedtolend$25milliontotheAlbaniangovernmentfortheconstructionofahighway.Interestpaymentswerepartofthecontract.

Domestic debt market

At the end of 2015, general government debt had the following characteristics: 52.8% wasdomesticliabilities,whereas47.2%wasexternaldebt(seeFigure4­26).Whiledomesticdebtwas held entirely in tradeable instruments, only 13.4% of external debt was tradeable ininternational markets. The major part of external debt consists of loans for developmentprojects,budgetsupportbytheIMFandtheWorldBankaswellasliabilitiesguaranteedbytheWorldBank,whicharenottradedonfinancialmarkets.

ImprovingPublicDebtManagementIntheOICMemberCountries

133

Theshareofgovernmentdebtdenotedindomesticcurrencyamountsto51.4%.Itdecreasedby 5.5 percentage points during 2015. While domestic debt is mostly denoted in domesticcurrency (97.2%), external debt is entirely denoted in foreign currencies. Among foreigncurrencies,theEuroisdominantmakingup70%offoreigncurrencydebt.ThisconcentrationontheEuro ismotivatedby the relativestableexchange rate betweentheAlbanianLekandtheEuro,theintensivetradelinkswiththeEuroareaandAlbania’splantobecomeamemberoftheEU.

Albania has a functioning, albeit narrow domestic debt market. Government securitiesauctioned in2015wereboughtbythebankingsector(50.3%),theBankofAlbania(20.1%),individuals (15.5%), financial institutions(13.5%)and non­financial institutions (0.7%). Theconcentrationofsecuritiesinthebankingsectorreflectsthenarrowinvestorbase.Moreover,asecondary market for government securities is missing. Compared to 2014 these numbersshowatendencytowardstheintendeddiversification:Whiletheshareofthebankingsectorhasdecreased,individualsandnonfinancialinstitutionshavebecomemoreimportantplayers.

Figure4­28showsthebreakdownofoutstandingdebtbetweentypesofholders.Thefiguresofoutstandingdebtandnewpurchases,showthatthelowershareofthebankingsectorinnewpurchasesiscoveredbyalargershareoftheBankofAlbania.ThisindicatesthattheBankofAlbania has become a more important player on the market for government securities. Animportantquestionishoweverwhetherthesetransactionsaremotivatedbymonetarypolicyorbygovernmentfinancingneeds.

Figure 4-28: Albania – Creditor Structure of Domestic Public Debt

Source: MoF (2016a).

Foreign borrowing

Externalpublicborrowinghasconsistedofmultilateralandbilateralofficialcredits,syndicatedbankborrowingandEurobonds.Amongthemost importantmultilateralcreditorshavebeenthe World Bank, the European Bank for Reconstruction and Development, the EuropeanInvestmentBank,theCouncilofEuropeDevelopmentBankandtheIslamicDevelopmentBank.Officialcreditshavebeenthegovernment’spreferredsourceofexternalfinancingbecauseofitsconcessionalnature.Thesegenerallyhavebeenrelatedtoareformprogramme.ThemostimportantbilateralcreditorshavebeenGermany(throughKfWDevelopmentBank),ItalyandAustria. In 2010, Albania issued its maiden Eurobond amounting to €300 million. BeforeenteringtheEurobondmarketsomeprerequisiteshadtobefulfilled–includingtheexistenceof a sovereign credit rating – such that the first Eurobond issuance was considered animportantstepinaccessingexternalfinancialmarkets.

ImprovingPublicDebtManagementIntheOICMemberCountries

134

C) Policy Recommendations

The Albanian governmenthas implementedchallenging reforms in public debt managementwiththeintentiontoadoptglobalbestpractices.Thesuccessisremarkable:first,thecreationoftheGeneralDirectorateofPublicDebtManagementandtheformulationofaclearstrategyhavecontributedtotheaccountabilityandtransparencyofpublicdebtmanagement.Second,thestructureofpublicdebthasbeenmoved inlinewiththestrategicobjectives.Asaresult,interestrateandrefinancingriskshavebeenreduced.

The analysis, however, reveals a number of risks: rollover risk is still high: (1) the averagematurity ofoutstanding marketable debt is low. In 2015 financing needs amounted tomorethan37%ofGDP.(2)Asubstantialpartofpublicdebtisheldbydomesticbanks.Thiscreatesaviciouslinkbetweenpublicfinancesandthebankingsector:publicdefaultwoulddamagethebankingsectoranddifficultiesinthebankingsectorendangergovernment’ssuccessinplacingitsbondsonthedomesticmarket(WorldBank,2014a).TheserisksareenhancedbythefactthatthegovernmentrevenuesrelativetoGDParelow.Thisrestrictsfiscalleewayandmakesitmore difficult for government to run substantial surpluses in order to reduce public debtlevels.Therefore,itisimportanttoimprovethetaxsystemfocusingontaxcomplianceandanexpansionofthetaxbase.

The Bank of Albania purchased substantial shares of sovereign bonds: in 2014 and 2015,wheredataisavailable,theBankofAlbaniapurchasedabout20%ofnewlyissuedgovernmentsecuritieswhileitheldabout10%ofalloutstandinggovernmentsecurities.Thisposestheriskthatmonetaryandfinancialpoliciesarenotclearlyseparatedandthatthecentralbankcannotimplementanindependentmonetarypolicy.Publicdebtmanagementiswellrecommendedtofurtherdiversifyitsinvestorbase.

The average maturity of domestic sovereign bonds is still relatively low. Public budgetmanagement might benefit from the low interest rate environment to lengthen the averagematurityofdebttoreducerefinancingriskandreducetheamountofbondsissuedannually.

Itisimportanttoachieveabalancebetweendomesticandforeignborrowing.Overrelianceondomesticborrowingbythepublicsectormayleadtoacrowding­outofprivatesectorcredit.Given that the domestic investor base is limited, access to foreign investors makes thegovernmentmoreindependentfromdomesticdevelopments.AfterthesuccessfulissuanceofEurobondspublicdebtmanagementshouldtrytoturnthisinstrumentofexceptionalfinancingintoageneralone.Eurobondsmightbe issuedonaregularbasis.Ingeneral,Albaniashouldreduce its reliance on concessional external debt and broaden its base of internationalinvestors. While a stable macroeconomic development and close links to the EU might behelpfulpreconditions,aclearcommitment tothepublicdebtmanagementstrategymightbehelpful in itself. In this sense, it is important that Albania continues its process of fiscaladjustmentinordertobuild­upagoodreputation.

ImprovingPublicDebtManagementIntheOICMemberCountries

135

4.1.10 Islamic Republic of Iran

A) Public Debt Dynamics

General government debt of the IslamicRepublicof Iran isat a moderate levelcompared toother OIC member countries. However, between 2006 and 2015 the debt­to­GDP ratioincreasedfrom12.5%to17.1%(seeFigure4­29).Afteratemporarydeclinein2011,thedebtratiorosesharplyfrom8.9%to16.8%ofGDPin2012.Theincreasemaybeattributedtolarge­scalesocialhousingprojects,andaninjectionofpublicrevenuesintotheconstructionsector.Followingtheholdofmanyinfrastructureprojectsandtheexpansionofthetaxationsystemintheaftermathofdecliningoilprices,generalgovernmentdebtisexpectedtoremainrelativelystable, increasing only slightly to 17.7% of GDP in 2017. The IMF (2015a) even expects adeclineofthedebtratioifarrearsaresettled.Generalgovernmentnetdebtfluctuatedbetween­2.8% of GDP in 2008 and 5.8% of GDP in 2012. Overall, general government net debt isexpectedtostabilizeataround3%ofGDP.Estimationshaveputcontingentliabilitiesthroughtradefinancingofdomesticbanksof7percentofGDP($9.2billion)inMarch2014(Bovaetal.2016).

Between2006and2011, Iran’s budgetbalance waspositive,but thebudgetsurplusbecamesmallerover time. Iranexperienced aneconomicdownturnfollowing thesanctions imposedbytheUnitedNations,theUnitedStatesandtheEuropeanUnion(EU)in2010and2012(IMF2014, 2015a). In particular, the intensification of sanctions imposed by the EU in 2012(External Action Service 2012) gave rise to a drop in economic activity. The decline of oilprices starting in 2014 and the related decline in oil revenues have also contributed toincreasing deficits (Mojarrad 2015). Net borrowing reached its maximum at 2.9% of GDP in2015.AstheUNsanctionsarescheduledtobeliftedstepbystep(UNSecurityCouncil2015),primary net lending is expected to narrow and supposed to stabilize at around 1% of GDP,whilenetlendingisexpectedtostabilizeataround1.5%ofGDPin2017.Budgetconsolidationis a result of increasing domestic revenues and the impact of a subsidy reform approved in2010(Mojarrad2015).Debtservicecostsstartedtoincreasein2014,comingalongwiththeincrease ingeneralgovernmentnet debt. In general, the reliefofeconomic sanctions in Iranprovides a wide range of opportunities for economic improvement in Iran, which may bestrengthenedbyaccompaniedstructuralreforms(seealsoVersailles2016).Thegovernmenthasbeenespeciallyactiveinderegulatingtheelectricity,gasandoilmarketssince2005.Inanyevent, electricity and gas and oil industries remain vulnerable to exchange rate fluctuationsandareinneedformodernizationinvestments.

ImprovingPublicDebtManagementIntheOICMemberCountries

136

Figure 4-29: Iran – Public Debt Dynamics

Sources: WEO (2016), IMF (2014, calculations by the Ifo Institute. Note: Due to missing data the bar for 2015 concerning the creditor structure of public debt (top-right panel) is missing.

-50

51

01

52

0

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Gross Net

Projections

Public Debt

02

55

07

51

00

% o

f to

tal p

ub

lic d

eb

t

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Creditor Structure of Public Debt

Domestic External

-4-2

02

46

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Net lending

Primary net lending

Net interest payments

Net Lending

02

04

06

08

01

00

% o

f e

xt.

pu

blic

de

bt

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Currency Structure of Ext. Public Debt

USD EUR GBP

CHF JPY Mult.

Other SDR

ImprovingPublicDebtManagementIntheOICMemberCountries

137

B) Public Debt Management

GovernanceandStrategyDevelopment

Legal framework

Thereisnolegalframeworkconcerningpublicdebtmanagementyet.However,theMinistryofEconomicAffairsandFinance(2016)signsresponsiblefortherepaymentofdebtsincurredbyministries and state owned enterprises. A legal foundation steering fiscal policy is also notestablished yet, as criticized by the IMF (2015a). The IMF suggests developing a legalframeworkincludingthepossibilitytoimposecostsonpolicymakerswhodonotcomplywithfiscalrules.

Managerial structure (incl. coordination with other policies)

Toimprovedebtmanagementpracticesandstrengthentransparencyandaccountability,Irancreated adebt management unit (DMU) in2015 which isan integratedpartof the TreasuryDepartment.Asthecentralinstitutionresponsiblefordebtmanagement,theDMUidentifiesallgovernment debt and associated risks (Shahriari et al. 2016). The DMU also develops amedium­term fiscal strategy and issues a well­developed range of Islamic debt instruments,includingsukuk,IslamicTreasuryBillsorIslamicSettlementBills(Shahriarietal.2016).Otherinstitutions suchas theCentralBankof Iran(CBI), theMoneyandCreditCouncil (MCC), theSupremeAuditCourtofIran(SAC),theVice­PresidencyforStrategicPlanningandSupervision,the Iran Privatisation Organisation (IPO) and the Organisation for Investment, Economic &TechnicalAssistanceofIran(OIETAI)supporttheDMUwiththeirspecificknowledge(Akrami2014).Overall,TheIslamicRepublicofIranadherestogoodgovernancecriteria.

Debt reporting

Theinformationinfrastructureandthepublicsectoraccountingandauditingprocedureshaveimproved over the past, but do not fully meet international standards until now (Akrami2014),whichgivesrisetoincompletedebtdata.Astrategicdocument,whichcontainsspecificobjectivesandindicatorsfordebtandriskmanagement,isnotavailable(IMF2015d).Formalaccountsforcontingentliabilitiesdonotexist.

The Iranian government took efforts to improve public debt management and reportingpractices. From July to August 2015, a Technical Assistance Mission by the Fiscal AffairsDepartmentoftheIMFvisitedIranandgavesomeadvicetotheIraniangovernment(Hansen2015). Inparticular, the Iraniangovernment intends to improve the qualityofdatawhich isexpected to be updated on a regular basis in the near future (IMF 2015b). Iran alsoparticipatedintheTenthDebtManagementConferencewhichtookplacein2015aspartoftheUNConferenceonTradeandDevelopmentinGeneva(UN2015).

Debt management strategy (incl. risk management)

TheMinistryofEconomicAffairsandFinance(MEAF)ofIranconsidersdebtmanagementasan important part of their general strategy to reduce fiscal vulnerability and strengthenfinancialsystems.

BorrowingandRelatedFinancialActivities

Operations (incl. Islamic finance)

In 1983, the Usury­Free Banking Act abolished interest­rate practices in Iran within threeyears(Warde2000).Apartfromthat,creditexpansionandforeignexchangeavailabletobankswere strictly regulated bytheCentralBankand theSupremeCouncilof Banks.Due to these

ImprovingPublicDebtManagementIntheOICMemberCountries

138

strict national regulations, basically all assets in Iran are considered to be Islamic financeassets.Iranrepresents37.3%oftheglobalIslamicbankingassets(IFSB2016).Whileinterestpayments are forbidden in Iran’sunique formofsharia compliant banking system (Vizcaino2015),theusageofprofitandlosssharingwithintheframeworkoffinancialintermediationisallowed(Ahmad1994).AstheCBIcannotaccessthetraditionalinstrumentofsettingthebankrate,itsetsmaximumandminimumprofitsharingratios,whichmaybeadjustedfromtimetotimetosteercreditexpansion(Ahmad1994).TheCBIalsodeterminesso­called ‘provisionalrates’whichareminimumandmaximumexpectedratesofreturnfromvariousfacilitiestothebanks and maximum rates of commission the banks are allowed to charge for investmentaccounts (Ahmad 1994). The deposit rates are updated regularly by the Money and CreditCouncil(MCC)andvaryregardingmaturity.Thebanks'provisionaldepositrateceilingissetat20%,proportionatetothematurityofdeposits(CBI2015a).Theminimumexpected lendingrates for transaction contracts are set specifically for each economic sector, e.g. formanufacturing and mining, construction and housing, agriculture, trade and services andexports (CBI 2015b). The expected maximum profit rate of Profit­/Loss­Sharing (PLS)contractsconcludedbetweenbanksandcreditinstitutionsandtheirclientsissetat24%.Themaximum lending rate on loans and facilities extended by banks and credit institutions fornon­PLScontractscurrentlyequals21%(CBI2015a).

In contrast to the private banking system, transactions among the government and otherelementsofthepublicsectorincludingtheCBIandnationalizedcommercialbanksarelegallybasedonafixedrateofreturn.Thismaybeproblematic,asthefactthatthegovernmentcantakeloansunderaconventionalfixedratewithinaninterest­freebankingsystemimpliesthatbank charges would be indexed to this rate instead of representing profits of borrowingentities(IqbalandMirakhor1987).

In 2015 Iran has started to expand its Islamic bond market. There are various types ofinstrumentssuchasmurabahah,musharakah,ijarah,anddifferenttypesofsukukwithvariousmaturities.InSeptember2015,IslamicTreasuryBills(ITBs)wereintroducedinIran(Kalhor2016).TheseITBsarezerocouponbondssoldatadiscounttotheirfacevalues.Theacquiredprofit isnon­taxableandtheyarenon­transferable(GoodarziandKalhor2016). ITBshaveaoneyearmaturityandaretradedpredominantlyattheIranFaraBourse,anover­the­counter­marketoperatingincapitalmarketsforlistedandunlistedsecurities(IranFaraBourse2016).TheeffectiverateofreturnofITBsisexpectedtobehigherthantheofficialbankdepositratethat is set by the central bank (Bozorgmehr and Arnold 2015). Sovereign sukuk, ijarah andSovereignSettlementBillswereissuedforthefirsttimewiththebeginningoftheIranianfiscalyearinMarch2016(Kalhor2016).

The Iranian fiscal year 2016 included the issuance of 225 trillion rials ($7 billion) of debt,which contain 75 trillion rials ($2.5 billion) of ITBs while the remainder represents sukuk(Kalhor 2016). Short­term instruments such as ITBs are predominantly used for cashmanagement,ensuringanefficientcashflowandsecuringthegovernment’sliquidity.

The effectiveborrowingcost rate on total government debt at the end of theyearremainedrelativelystableataround1%between2011and2015.In2016,borrowingcostshavebeenexpected to increase to 4.8%, and this positive trend is projected to continue. The IMFemphasizedthattheseborrowingcostratesarehighduetotheinefficiencyofthedepositandlending rates caps set by the CBI, and that market­determined borrowing cost rates wouldbetter reflect liquidity and risks (IMF 2015a). New international issuances of governmentbondsareexpectedtocomewithayieldofaround8%(Fitch2015).

ImprovingPublicDebtManagementIntheOICMemberCountries

139

Domestic debt market

Iran’s general government debt is largely held domestically, which is why Iran DebtManagement ismainlysubject torefinancingrather thanexchange rate risks.Between2008and 2011, the share of domestic general government debt to total general government debtremained on a high level between 62.1% in 2008 and 65.6% in 2011. In 2012, the share ofdomestic debt increased to 83.9%. Until 2017, these high levels of domestic generalgovernmentdebtprevailduetotheeconomicsanctions,whichledtoaweak involvement ininternational economic relations (Atkinson 2015). While total (public and private) externaldebtrepresentsapproximately2.7%ofGDPin2015,thisshareisexpectedtoriseinthefuturewhenthesanctionswillbelifted(IMF2015a).

Loans owed to the banking system represent a large share of domestic general governmentdebt (IMF 2015d). The claims of the banking systems on the public sector (including state­owned companies) equalled 1676.9 trillion rials (about $53 billion) in March 2015 (CBI2015a). The government indebtedness to banks in 2015 amounted to 1191.3 trillion rials($37.6billion)or60%ofgeneralgovernmentgrossdebt,andthegovernment’sindebtednessto the central bank was equal to about 9.2% of general government gross debt. The bondmarketrepresentslessthan3.2%oftheoverallfinancingneedsintheIranianfiscalyearthatendedinMarch2015,whileapproximately89.2%wasfacilitatedbymoneymarketsand7.6%bythestockexchange(Kalhor2016).Between2011and2015,only5%ofthetransactionsinIraniancapitalmarketstookplaceinthebondmarket(Kalhor2016).However,Iranplanstofurther develop the domestic bond market by lowering transaction costs to reduce debtservicecostsofthegovernmentoverthemedium­tolong­term(IMF2015a).Suchadomesticsecurities market is supposed to increase financial stability and to improve financialintermediation as it fosters greater competition and the evolution of related financialinfrastructure,instrumentsandservices(Kalhor2016).

Foreign borrowing

IranissuedinternationaldebtforthelasttimeinJuly2002(IMF2002).TheEuro­denominatedbonds worth of about $1 billion were paid off full in 2007 (Fitch 2015). Iran is currentlyplanning its return to international debt markets in order to finance the recovery after thenucleardealpreparedthewayoutofisolation(Montevalli2016),whichisexpectedtoopenupopportunitiestotransformthedebtpractisesinIran(IyigünandTozy2016).

External public debt is denominated predominantly in Euros and U.S. Dollars. The share ofEuro­denominatedpublicdebtintotalexternalpublicdebtdecreasedslightlyfrom56.53%in2008 to 50.8% in 2012. U.S. Dollar has the second largest currency share, which equalled33.15% in 2008 and increased continuously to 39.9% in 2014. The share of Japanese Yenshows a decreasing trend from 7.40 in 2008 to 3.5% in 2014. The same pattern can beobservedwiththeshareoftheSwissfranc,whichstartedwith3.7%in2008anddisappearedalmostcompletelyin2014(0.6%).Futureexternalpublicdebt,whichisexpectedtobeissuedafterthesanctionsarelifted,islikelynottobedenominatedinU.S.Dollar,buteitherinIranianRialsorinEuro(Wright2015).

ImprovingPublicDebtManagementIntheOICMemberCountries

140

C) Policy Recommendations

ItisrecommendedtofurtherimprovetheinstitutionalframeworkofpublicdebtmanagementinIran,clearlydefiningandmakingpublictheoperations,membersandcompetenciesofthenewlycreatedDMU.Therelationsandinteractionsbetweenthevariousentitiesintegratedindebt management might also be strengthened. In particular, the precise division ofcompetenciesbetweentheDMU,theCBIandtheMCCremainsrathervague.ThisspecificallyincludesthetasksoftheCBIwhichshouldremainitsindependence.Moreover,atransparentlegal framework for debt management is required (Hansen 2015). The development of ageneralstrategyfordebtmanagementandamedium­termdebtmanagementstrategybytheDMUfollowinginternationalstandardswouldmaketheframeworkmorecomprehensive.

Oneof themostpressing issuesconcernscollecting,managingandpublishingdebtdata.Forexample, government finance statistics should go beyond the coverage of the centralgovernmentandalsoincludesubordinatepublicentities.Theroleofsemi­publicinstitutions,especially those lead by members of the military or religious community, may be betterclarified,giventheirimportancewithregardstoeconomicactivitiesandpublicdebtholdings.Statisticsmaybereleasedmoreregularly(IMF2015a).Althoughdataonpublicandpubliclyguaranteeddebtispublished,furtherimprovementsarestillnecessaryastheclassificationsdonotmeetthestandardsoftheIMFExternalDebtGuide(IMF2015b).

Moreover, more transparency regarding the supervision of the banking sector as a largecreditor to the government is recommended, at it currently lacks clear transparency onownershipand operations. It isadvisable to restructure the high numberofnon­performingloansandbanksingeneral,andsolveissueswithunlicensedfinancial institutions,whicharepartly responsible for these high borrowing cost rate levels threatening macro­economicstability(IMF2015a).Giventheimportanceofthebankingsectorforpublicborrowingneeds,thegovernmentshouldensuresufficientliquidityinthemarket.Thismaybeofspecialconcerngiven that banks mostly hold illiquid assets in the housing and construction sector, whilesimultaneouslymanagingcomparativelyhighdebt.

It is important to re­evaluate the nexus between fiscal and monetary policy regarding theconcerns connected to the implementation of Islamic banking in Iran. The fact that thegovernmentistheonlyactorthatisallowedtoborrowatafixedrate,alsoinfluencestheotherbankchargeswhicharesupposedtoreflectactualprofitsoftheborrowingentities(IqbalandMirakhor1987).Varioussolutionshavebeenpresentedtosolvethisissue,amongothersthereplacementof thefixedratebyavariablerateofreturntiedtonominalGDPgrowthortheallowanceforthegovernmenttoaccessaportionofthedemanddepositsatthecentralbankon a non­interest basis (Iqbal and Mirakhor 1987). Despite these issues related to Islamicbankingpractices,theIMFsupportsIran’stransitionfromloanmarketstowardsmarket­basedapproaches to finance government debt, which include explicitly the issuance of sukuk andotherIslamicdebtinstruments(IMF2015a).

Finally, the expected lift of sanctions provides great opportunities for internationalcooperation.Foreigndirectinvestmentsmaylessenthepressureonpublicaccountstofinanceneeded investments in the oil and gas sector. Moreover, it opens room for a deepenedeconomiccooperationwithintheregionandwithotherOICmemberstates.

ImprovingPublicDebtManagementIntheOICMemberCountries

141

4.1.11 Republic of Kazakhstan

A) Public Debt Dynamics

ComparedtootherOICmembercountries, theRepublicofKazakhstan’sgeneralgovernmentdebt levels are moderate. General government debt increased from 7% to 26% of GDPbetween2006and2016.27Additionalliabilitiesnotrecordedinthebudgetarysystem(“quasi­debt”)amounttoabout30%ofGDP.28Beforetherecentoilpricedecline,thesteadyincreaseindebtwasaccompaniedbyanevenlargeraccumulationoffinancialassetsbecauseofhighoilrevenues.Consequently,generalgovernmentnetdebtdecreasedfromaround­11%in2006to­19%ofGDPin2014(seeFigure4­30).

Thissituationhaschangedverysignificantly in2014becauseof thesustained lowoilpricesand decreasing export revenues (especially from Russia and China). To finance increasingbudgetdeficitsandtoavoidamajorrecession,$16billionweretransferredfromtheNationalOilFund(NFRK)tothebudgetin2015,anamountbeingabovethelimitof$8billionallowedaccordingtotherules.Externalmonitorscriticizedthebreakofthetransferrulesbecausethismay have negative effects regarding sustainable debt financing. The oil fund’s revenues areestimated to be at around $5 billion on average per annum during “normal” times, but aresignificantly lower at present. It is planned to reduce the transfers from the NFRK to thebudgetto$5billionin2016.TheNFRK'sassetsfellfrom$77.2billioninAugust2014to$63.5billion at the end of 2015and have beenestimated to equal about $60 billionby the end of2016.AccordingtointerviewsourcesinNovember2016,itisintendedtoreturntosustainableoilfundreservesevenatthecostofmoreseverebudgetcuts.

Netlendingdecreasedfrom7.7%ofGDPin2006to­1.3%ofGDPin2009becauseofdecliningoil revenues during the global financial crisis. In 2015, net borrowing was 5.3% of GDPfollowing the decline inoilprices. The non­oilbudget deficit in2008was 3.7%and steadilyroseto13%in2015.Thegovernmentintendstoreducethenon­oildeficitto10%in2016andto7% in2020. For2025a non­oildeficitof not more than6%is intended, which would besustainable according to the MoFand the World Bank.At present, majorbudgetcutscanbeobserved.

Sincemid­2015,thevalueoftheTengehasdevaluatedtowardstheU.S.Dollarbyabout50%.To avoidamajorrecession,an infrastructure investmentprogramfor theperiod2015­2017has been launched to stimulate the economy, which is partly financed by the NFRK and bysomeexternalfinancialinstitutionssuchastheWorldBank,theAsianDevelopmentBankandtheEuropeanBankforReconstructionundertheProgrammeFrameworkAgreement(PFA).$9billion will be contributed by Kazakhstan and another $9 billion by external sources. FitchRatingshas recentlydowngraded Kazakhstan to 'BBB' because it regarded thegovernment’sfunding of infrastructure investment out of the NFRK and financing troubled state­ownedenterprisesasnon­sustainable.

Contingentliabilitiesimposeapotentialrisktopublicdebt.Theriskismainlyduetothelargequasi­fiscalsector.Thenationalwelfarefund(SamrukKazyna),hasestimated50%ofGDPinassetsand30%ofGDPinexternaldebt.Thehighlypronouncedbankingsectorwithunstableoutlook may need further recapitalization in the future, imposing additional contingent

27EstimatesbytheMoFinNovember2016.ThesefiguresslightlydeviatefromthefiguresintheIMFWEO2016.

28Quasidebtrelatesmainlytoliabilitiesofthethreemajorpublicholdings:Samruk­Kazyna,BaitarekandKazagro.

ImprovingPublicDebtManagementIntheOICMemberCountries

142

liabilities.Incaseofabankcapitalshortfall,theneededmonetaryinjectionmaywellbeabove4%ofGDP(Moody’s2016).

Figure 4-30: Kazakhstan – Public Debt Dynamics

Sources: WEO (2016), IMF (2015), calculations by the Ifo Institute.

-30

-20

-10

01

02

0

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Gross Net

Projections

Public Debt

02

55

07

51

00

% o

f to

tal p

ublic

debt

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Creditor Structure of Public Debt

Domestic External

-50

51

0

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Net lending

Primary net lending

Net interest payments

Net Lending

02

04

06

08

01

00

% o

f e

xt. p

ublic

debt

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Currency Structure of Ext. Public Debt

USD EUR GBP

CHF JPY Mult.

Other SDR

ImprovingPublicDebtManagementIntheOICMemberCountries

143

B) Public Debt Management

GovernanceandStrategyDevelopment

Legal framework

AnimportantlegaldocumentregardingdebtmanagementinKazakhstanisthebudgetcode(inparticular Section 12).29 State borrowing in Kazakhstan is defined as borrowing by thegovernment Kazakhstan, local executive bodies and the National Bank of Kazakhstan (NBK)(Republic of Kazakhstan 2008, Article 199). Resolution No. 906 (2009) defines the limits onstateborrowing(WorldBank2011).

Managerial structure (incl. coordination with other policies)

Several institutionsareresponsibleforpublicdebtmanagementinKazakhstan.TheMinistryofNationalEconomy isformallyresponsibleforoverallcoordinationandstrategicplanningofpublic debt management. This unique concept is based on the view that Kazakhstan is adeveloping country and therefore debt management strategies have to be in line withdevelopmentplanningwhichisthecorecompetenceofthisMinistry.

The MoF is responsible for budget financing (incl. issuing of government bonds), debtmonitoring and debt statistics. The Department for the Administration of GovernmentObligations(DebtOffice)attheMoFisthede factocoordinationandplanningofficeaccordingto interview sources, the reason being that the Debt Office has the best information and isinvolved strongly in coordination issues. The Treasury is responsible only for operationalactivitiessuchaspaymenttransactions.

The NBK takes part in the debt management coordination by monetary policy operations(issuingshort termbillsofexchangetoreduce liquidityof thecommercialbankingsectortoreduce inflation)andcurrencypolicy(freefloatingexchangerateforthepastoneandahalfyearswithseveredevaluationeffects).TheNBKactsindependentlyaccordingtothelaw,buttheMinisterofFinanceisafullmemberoftheNBKCouncilofDirectors.

TheNBKadministerstheNFRK,whichfinanciallysupportsthegovernmentbudget.TheNBKalsoadministerstheUnifiedPensionFundwhichisownedbythecontributors.Whenthemanyprivatelyrunpensionfundswereunifiedandtakenover(inadministrativeterms)bytheNBKin2013, theMoFused itas an important source ofdebt financing.The fundwasused up to47%tobuyinflation­adjustedgovernmentbonds(dividendsareinflation­bondedplus0.01%to0.1%).Thisfinancingtoolisdiscussedcontroversially.Theuseofthefundshouldratherbeatitsowndecisionandnotforcedbygovernmenttoinvestinlowyieldinggovernmentbonds.TheNBKintendstoissuemedium­termbills­of­exchangeinthefuturepartlytosubstitutefortheissuingofthecontroversialpensionfundbonds.Overallcoordination,especiallydecisionsregardingtheuseoftheNBKadministeredfundsisdonebytheCoordinationCouncilchairedby the President of the Republic. Members are the Prime Minister, the Ministers and to acertainextentrepresentativesofinternationalfinancialinstitutions,whohaveanobservationstatus.Atalowerlevel,theCoordinationCouncilchairedbytheMinsterofNationalEconomy,attended by relevant Ministries and representatives of the Budget Committee, prepares andrecommendsdecisionsforthePresidentialCoordinationCouncil.

29 Other important legal documents are Rules of Budget Execution and its Cash Service approved by Decree of the

Government, RKNo.22(2009),Rules of Registration and Recording of Government and Government Guaranteed Loans, Loans Supported by Government Sureties, Government Guarantees and Sureties,approvedbyDecreeoftheGovernment,RKNo.739(2010)andConceptNo.234On management of State and gross external debt(2006)(WorldBank2011).

ImprovingPublicDebtManagementIntheOICMemberCountries

144

Debt reporting

Monitoringofdebtdevelopments,internalreportingofmonitoringresultsandprovidingdebtstatistics are main tasks of the Debt Office. Monitoring and related reporting is carried outaccordingtoIMFstandards.TheMinistryofEconomyprovides“consolidated”reportsoftotalpublic debt which also include quasi­debt developments and debt related operations of theNationalBank.Thesemonitoringreportsarepublishedquarterly.

Debt management strategy (incl. risk management)

The general purpose of state borrowing is to fund the budget deficit, to promote thedevelopment of the domestic debt market and to refinance government debt (Republic ofKazakhstan2008,Article205).

Debtmanagementincludestheannualassessmentandforecastofstateandstateguaranteedborrowing, the identification of limits on government debt on the provision of stateguarantees, and the categorization of debt amounts into forms and conditions (Republic ofKazakhstan 2008, Article 203). Debt management also includes measures to optimize anddiversifythedebtstructureanddebtservice(useofvariousderivative financial instrumentssuch as options, swaps, forwards, futures and other transactions), and debt refinancingstrategiesandriskmanagement(RepublicofKazakhstan2008,Article203).

Althoughthereisnopublisheddebtmanagementstrategyfollowinginternationalguidelines,theStrategicPlanoftheMoFaddressessomeareasofdebtmanagement(MoF2011).Fortheperiod2011­2015,thekeymeanstoreducedebtwerethemonitoringofgovernmentdebtandthe “full and timely implementation of obligations to creditors on payment of remuneration(interests) on governmental loans” (MoF 2011, p. 7). In order to secure the accountability,transparency and efficiency of the involved institutions, the introduction of a risk controlsystem to monitor the activity of administrators through an external supervision wasestablishedin2012/2013.

The general strategy of the MoF and the medium fiscal plans serve as general guidelines topublicexpenditureanddebtmanagement.TheMoFfurtherpublishesdetaileddescriptionsofthegovernmentsecurities,coupondatesandauctionrulesonitswebsite(MoF2016).

BorrowingandRelatedFinancialActivities

Operations (incl. Islamic finance)

ThegovernmentofKazakhstanisallowedtousebothloansandgovernmentsecuritiesforthepurpose of borrowing (Republic of Kazakhstan 2008, Article 200). Government securitiesmight have short­ (up to 1 year), medium­ (1 to 5 years) and long­term (over 5 years)maturitiesandmaybeissuedincertificatedandnon­certificatedforms.Theycanbeissuedatnominalorpresentvaluewithfixedandnon­fixed(floating)ratesofremuneration(RepublicofKazakhstan2008,Article200).

Kazakhstan uses various debt instruments (see Figure 4­31). The borrowing costs dependprimarily on the refinancing rate set by the NBK. A major disruption of the yields ongovernmentsecuritieswascausedbytheloosemonetarypoliciesworldwideduringtheglobalfinancialcrisisin2008/2009,whichledtoasharpdecreaseofyieldsonshorttermsecurities.Medium­ and long­term obligations were affected less strongly. For instance, the yield onIndexedGovernmentTreasuryobligationswiththreemonthstooneyearmaturity(MEIKAM)decreased from 9.1% at the end of 2007 to around 2% at the end of 2010. Long­termgovernment Treasury obligations (MEUKAM) and Long­term Savings Government Treasury

ImprovingPublicDebtManagementIntheOICMemberCountries

145

obligations started to increase in 2014, which can be attributed to the general increase inpublic debt levels after 2013 and the oil price decline in 2014/2015. The recent largefluctuationsoftheyieldonshort­termnotesoftheNBKmaybetheresultofthedecisionofthegovernmenttofloattheTengein2015.

Figure 4-31: Kazakhstan - Yields on Government Securities

Sources: National Bank of the Republic of Kazakhstan (2016), calculations by the Ifo Institute.

Kazakhstan is actively participating in the international bond markets. In 2014, Kazakhstanhasissueditsfirstinternationaldollar­denominatedbondsince2000(Cox2014).Theissuancewas worth of $2.5 billion and consisted of 10­year bonds (1.5 billion) with a yield of 1.5percentage points above mid­swaps and 30­year bonds with a yield of 2 percentage pointsover mid­swaps. Long­term maturities were chosen in order to build out a yield curve(PorzecanskiandPronina2014).In2015,Kazakhstanissuedthesameamountwiththesamematuritiesagain(Pronina2015).

WiththeintroductionofthelawonIslamicbanksandIslamicfinancein2009,Kazakhstanhasapproved Islamic finance. The laws specify the rules concerning Islamic finance instrumentsandallowtheissuanceofIslamicfinanceinstrumentsbothforprivateandpublicinstitutions(NBK2013).ThefirstIslamicBankinKazakhstanopenedin2009(asubsidiaryofthebankAl­HilalfromtheUnitedArabEmirates).WiththetransferoftheFinancialCentrefromAlmatytoAstana(supposedtobe implemented in2017) thebank is intended to opena majorIslamicfinance market. The first quasi­sovereign sukuk was issued in 2012 by the state­ownedDevelopmentBankofKazakhstaninMalaysiaandamountedtoaround$73million(Vizcaino2015).TheNBKheldaninternationalworkshopabout“IslamicModesofFinanceandSukuk”in 2012 (NBK 2012) and legislative amendments have been adopted in order to facilitateIslamicfinancefurther.

ThereisnouseofIslamicfinanceinpublicdebtmanagementuntilnow,althoughthebudgetcode makes provision for issuing state securities in the form of state Islamic securities. Thestate Islamic securities are allowed to be issued in accordance with the basic principles ofIslamic finance and certify “the right of the holder to receive income from the assets on thebasisofthesubleaseagreement”(RepublicofKazakhstan2008,Article206).Theintroduction

0

2

4

6

8

10

12

14

16

18

20

01

.06

08

.06

03

.07

10

.07

05

.08

12

.08

07

.09

02

.10

09

.10

04

.11

11

.11

06

.12

01

.13

08

.13

03

.14

10

.14

05

.15

12

.15

07

.16

Short­termNotesofNBKwith7daysto1yearmaturity

МЕIКАМ:IndexedGovernmentTreasureobligationwith3monthandabovematurity

MEOKAM:Medium­termGovernmentTreasureobligationwithabove1yeartill10yearsmaturity

МЕUКАМ:Long­termGovernmentTreasureobligationwithabove5yearsmaturity

МЕUZКАМ:Long­termSavingsGovernmentTreasureobligationwithabove5yearsmaturity

МUIКАМ:Long­termIndexedTreasuryBill

RefinancingRateofNBK

ImprovingPublicDebtManagementIntheOICMemberCountries

146

ofsovereignsukukisexpectedtocreateabenchmarkfortheissuanceofcorporatesukukandisplanned to increase flexibility to the funding of strategic projects supporting theindustrializationofthecountry(NBK2016).Thisstatement,however,hasnotbeenfollowedbyimplementationactionuptillnow.

Domestic debt market

Kazakhstan’s general government debt is largely domestic debt, whose share remainedrelatively constant between 2006 and 2015 at around 74% (see Figure 4­30). DomesticgeneralgovernmentdebtofKazakhstancanbecategorizedintolong­termtreasuryliabilities(59%), long­term treasury balanced liabilities (33%) and medium­term treasury liabilities(8%). The United PensionFund(almost $20 billion)hasbeenused up to more than45% topurchasebondsissuedbytheMoF.

Foreign borrowing

The largest share of external debt (47%) consists of international bonds issued at theEurobond market (see Figure 4­32). With a share of 29%, the International Bank forReconstruction and Development represents the second­largest part of external debt. OthercreditorsaretheAsianDevelopmentBank(15%),theJapanInternationalCooperationAgency(5%), the European Bank for Reconstruction and Development (1%) and the IslamicDevelopmentBank(1%).Theshareofexternaldebtowedtoforeigncommercialbanksequals2%.

Figure 4-32: Kazakhstan – Creditor Structure of External Public Debt (2016)

Sources: NBK (2016), calculations by the Ifo Institute.

External debt, which is dominated by long­term debt (99% in 2016), is predominantlydenominatedinU.S.Dollar,whoseshareincreasedbetween2008and2014fromaround42%to 96%. The reason for the high U.S. Dollar share is a policy to lend predominantly fromInternational financial Institutions which is cost efficient and risk reducing. Over the sameperiod, theshareofPoundSterling inexternaldebtdecreasedfrom53%toaround3%.TheremainderrepresentsSDRsandothercurrencies,includingbutnotlimitedtoEuro(Figure4­30).

29%

15%

1%1%

5%

2%

47%

InternationalBankforReconstructionandDevelopment

AsianDevelopmentBank

EuropeanBankforReconstructionandDevelopment

IslamicDevelopmentBank

JapanInternationalCooperationAgency

Foreigncommercialbanks

Eurobonds

ImprovingPublicDebtManagementIntheOICMemberCountries

147

C) Policy Recommendations

AccordingtotheWorldBankDebtManagementPerformanceAssessmentin2011,Kazakhstanappears to be very strong in some areas concerning debt management such as the legalframework,governance,operationalriskmanagement,coordinationwithfiscalandmonetarypolicies as well as debt recording and reporting (World Bank 2011). Kazakhstan hasestablishedaninstitutionalandcoordinationsystemwhichisabletohandlepublicdebtwellinthe short­term. Fiscal policies are prudent, the monitoring of debt is well designed and theexistingdebtmanagementpoliciesarerathertransparent.However,medium­and long­termdebtstrategiesandriskmanagementneedtobefurtherimproved.Debtmanagementisdonemore or less on an annual basis. According to interview sources, “back office” work is stillratherdeficient,but“frontoffice”activitieshavebeendevelopedrathersuccessful.

A long­termfiscal policyand strategyas well as related riskmanagementhasnot beenfullydeveloped. Therefore it is recommended to increase back office capacities (analytical andconceptualtaskssuchasanalysis,planning,forecastingandstrategydevelopment)especiallyat the Debt Office to enable appropriate strategy development according to internationalstandards. To meet this requirement, increasing the personnel capacities of the back officecouldbeinparticularaveryrewardinginvestment.Furthermore,developingamedium­termfiscal policy strategy with defined target indicators going along with the development of anappropriate medium­term debt management strategy with the target to settle fiscal debt atsustainable levels would deteriorate risks concerning public debt. For this task it isrecommended to parallel this approach by implementing a controlling strategy for themedium­termdebtandriskmanagementstrategy.

TheuseoftheNationalOilFundfordebtmanagementissomewhaterraticandnotsustainableatthebeginningof2017.TheuseoftheUnitedPensionFundforlargescaleandforcedpublicdebt financing is inhabits certain risks. The NBK’s intension to issue medium­term bills­of­exchange could substitute debt financing by the pension fund at least to a certain extent.Adjusting the National Oil Fund rules for strict application during “normal” times and somedefined flexibility in crisis times seems to be a good solution. The fund should be keptsustainableinamedium­andlong­termperspective.Itshouldbeavoidedtodeviatefromtheagreed upon rules. The forced use for public debt financing of the Pension Fund should bereduced step by step. Consider substitution for this financing resource by the issuing ofmedium­termbillsofexchange(bytheNBK).

Concerning the institutional setup and by looking at the distribution of responsibilities, thecoordination responsibility presently allocated to the Ministry of National Economy can bereviewed. A separate “independent” Debt Management Agency might be created or thecoordination responsibility might be allocated to the Debt Office at the MoF. However, thechange of responsibility should not affect the close coordination of debt management withdevelopmentandinvestmentplanning.

Lastly,includingmeasurestoreducethequasi­publicdebtdevelopmentisrecommended.ThismeanstoreviewtheneedforSOEsaswellastheirprivatization.Quasi­publicdebtmightbeincluded in overall public debt management. Furthermore, Islamic finance sources (sukuk)mightbemoresystematicallyexplored as potentialadditional public debt financingsources,especiallyunderthepurposetoreducecertaindebtrelatedrisks.However,effortsareneededtoreducethecostforsukuklendingbecauseIslamicfinanceinstrumentsareconsideredtobesignificantlymoreexpensivethanconventionallendingtoolsinKazakhstanatthemoment.

ImprovingPublicDebtManagementIntheOICMemberCountries

148

4.1.12 Lebanese Republic

A) Public Debt Dynamics

Withagrossdebtratioamountingtoabout139%ofGDP(andanetdebtamountingtoabout131% of GDP) the Lebanese Republic had the highest debt ratio among all OIC membercountriesin2015.Aftergeneralgovernmentdebthaddecreasedfromover180%to130%ofGDP between 2006 and 2012, debt started to increase again in 2013 and gross debt isprojected to reach about148% of GDP in 2017 (seeupper panel of Figure 4­33). Additionalliabilities(e.g.governmentobligationsto theNationalSocialSecurityFund(NSSF),hospitals,andprivatesectorcontractors)areestimatedtoequalbetween3.9%and7.8%ofGDP(CreditLibanais 2016). Even though the primary balance was positive in most years between 2006and2015,Lebanon’snetborrowingwasoftenveryhighbecauseofhighinterestpayments.Netinterestpayments were reduced from13.9%of GDP in2006 to8%ofGDP in2013,butareprojectedtoriseto11%ofGDPin2017.

Contingent liabilities inLebanonarise fromtransfers toElectricitédu Liban(EdL), the mainpower utility of Lebanon, the National Social Security Fund (NSSF), and liabilities to thecommitment to the fixed exchange rate. Furthermore, contingent liabilities can result fromstate owned companies heading towards privatization. Lebanon may be vulnerable tocontingentliabilityshockssincethesizeofitsbankingsectorislargecomparedtotheoveralleconomy(IMF2015b).

B) Public Debt Management

GovernanceandStrategyDevelopment

Legal framework

In 2008, theLebanese government adopted the PublicDebtDirectorate Law(no. 17),whichaims at institutionalizing debt management functions at the Ministry of Finance (MoF). Thelaw allows the Lebanese government to issue new debt of up to $400 million. Additionalforeigncurrencyissuancesmustberatifiedbythebudgetorbyastand­alonelaw.AllforeigncurrencydebtissuancesaresubjecttoauthorizationbyaresolutionoftheCouncilofMinistersandtransactionsareconductedbytheMoF.

Organizational structure (incl. coordination with other policies)

The mandate for public debt management is held by the Public Debt Directorate (PDD), adivision of the MoF. While the PDD is the primary institution regarding debt management,other institutions are also involved in the debt management process: front officeresponsibilitiesareheld by the MoF(Eurobond issuances in foreigncurrencies), the Councilfor Development and Reconstruction (bilateral and multilateral project loans in line with itsmandate) and the Banque du Liban (management of domestic debt auctions). Back officeresponsibilities are held by the MoF (foreign currency debt) and the Banque du Liban(domesticdebtaswellasbilateralandmultilateralproject loans).Thecoordinationbetweenpublic debt management and monetary policy is institutionalized in the so­called High DebtCommittee(MoF2014).

Debt reporting

ToinformthepublicaboutthedebtprofileoftheLebanesegovernment,theMoFpublishesa“Quarterly Bulletin about Debt and Debt Markets”. This bulletin includes detailed debt dataand is published online. The MoF also publishes auction calendars and auction resultsregardinggovernmentbillsandbondsaswellasinformationonratingsandinvestments.

ImprovingPublicDebtManagementIntheOICMemberCountries

149

Figure 4-33: Lebanon – Public Debt Dynamics

Sources: WEO (2016), IMF (2015a), calculations by the Ifo Institute.

Debt management strategy (incl. risk management)

The PDD has developed a medium­term debt management strategy (MDTS) for the years2014­2016,whichisembeddedinthemacro­fiscalframeworkofthegovernmentandupdatedannually.Whilethemainobjectiveofthestrategyis“toensurethatthegovernment’sfinancingneeds and its payment obligations are met at all times, at the lowest possible cost over themediumtolongrunandconsistentwithaprudent,acceptabledegreeofrisk”(MoF2014,p.2),thestrategyalsoputsemphasisonthedevelopmentofprimaryandsecondarydomesticdebtmarkets. Restrained domestic financing capacities have presented an obstacle for economicdevelopment inLebanon.Forthispurpose,thestrategystressesthe importanceofproactivesupportofmarketdevelopment,forexamplethroughatransparentandpredictabledomestic

05

01

00

15

02

00

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Gross Net

Projections

Public Debt

02

55

07

51

00

% o

f to

tal p

ub

lic d

eb

t

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Creditor Structure of Public Debt

Domestic External

-10

-50

51

01

5

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Net lending

Primary net lending

Net interest payments

Net Lending

02

04

06

08

01

00

% o

f e

xt.

pu

blic

de

bt

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Currency Structure of Ext. Public Debt

USD EUR GBP

CHF JPY Mult.

Other SDR

ImprovingPublicDebtManagementIntheOICMemberCountries

150

debt issuance strategy. Moreover, public debt management should create a yield curve ofgovernmentbondsandbillstosupportthetransmissionprocessofmonetarypolicy.

Thestrategy identifies therefinancingriskofmaturingdebtandpotentiallyadverse interestratemovementsasprimaryrisk factors(seealsoTable4­11).Giventheserisks, thestrategyproposesthe furtherextensionofboththeaveragetimetomaturityandtheaveragetimetorefixingofthedebtportfolioasitguardsgovernmentfinancesfromthenegativeimplicationsofprospectiveincreasesininterestrates.Inordertocoverredemptionsandinterestpaymentsofforeigncurrencydebt,thestrategyaimstoincreaseannualforeigncurrencyborrowingbyraisingtheceilingonannualforeigncurrencyborrowing(currently30%oftotalborrowing).To enable higher foreign currency borrowing, additional legislature might be needed.According to the strategy, the quantification of borrowing and risk targets will remain aninternal matter of the MoF with support from the High Debt Committee and actualperformancewillbecomparedtothesetargetsregularly(MoF2014).

Table 4-11: Lebanon – Cost and Risk indicators for the Government's Debt Portfolio (2013)

Type of risk Risk indicator Domestic debt

External debt

Total debt

Targets (tot. debt)

Cost of debt Interestas%ofgovt.revenues 24 17 40 WAIR(in%) 6.7 5.9 6.4

Refinancing risk

ATM(years) 3.5 5.6 4.3 >4.3Debtmaturingin1year(%oftotal) 20.4 8.9 15.7 Debtmaturingin1year(%ofGDP)

Interest rate risk

ATR(years) 3.5 5.5 4.3 >4.3Debtrefixingin1year(%oftotal) 20.4 9.9 16.1 Fixedratedebt(%oftotal) 96.3 98.8 97.3

Exchange rate risk

FXdebt(%oftotal) 41.3

Note: Note: ATM = Average Time to Maturity; ATR = Average Time to Refixing; FX = Foreign exchange; ST = Short-term; WAIR = Weighted average interest rate. Classification of domestic and external debt based on currency denomination. Source: MoF (2014).

BorrowingandRelatedFinancialActivities

Operations (incl. Islamic finance)

The government issues T­Bills (maturities of three, six and twelve months) and T­Bonds(maturitiesof2­15years).Over97%ofdomestic­currencydebthasamaturityoftwoyearsormore. Since 2012, Lebanon has also issued domestic­currency debt with maturities of eightyearsormore.InMarch2016,theaveragetimetomaturityofdomesticcurrencydebt(T­BillsandT­Bonds)was3.41years,upfrom1.6years in2009.Short­termT­Billsareusuallyusedforcashmanagement.Thegovernmenthasalsoidlecashreserves,i.e.publicsectordepositsincommercialbanksandtheBanqueduLiban.

The average yields on Lebanese T­Bills have decreased since 2002 when the internationaldonorconventioninParisrestoredconfidenceinthegovernmentandintheeconomy(CreditLibanais2016).Between2006and2015theaverageyieldofLebaneseshort­termrates(three,sixandtwelvemonths)decreasedfrom6.74%to4.93%(seeFigure4­34).

ImprovingPublicDebtManagementIntheOICMemberCountries

151

ComparedtootherIslamiccountries,IslamicfinanceinLebanonisoflowimportance.In2013,Islamic bank deposits accounted for only around 0.4% of total bank deposits (Henry 2016).Although this marks a slight increase from 0.33% in 2007 (Beck et al. 2013), the LebaneseIslamicbankingsectorstillisverysmallincomparisontotheconventionalbankingsector.Atthemoment,onlyfourbanksinLebanonareshariahcompliant(AlBarakaBankLebanon,ArabFinance House, BLOM Development Bank and Lebanese Islamic Bank). Islamic windows ofconventionalbanksdonotexistasonlyindependentIslamicbanksarelegallyallowedtoofferIslamic banking services and products (El Hachem 2014, Halal Times 2015). In contrast toothercountries intheregion,Lebanondoesnot issue debt in the formofsukuk.Besides thelack of sovereign sukuk issuance and the prohibition of Islamic banking activities forconventionalbanks,anumberoflegalrestrictionssuchasthedoubletaxationofIslamicbanksinhibitfurtherdevelopmentofIslamicbankinginLebanon(DailyStar2014,ElHachem2014).

Figure 4-34: Lebanon - Yields on T-Bills

Source: Credit Libanais (2016).

Domestic debt market

Theshareofdomesticgeneralgovernmentdebt intotalgeneralgovernmentdebtwasabout86.2%in2015(seeFigure4­33).InMarch2016,43.9%ofoutstandingdomesticcurrencydebt(T­BillsandT­Bonds)washeldbycommercialbanks,39.8%bythecentralbankand12.5%bypublicinstitutions.Thebankingsectorcurrentlyholdsaround53%oftotalgross(foreignanddomestic)generalgovernmentdebt.

Foreign borrowing

The share of external public debt in totalpublic debt has consistently decreased since 2006andiscurrentlyamongthelowestofallOICcountries(13.8%).Inasimilarvein,theshareofforeign­currency public debt in total public debt declined from 50.4% in 2008 to 38.5% in2015.Lebanonhas,however,recentlyincreasedtheshareofforeigncurrencydebtto41%oftotaldebtbyexchanging$2billionof localcurrencydebt intoEurobonds(Barrington2016).Foreign­currency public debt is largely held by domestic financial institutions. This explainswhytheshareofforeign­currencypublicdebtishigherthantheshareofexternalpublicdebt

0

1

2

3

4

5

6

7

8

9

Perc

ent

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Average 3-month

6-month 12-month

ImprovingPublicDebtManagementIntheOICMemberCountries

152

in total public debt. The share of multilateral debt (debt extended by the IMF or the WorldBank)inforeigncurrencydebtiscomparablylowat2.8%.

InMarch2016,88.9%ofoutstandingforeigncurrencydebtwaskeptinmarket­issuedEuro­bonds,6.2%inprivatesectorloansand4.7%indebtrelatedtotheParisconventionsIIandIII.Averagetimetomaturityof foreigncurrencydebthassteadilydecreasedfrom7.24years in2008 to 6.07 years in March 2016. Public and publicly­guaranteed foreign currency debt ismostlydenominatedinU.S.Dollars(around92%offoreigncurrencydebtin2015)whiledebtdenominatedinEurosaccountsforonlyaround4.5%.

C) Policy Recommendations

PublicdebtmanagementinLebanonfollowsguidelinesproposedbytheWorldBankandtheIMF.ThereisaPublicDebtDirectoratelocatedattheMoFresponsiblefordebtmanagement.However,therearestillseveralinstitutionsinvolvedinpublicdebtmanagement.Aslongasallpublic debt management functions are not centralized at the Public Debt Directorate, it isimportantthatregularlyexchangeofinformationandcoordinationisensured.Lebanon’sdebtmanagementstrategyconsidersseveralriskindicatorsandsetsobjectivesforthepublicdebtportfolio.ThedebtmanagementstrategyispublishedonlineandtheMoFquarterlypublishesinformationonthepublicdebtprofile.

Regardingpublicdebtdevelopments,Lebanoniscurrentlystuckinaviciouscircle:increasingdebtnecessitateshigherdebtservicingpayments,whichinturnincreasebudgetdeficits.Thesebudget deficits result in higher borrowing needs, new debt and, consequently, in increasingdebtstocks.ReducingLebanon’spublicdebtstockshouldbeahighpriorityforpolicymakersin Lebanon. One possible instrument against rising public debt is the privatization of publicsector assets and companies. Privatization would increase government revenue through thereturnonsalesofpublicsectorassetsandalsoincreaseforeigndirectinvestment,competitionin the respective markets and efficiency in the management of state owned companies.Because of the currently high country risk, public sector assets might, however, beundervaluediftheywereofferedforsaleatthemoment.Alternatively,theformationofPublic­PrivatePartnershipscanbringsomeofthebenefitsofprivatization(suchas lowerexpensesfor the state) while leaving control over the assets in the hands of the public sector, whichmakesthempoliticallymorefeasiblethanprivatizations.Toachieveareductioninpublicdebt,changesinthetaxsystemmightbenecessary,suchasaslightincreaseoftheVAT(IMF2015a)orincreasesofcorporateandinteresttaxrates(Neaime2015,CreditLibanais2016).Itisalsoimportanttoimprovethetaxcollectionsystem.

The Public Debt Directorate and the Lebanese Central Bank are recommended to continuemaking use of financial engineering schemes that lower the government’s cost of borrowingand support fiscal sustainability. In particular, these schemes might be used to reduce theyieldsongovernmentbondsand,assuch,thecostofdebt.Thematurityofpublicdebtmightbeexpanded. These objectives could be achieved, for example, through swaps of domesticcurrencydebttoforeigncurrencydebtwhichgenerallyhasloweryieldsandhighermaturity.In theseregards,Lebanonhasrecentlyusedswapsofdomesticcurrencydebt toEurobonds.TheMTDS2014­2016alsodescribestheintentiontoraisetheshareofforeigncurrencydebt.However, the use of these instruments is limited as the share of foreign currency debt isalreadyhighamountingto41%oftotaldebt.Anotherschemewouldbetheswapoflong­termbonds with low coupon to a lower numberof bonds withhighercoupon. While this schemeincreasesthecostofdebtthroughhighercoupon,itlowersthevalueoftheoutstandingpublicdebtstock.

ImprovingPublicDebtManagementIntheOICMemberCountries

153

The share of external debt could be increased by attracting foreign investors. Reducing theshare ofdomestic debt counteracts potential crowding­outofprivatecrediton the domesticdebtmarket.Butifcreditors’expectationsaboutthepoliticalstabilityofLebanoncontinuetodecline, however, the cost of debt will increase.30 Economic measures to reduce public debtwill prove futile if the Lebanese government cannot convince creditorsof its capacity to actandundertakeextensivereforms.TheLebanesegovernmentisrecommendedtopassthefirstbudget law proposal note since 2006 and fill the presidential void that exists since 2014 inorder to create the necessary preconditions for future expenditure rationalizations, whichpotentiallyimprovepublicfinances.

ReducinglegalimpedimentsrestrictingIslamicfinancemayfosterincreasingmarketsharesofIslamicbanksparticularlysincethereisconsiderablepotentialforIslamicbankinginLebanon(ElHachem2014,Naseretal.2014b,Henry2016).Moreover,IslamicbanksinLebanonhavebeenfoundtobeasefficientastheirconventionalcompetitors(Baderetal.2008,Hassanetal.2009).WhilethepublicmightbewillingtoinvestinIslamicfinancialservicesandproducts,alargeshareoftheLebanesepopulationisnotyetawareoftheseinvestmentpossibilities(DailyStar 2014). The Lebanese government may foster the development of Islamic finance byissuingdebt inthe formofsukukbonds. Issuingsukukmayalsoattract investors fromotherIslamiccountries,thereforediversifyingtheinvestorbaseandincreasingtheshareofexternaldebt.

30 In July2016,Fitch Ratingsdowngraded itscredit rating for Lebanon from“B” to “B­“, citing,amongotherreasons, the

“persistentpoliticalrisks”(FitchRatings2016).

ImprovingPublicDebtManagementIntheOICMemberCountries

154

4.1.13 Republic of Turkey

In 2015, the Republic of Turkey’s gross general government debt­to­GDP ratio was 27.5%.Since2006TurkeyhasmanagedtoreduceitsgrossgeneralgovernmentdebtrelativetoGDPby around 16 percentage points and it is projected to fall further in the coming years (seeFigure 4-35).

Since2006,Turkey’sprimarybudgetbalanceofgeneralgovernmenthasbeen indeficitonlyonce,namelyin2009.Interestpaymentsonoutstandingdebthavelargelyoffsetthesurplusofthe primary budget balance and the overall budget balance has been negative during theperiod of consideration since 2006. Since2011 the shortfall in the budget balance has beenrelatively stable at around 1.3% of GDP on average. Interest payments are decreasingcontinuouslyandhavenfallenfromaround6.1%ofGDPin2006toabout2.7%in2015andareexpectedtoremainstable(seeFigure 4-35).Turkeyhasreceivedfavorableassessmentsofitspublicdebtdynamicsby internationalorganizations.Forexample, theDebtSustainabilityAnalysis (DSA) of the IMF (2016) concludes that Turkey’s public debt is sustainable evenunderdifferentshockscenarios. It is,however, sensitive todeclines in theGDPgrowth rate.Despitethispotentialthreat,thegeneralgovernmentdebttoGDPratioisexpectedtodeclinefurther.Further,theIMFhighlightsthesignificantdecreaseingrosspublicfinancingneedsto5.1%ofGDP,whiletheaveragebetween2005and2013usedtobearound15%(IMF2016)31.

Main explicit contingent liabilities of the Turkish government are Treasury repaymentguarantees, debt assumption commitments, Treasury investment guarantees, demandguaranteesprovidedtoPublicPrivatePartnerships(PPPs)anddepositoryinsurancescheme.Oftheseexplicitcontingentliabilities,thebeneficiariesofTreasuryrepaymentguaranteesareSOEs, state and development banks, municipalities and municipal administrations. Theserepaymentguaranteesareprovidedtocreditsgivenbyinternationalfinancialinstitutionsforproject financecreditsdedicatedtospecificsectorssuchasrenewableenergy, infrastructureandSMEs.TheamountofsuchTreasuryrepaymentguaranteesarearound$12.5billionasofSeptember 30, 2016. A second kind of explicit Treasury guarantee, the debt assumptioncommitmentsareprovidedtothecreditorsofPPPsasacreditenhancementtooltriggeredinthecaseofanearlyterminationofthePPPcontractbetweenthepubliccontractingauthorityand the company carrying out the project. It results in the acquisition of the assets of theproject by public as well as the liabilities (senior debt) outstanding as of the date ofterminationofthePPPcontract.ThetotalamountofdebtassumptioncommitmentsprovidedbyTreasuryasofNovember30,2016isaround$8.7billion.

31TheGDPseries forTurkeyhasbeenrevisedafterthereferredIMF(2016)reportwaspublished.Therefore, thebudget

figuresinthisparagraphreflectthesharesasapercentofthepreviousGDPseriesbeforerevision.

ImprovingPublicDebtManagementIntheOICMemberCountries

155

Figure 4-35: Turkey – General Government Debt Dynamics

Sources: Turkish Treasury (2017), WEO (2016), IMF (2016), calculations by the Ifo Institute.

010

20

30

40

50

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Gross general government debt

Gross Public Debt

025

50

75

100

% o

f to

tal p

ublic

de

bt

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Creditor Structure of Public Debt

Domestic External

-50

5

% o

f G

DP

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Net lending

Primary net lending

Net interest payments

Net Lending

020

40

60

80

100

% o

f ext. p

ublic

debt

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Currency Structure of Ext. Public Debt

USD EUR

JPY Other

SDR

ImprovingPublicDebtManagementIntheOICMemberCountries

156

B) Public Debt Management

GovernanceandStrategyDevelopment

Legal framework

In Turkey “effective debt management has an important role for the continuity of economicstability” (Undersecretariat of Treasury 2015, p.7). Article 12 of the Law No. 4749 onregulating public finance and debt management defines the Debt and Risk ManagementCommittee as the institution in charge of public debt management, which takes all strategicdecision.

Managerial structure (including coordination with other policies)

Whereas the Debt and Risk Management Committee (DRMC) provides the general strategicbenchmarks and implementation framework, the operationalization of these benchmarks iscarriedoutbytheGeneralDirectorateofPublicFinanceandtheGeneralDirectorateofForeignEconomicRelations,whicharebothpartoftheUndersecretaryofTreasury(seeFigure4­36).TheUndersecretariatofTreasuryoperatesinclosecoordinationandcommunicationwiththeCentralBankofTurkeyandtheMoF.

TheGeneralDirectorateofPublicFinance(DGPF)isresponsiblefordomesticborrowing,cashmanagement, management of Treasury receivables, risk management, accounting andstatistics operations as well as activities regarding the compulsory savings account. Middleoffice, back office and front office for domestic borrowing are under DGPF. The GeneralDirectorateofForeignEconomicRelations isresponsible forbond issuances in internationalcapitalmarkets,projectfinancingviaexternalloansandbudgetfinancingwithprogramloansfrom international institutions.All strategic decisions on debt management are takenby theDRMC, which is chaired by the Undersecretary (except for certain cases when the ministerchairs the committee). DRMC consists of deputies of Undersecretary and three DirectorsGeneral.

Figure 4-36: Turkey - Organization of Public Debt Management

Source: Undersecretariat of Treasury (2015, 2016a).

ImprovingPublicDebtManagementIntheOICMemberCountries

157

Debt reporting

TheUndersecretariatofTreasuryalsopublishespublicdebtstatisticsforTurkey.Itprovidesdetailed and up­to date statistics on central government debt. In particular, the stocks ofdomestic and external debt are provided on a monthly basis as well as their structure withrespect to maturity, currency denomination and interest type. There is a special seriesapplying the principles of the EU for its Excessive Debt Procedure for debt accounting. Thisdataismadeavailableonline.Moreover,theUndersecretariatofTreasurypublishesamonthlyand annual public debt management report, which visualizes debt developments in a largenumberofappropriategraphs.

Debt management strategy (incl. risk management)

The fundamental objectives of Turkey’s debt management are defined in the constitutedRegulationonthePrinciplesandProceduresforCoordinationandImplementationofDebtandRiskManagement.Accordingtothisregulation,Turkey’spublicdebtriskmanagementisbasedon “a sustainable, transparent and accountable loan policy that conforms to monetary andfiscal policies in respect to macroeconomic equilibriums.” Further, “to address financerequirementsinlimitsofrisklevelwhichisdeterminedbytakingdomesticandinternationalmarketconditionsandcostfactorsintoconsiderationwithminimumcostasmuchaspossibleinmediumandlongterms”.

The Turkish government pursues a debt management approach, which deviates in someaspects from the traditional view of debt management. Traditionally, governments aim atborrowing at the lowest cost and with a reasonable risk level while strengthening thestructure of the debt stock against external shocks. According to the Undersecretariat ofTreasury (2015), Turkey pursues a holistic approach within the broader framework offinancialAsset­LiabilityManagement(ALM),whichtakesabroaderviewinanalyzingnotonlyliabilities,butliabilitiesandassetstogetherdeterminethedesirablestructureofboth.

The Undersecretariat of Treasury monitors macroeconomic risks related to budget andfinancialdevelopmentsandreportstotheDRMC.Inthisprocess,allrelevantpublicauthoritiesare included when necessary and financing programs are updated in correspondence(UndersecretariatofTresaury2015).

Article4ofthe“RegulationonthePrinciplesandProceduresofCoordinationandExecutionofDebtandRiskManagement”definesthefollowingprinciplesforpublicdebtmanagement:

a) Followa sustainable, transparent and accountable borrowingpolicy,which is in linewithmonetaryandfiscalpoliciesandtakesthemacroeconomicbalancesintoaccount;

b)Fulfillthefinancingrequirementsatthelowestpossiblecostinthemediumandlongtermin accordance with the levels of risk determined considering the domestic and externalmarketconditionsandcosts.

TheUndersecretariatofTreasuryformulatesstrategicbenchmarks.Benchmarksareseteveryyearforthefollowingthreeyearsandfrontofficesconductdebtmanagementactivitiesinlinewiththosebenchmarks.Debtmanagementaimsatincreasingtheaveragematurityofdomesticpublicdebtwhilereducingdomesticdebtmaturingwithinoneyear.Liquidityriskshouldalsobe minimized by holding sufficient cash reserves. Exposure to interest rate fluctuations isintended to be limited by the use of fixed rate instruments as the main source of domesticcurrency borrowing; as such the share of the domestic currency debt stock with an interestrate re­fixing period of less than one year is intended to be reduced. To limit detrimental

ImprovingPublicDebtManagementIntheOICMemberCountries

158

effects associated with exchange rate fluctuations, Turkey has been borrowing solely indomesticcurrencyindomesticmarketsince2010.(UndersecretariatofTreasury2016a).

From a budgetary and cash management pointof view, it is necessary to monitor, limit andmitigate therisksassociatedwithcontingent liabilities. In thiscontext, theTurkishTreasuryanalyzes the impact of the Treasury debt assumption commitments, Treasury investmentguarantees and Treasury repayment guarantees on the outstanding debt stock, the fiscaldiscipline and the debt sustainabilityunderdifferent scenarios. To limit the risks associatedwith these contingent liabilities, two separate ceilings are introduced in the annual centralgovernmentbudgetlawwithregardtotheTreasuryrepaymentguaranteesandTreasurydebtassumption commitments. For 2017, both ceilings equal to $4 billion. Mitigation schemesincludetheRiskaccount(anescrowaccounttopayfortheundertakenamountsfromTreasuryrepayment guarantees), Savings Deposit Insurance Fund and Natural Disaster CatastropheInsurancePool.

BorrowingandRelatedFinancialActivities

Operations (incl. Islamic finance)

In terms of domestic borrowing, Turkey issues two, five and ten year fixed rate benchmarkbondsonaregularbasis.Eurobondsareissuedwithmaturitiesofeight,ten,eleven,twelveand30 years. In addition, lease certificates, which were issued in 2012 for the first time, haveturned into a regularly used financing instrument. This type of Islamic finance instrumentmadeupto3.7%oftotalborrowingin2015(seeFigure4­37).Dependingontheredemptionprofileandmarketconditions,TurkishTreasuryisalsoissuingTLdenominatedzerocouponTreasuryBills,zerocouponGovernmentBondsand7yearfloatingratenotes.TherearealsobondsindexedtoCPI.

Figure 4-37: Turkey - Domestic Borrowing by Instruments (2015)

Source: Undersecretariat of Treasury (2016b, p. 26).

10­yearbondyieldsarequitevolatilerangingbetween6%and11%duringthelastfiveyears,yettheyhavenotreachedpost­Lehmanheights(seeFigure4­38).

ImprovingPublicDebtManagementIntheOICMemberCountries

159

Figure 4-38: Turkey - 10-year Bonds Yields

Source: Eurostat (2017).

Changesinregulationsdatingbackto1983allowtheestablishmentofIslamicbanksinTurkey(Erol et al. 2014). Currently there are four Islamic banks operating in the Turkish bankingsector. Two Islamic banks, Albaraka Turk Participation Bank and Kuveyt Turk ParticipationBank are foreign owned. Bank Asya and Turkey Finance Participation Bank are privatelyowned.IncontrasttootherOICmemberstatestheregulationofthebankingsectorinTurkeyisbasedonWesterntypetraditionalbankingsystemsasopposedtoaregulatoryframeworkthatisbasedoncompliancewithshariah.Since1999,participationbanksinTurkeyaresubjecttothesameregulativerulesascommoncommercialbanksare.Regulations,suchasarequiredminimum stake in short­term financial assets, which aim at sufficient liquidity provision,present difficulties for Islamic banks (Erol et al. 2014). The confidence in Islamic banks inTurkeywasstrengthenedbythefactthatnoneofthemfailedinthe2001crisis,asopposedto18otherbanks.TypicalcharacteristicsofIslamicbanks,namelythattheyarenot(oronlytoacertainextent)exposedtointerestraterisksandexchangeratefluctuations,turnedouttobean advantage of Islamic banks over commercial banks (Erol et al., 2014). However, incomparison to other OIC member countries the share of Sharia­compliant deposits in totalcommercialbankdepositsisrelativelysmall,accountingforonly6.6%in2013(Henry,2016).

Concerning public bonds, the Public Finance and Debt Management Law (No. 4749; article7/A)wasamendedinJune2012allowingTurkeytoissuesukuk,i.e.toissuegovernmentbondsin line with Islamic law. Specifically, the law amendment allows the establishment of publicspecialpurposevehicles(SPVs),alsocalledAssetLeasingCompanies,whicharefullyownedbythe Undersecretariat of Treasury. ThoseAsset Leasing Companies areallowed to issue leasecertificates on domestic and international capital markets. According to Undersecretariat ofTreasury,startingwiththe first issuance inSeptember2012sukuksamountingtomorethanTRY20billionweresold.Themajoritywasdenotedindomesticcurrency,asmallerpartinU.S.Dollar.

Domestic debt market

Thereisafunctioningdomesticmarketforpublicdebt.Theshareofdomesticintotalcentralgovernmentdebthasdecreasedslightlyinthelastthreeyearsandamountedto65%in2015.TheabsolutemajorityofTurkey’sdomesticdebtisheldbyresidents,buttheirshareofaround

5.0

01

0.0

01

5.0

02

0.0

02

5.0

0

Yie

lds

on

10

y G

ov.

Bo

nd

s (in %

)

2006 2008 2010 2012 2014 2016

ImprovingPublicDebtManagementIntheOICMemberCountries

160

81%oftotaldomesticdebthasfallenabout9percentagepointssince2009.Whiletheshareofdomestic banks has been decreasing since 2009, the weight of corporate investors in thedomesticdebtmarkethasincreasedsincethen(UndersecretariatofTreasury,2016).In2015,68% of total domestic borrowing was raised in fixed interest instruments. 96,3% of totalborrowingwasraisedin48auctionsandtheremaining3.7%throughdirectsales.Theaveragetimetomaturityofdomesticdebtwas4.6yearsin2015whichismorethantwiceaslongasin2009(UndersecretariatofTreasury2016a).

Foreign borrowing

Since2008theshareofexternalcentralgovernmentdebthasincreasedfrom28%to35%oftotalcentralgovernmentdebtin2015,whichisstillrelativelylowincomparisontootherOICmember countries (see Figure 4­35). Around two­thirds of Turkey’s external debt is held inU.S.Dollars.Thissharehasincreasedbytenpercentagepointssince2006,whiletheshareofexternal debt held in Euros has slightly decreased and amounted to 26% in mid­2016. Theaveragematurityofnewexternaldebtcommitmentswas13.5years in2015,which isaboutthe same level as in 2006, while there have been peaks between 2008 and 2012 when theaverage maturity on new external debt commitments exceeded 17 years. Given Turkey’scurrentdebtstructure,thedirectinterestandexchangeratepass­througharerelativelysmall(IMF2016).

As of December2016, over 73% of Turkey’s stock of external debt consisted of bonds.Only27% were loans. The majority of creditors are multilateral agencies (18% of the centralgovernment’stotalexternaldebtstock)andbilaterallenders(5%).LoansprovidedbytheIMFhavebeenrepaiduntil2013(UndersecretariatofTreasury2016b).

C) Policy Recommendations

TheinstitutionalframeworkofpublicdebtmanagementinTurkeygenerallyfollowsguidelinesproposedbytheWorldBankandtheIMF.Thereisanindependentdebtmanagementagencyresponsible for debt management located at the Undersecretariat of Treasury, which is thesoleauthorityresponsiblefordebtmanagement.Debtlevel,structureandcurrentborrowingaretransparentbecausetherelevantinformationismadeavailableonlineonamonthlybasis.There isamedium­termdebtmanagementstrategy,whichdefinestargets.Moreover,thankstotheimplementationoftheFinancialAsset­Liabilityframework,Turkeyminimizestheriskofilliquidity.ThankstothepredominantrelianceondebtdenominatedinTurkishLira,exchangerate risk is limited. Interest rate risk is also under control due to the preferred use of fixedinterestinstruments.

Turkeyiswelladvisedtocontinueitsprocessoffiscalconsolidationandtofurtherreduceitslevel of external debt. Given its large and persistent current account deficit, it is even moreimportant to keep public debt at sustainable levels. To further refine its public debtmanagement,Turkeymightconsiderpublishingnumericaltargetsinadditiontojustprovidingthedirection, inwhich thestructureof publicdebt is intended tomove.Finally, it shouldbeconsidered to furtherreduce therelianceon domestic banks. In order to maketheeconomymorecrisis­resilient,itisimportantnottooverstressthelinkbetweenthebankingsystemandsovereign borrowing because banking crises might turn into sovereign debt crises and viceversa.

Turkey shares its experience and knowledge in public debt management with partnercountriesviaitsExperienceSharingProgram.Information,trainingandtechnicalassistanceondebt, cash and risk management has been provided to a large number of countries. ThiscooperationandassistancemightalsobeintensifiedwithinthegroupofCOMCECcountries.

ImprovingPublicDebtManagementIntheOICMemberCountries

161

4.1.14 Sultanate of Oman

A) Public Debt Dynamics

Until2014debtlevelshavebeenverylowintheSultanateofOman.Butfollowingthedeclineinoilprices,debtincreasedfrom5.1%to9.2%ofGDPin2015,accordingtoestimatesbythecentralbankofOman.TheIMFprojectsadebtratioofabout14%ofGDPin2015intheWorldEconomic Outlook fromOctober 2016 (WEO2016). However, thedebt ratio in Oman isstillrelatively low compared to many GCC countries, allowing for some maneuverability insustaining the public debt levels given the implementation of fiscal adjustments. But, as perIMFestimates, thedebt­to­GDPratio is likelyto increasefurtherto24.5%in2017.Tocoverthe lower oil revenues, the government sold government assets, raised loans from domesticdebtmarketsandaccessedinternationaldebtmarkets.Sellinggovernmentassetsgivesrisetoanincreaseinthenetdebt­to­GDPratio(seeFigure4­39).TheNationalBankofOmanreportscontingentliabilitiesof$1.75billionfor2016(OmanArabBank2016).

The decline in oil prices during the second half of 2014 gave rise to a strongly increasingbudgetdeficitinOman.In2015thebudgetdeficithasbeenestimatedbytheIMFtobeabout16.5%ofGDP.The governmenthas implemented fiscaladjustmentmeasures to mitigatetheimpactof fallingoilpricesonthebudget. In2016,expendituresoncategoriessuchaswagesand benefits, subsidies, defense and capital investment by civil ministries were reduced byabout $4.5 billion or 8% of GDP. However, the decline in oil and gas revenues may largelyoffset these savings. Fiscal adjustments, combined with the planned corporate income taxreformin2017andtheintroductionofVATin2018,areexpectedtoreducethedeficitinthemediumterm(IMF2016).For2016and2017deficitsofabout13.5%and10.3%ofGDPareprojected. Plans to keep infrastructure investments high and pressure to increase socialexpenditures,especiallytocombattheratherhighunemploymentrate,putthebudgetunderadditional pressure (Economist 2015). Expenditures for the pension system are anotherburden for the budget. Although it is planned to merge the existing seven different pensionfundsintoonefund,theneedforfurtherreformsandadjustmentsmightariseinthenot­too­distant future.Overall, thegovernment’s investmentprioritiesarecurrentlyconcentratedonfive areas: tourism, fishery, mining, manufacturing and transportation. In the medium term,the government is planning to increase revenues from tourism, to strengthen themanufacturingbasefortheoilandnon­oilsector,andtopassanewinvestmentlawtoattractforeign direct investment (Central Bank 2016). Privatization of state­owned entities and anincreaseinpublic­private­partnershipsareplannedmeasurestorelievethestatebudgetinthefuture.

ImprovingPublicDebtManagementIntheOICMemberCountries

162

Figure 4-39: Oman - Public Debt Dynamics

Sources: WEO (2016), IMF (2011, 2013, 2016), calculations by the Ifo Institute. Note: Due to missing data the bars for 2006 and 2007 concerning the creditor structure of public debt (top-right panel) are missing.

ImprovingPublicDebtManagementIntheOICMemberCountries

163

B) Public Debt Management

GovernanceandStrategyDevelopment

Legal framework

AccordingtotheRoyalDecree39/96theMinistryofFinance(MoF)ofOmanhasthe“authorityto borrow on behalf of the Government and keeps records of the government’s financialtransactions”(CentralBank2011,p.6).However, thereareno legalruleswhich“specifythepurpose of borrowing, limits of borrowing and objectives of debt management strategy”(Central Bank 2011, p.6). Organizationally, the Supreme Council of Planning collectsinformationonthefinancingneedsoftheministries.TheFinancialAffairsandEnergyCouncil,composedofministersfromdifferentconcernedauthorities,thendecidesontheallocationoffundsandsetstheguidelinesforthedebtmanagementstrategy.TheMoFhastheauthoritytoborrowaccordingtotheseguidelines.

AccordingtotheBankingLaw2000,theCentralBankofOman(CBO)cantakeloansthatareguaranteedbythegovernment.TheCBOcanalsoissueitsownsecuritiesformonetarypolicyoperations(Art.26oftheBankingLaw2000).

Managerial structure (incl. coordination with other policies)

WhileborrowingdecisionsaremadebythecabinetandmanagedbytheCentralBankofOman,themanagementoftheresultingdebtfallswithinthescopeoftheMoF.TherearetwoseparateunitsintheMoFfordebtissuances:theTreasuryDepartmentisresponsiblefordomesticdebtissuances and mainly carries out back office functions (i.e. short­term borrowing, cashmanagement).TheLoanDepartmentisresponsibleforexternaldebtissuancesandcarriesoutfrontandbackofficefunctions(i.e.negotiationofcommercialanddevelopmentloans).

TheCentralBankofOmanperformsfrontofficefunctionsfordomesticdebtasanagencyofthegovernment. The CBO “can borrow funds on behalf of the Sultanate provided the loans areguaranteedbytheGovernment”(CentralBank2011,p.6)andprovidesashort­termoverdraftfacility to the government up to a certain limit. A committee consisting of MoF and CBOofficials is supposed to meet regularly for the issuance of Treasury Bills and DevelopmentBonds(DBs).

Under the current structure different departments are responsible for public debtmanagement. The government plans to found a Debt Management Office (DMO) in order tohaveasingleauthoritytoberesponsiblefordebtmanagementoperations.

Debt reporting

ReportingofpublicdebtmanagementactivitiesisnotmandatedasthereisnoPublicDebtActin Oman. The annual public state budget is published in the official gazette and on the MoFwebsite.TheCBOalsopublishesmonthlyandannualreportsonpublicdebtdata.

The Sultanate of Oman implemented International Accounting Standards for companiesincluding the section IAS 37 approaching “Provisions, Contingent Liabilities and ContingentAssets”. The Sultanate does not publish further information or data concerning state­basedcontingentliabilities.

Debt management strategy (incl. risk management)

There is no publiclyavailable informationaboutOman’s public debt management objectivesand risk management. For strictly internal use documents on objectives, strategies and riskmanagementexist.

ImprovingPublicDebtManagementIntheOICMemberCountries

164

Borrowingandrelatedfinancialactivities

Operations (incl. Islamic finance)

Oman uses Government Development bonds (GDB), sukuk, loans and T­Bills in public debtmanagement.TheamountofoutstandingGDBssteadilydeclineduntil2011,buthasincreasedagainsignificantlyinthelastyears(seeFigure4­40).

InOctober2015,Omanissuedsovereignsukuk forthefirst time,totaling$649.3millionandhaving a maturity of fiveyears (Economist2015). The strong investors’ demand for Oman’ssukukencouragedthegovernmenttoreturntothedebtmarketinthecomingperiods.InJune2016, Oman issuedsukuk again, totaling$500 million with a profit rate of 3.5% per annum.Thesukukarebasedonanal­Ijarastructureandhaveamaturityofsixyears(Moody’s2016).IssuingsukuksupportsdevelopingOman'sIslamicfinancemarketandopensanewchanneltoraisemoneyforthegovernment.PlanstoissuesukukdenominatedinU.S.dollaragaininthenearfutureexist.

InMarch2015theCBOissuedT­Billsi.e.short­termhighlysecuredfinancialinstruments,withmaturitiesof91daysand­lessfrequently­364daystodomesticbanksforthefirsttimeafterseveral years of non­issuing T­Bills. The outstanding amount of T­Bills was RO 64.2 million($166.7million)at theendof2015.In June2016,domesticbanks investedRO420.5million($1092.6million)inT­Bills(CentralBank2016).

Figure 4-40: Oman - Outstanding Public Debt by Instruments

Source: Central Bank of Oman (2011, 2016), Economist Intelligence Unit (2015), Moody’s (2016), Wall Street Journal (2016), calculations by the Ifo Institute.

Domestic debt market

The share of domestic debt in total debt was about 40% over the period 2005­2016. Bankshold the largest share of GDBs (55.1%), followed by pension funds (36%) other financialinstitutions(8.5%).Individualsonlyholdabout0.2%ofGDBs.Inordertoaugmentliquidityinthebankingsectorandencourageinvestments,OmandecidedinApril2016topermitbanks’investmentsinT­Bills,GDBsandOmansovereignsukuktobepartofeligiblereservesuptoamaximum of two percent of deposits (Central Bank 2016). The scope for further domesticborrowingislimited,becausetheliquidityofthelocalmarketisrelativelyshallow.

0%

2%

4%

6%

8%

10%

12%

14%

Sh

are

of

GD

P

Developmentbonds

Sukuk

Loans

TreasuryBills

ImprovingPublicDebtManagementIntheOICMemberCountries

165

Foreign borrowing

InJune2016,thegovernmentaccessedinternationaldebtmarketsforthefirsttimesince1997and issued bonds in the amount of $2.5 billiondenominated in U.S. dollar with five and tenyear maturities. Yields of these bonds were about 4.72% (Wall Street Journal 2016). Thegovernment plans to borrow a further $10 billion in the next four years to plug its budgetbalancedeficit.

C) Policy Recommendations

Afterdecadesofverylowdebtlevels,Omanhasbeenexperiencingincreasingdebtlevelssince2014becauseofthedeclineinoilprices.TomaintainfiscalsustainabilityandsupporttheUSdollar exchange rate peg over the medium­ to long­term, fiscal adjustment measures areimportant. Fiscal reforms are also likely to reduce borrowing costs and support economicgrowth.Furthermore,theexchangeratepegmayleadtoover­evaluationoftheRial.Thereforethe possibility of adjusting the exchange rate might be considered. The saving measuresalready initiated are a step in the right direction. It is recommended to anchor fiscaladjustmentsbyamedium­termfiscalframeworkandincludephasingoutremainingsubsidies,further contain recurrent government expenditures, and introduce excise duties on specificgoods(IMF2016).Furthermore,areformofthepensionsystemmaybeinitiatedinthenearfuturebeforethefiscalburdenonthebudgetincreasesevenfurther.

Omanissellinggovernmentfinancialassetstocompensatetherevenueshortfallsintheshort­run. However the country has limited fiscal buffers and financing the budget deficit mayrequire additional borrowing, both domestically and externally. Oman has historicallybenefited from low debt levels that have kept borrowing costs down. Thus, issuing debt oninternationaldebtmarketsdoesnotnecessarilyposeasignificantriskatthemoment.Butaspublicdebtisrising,thissituationmaychangeinthemedium­tolong­run.Hence,thepaceandefficiencyoffiscalreformsmayhelptopursuesustainablefiscalpolicies,notonlyonreducingthebudgetdeficit,butalsoonattractinginvestors.

Developing a further deepened and liquid domestic debt market requires proactive effortsfromthegovernment,centralbankandmarketparticipants.Regularissuanceofgovernmentdebtwithdifferentmaturitieswouldsupporttheestablishmentofayieldcurveandhelpfosterthe development of the domestic debt market. The government may resort to T­Bills forfinancing recurrent expenditures. T­Bills help the licensed commercial banks to invest theirsurplusfundsandincreasetheirdiversificationoptionsforliquiditymanagement.T­Billsalsopromotethelocalmoneymarketbycreatingabenchmarkyieldcurveforshort­terminterestrates (IMF 2011). Additionally, issuing sukuk might support the development of Oman'sIslamic finance market and can give the government a new channel to raise money fromspecializedinvestors,e.g.statefunds.

TheauthoritiesinOmanareencouragedtocontinuestrengtheningtheinstitutionalframeworkfor public debt management to ensure that financing needs are effectively managed. Omanmaydevelopatimeboundroadmapforanefficientmarketforgovernmentsecurities,whichmaystartwithanenactmentofa“PublicDebtActforOman”(IMF2008,p.17).Theset­upofacentralized,independentDebtManagementOfficeinsidetheMoFiswelcomed.Amedium­tolong­term debt management strategy could be developed. A focused issuance program ofgovernment securities is essential to establish benchmark securities, further improve theCBO’smonetarypolicyoperationsandspurmarketdevelopment(IMF2013).

ImprovingPublicDebtManagementIntheOICMemberCountries

166

4.1.15 Kingdom of Saudi Arabia

A) Public Debt Dynamics

The Kingdom of Saudi Arabia’s general government debt levels have been low until 2014becauseofhighoilrevenues(seeFigure4­41).32Since2007,whenthedebt­to­GDPratiowasabout17.1%ofGDP,SaudiArabiahasevenmanagedtoreducetheratioto1.6%in2014andthecountryhaddepositsinthebankingsystemintheamountof56%ofGDPatend­2014(IMF2015b).Until2015,thegovernmentofSaudiArabiamainlyuseditsfinancialreservestocoverbudgetdeficits(Torchia2015).Netlendingwasalwayspositivebetween2006and2014withthe exception being 2009, when the global financial crisis hit the oil­production basedeconomy.

Figure 4-41: Saudi Arabia – Public Debt Dynamics

Sources: WEO (2016), IMF (2015a, 2016b), calculations by the Ifo Institute.

Thedeclineinoilpricesstartingin2014,however,gaverisetoadeclineinoilrevenues.Sincethen, the government has been in a net borrowing position, which reached its maximum at16.3%ofGDPin2015.SaudiArabiauseddepositsinthecentralbanktofinancethedeficit,but

32Oil revenues accounted forabout90% of centralgovernment fiscal revenuesbefore2015.The shareof oil revenues is

expected to decrease to around 80% for the years 2015 and 2016 because of the decline in oil prices (IMF 2015a,

2015b).

-60

-40

-20

020

% o

f GD

P

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Gross Net

Projections

Public Debt

-20

-10

010

2030

% o

f GD

P

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Net lending

Primary net lending

Net interest payments

Net Lending

ImprovingPublicDebtManagementIntheOICMemberCountries

167

alsostartedtoissuegovernmentsecurities.Thedeficitin2016,whichisestimatedat13.6%ofGDPfollowingthesustaineddeclineofoilprices,willbe financedbyadepositdrawdownof$100 billion and domestic and international borrowing (IMF2016a, Kerr 2016). Until 2016,SaudiArabia’spublicdebthasconsistedcompletelyofdomesticdebt.In2016,thedebtlevelisestimatedat17.2%ofGDP.Publicdebtisprojectedtoincreaseto25.8%ofGDPin2017,andSaudiArabiamighthastoseeknewwaysforfundingofgovernmentexpendituresintimesofsustainedlowoilprices(Kerr2016,KerrandMoore2016).

B) Public Debt Management

GovernanceandStrategyDevelopment

Legal framework

SaudiArabiahasnotyetintroducedacomprehensivelaworspecificregulationonpublicdebtmanagement.TheMinistryofFinance(MoF) is ratherauthorized to issuedebton anannualbasis by the Council of Ministers (IMF 2016b). The legal framework and accountabilitystructuresofdebtmanagementarestillbeingintheprocessofdevelopment.

Managerial structure (incl. coordination with other policies)

In the past, the Saudi Arabian Monetary Authority (SAMA) was responsible for executingpublic debt management functions as an agent for the government. The SAMA also acts asbankertogovernmentandisresponsibleforthesupervisionofcommercialbanks.Moreover,itassumesallresponsibilitiesofacentralbank(COMCEC2016a).TheCapitalMarketAuthority(CMA)regulatesandoverseesallactivitiesrelatedtotheSaudiArabianCapitalMarkets,whichalsoincludebondmarkets(CMA2016).

SaudiArabiahasestablishedaDebtManagementOffice(DMO)forpreparingandexecutingthekingdom’s first international bond sale (IMF 2016b, Martin and Bianchi 2016). Debtmanagement functions are planned to be consolidated in one agency with operationalauthority(IMF2016b).Thegovernmentisawarethatprudentpublicdebtmanagementisnowimportantforsecuringthestabilityofthefinancialsystem(SAMA2016a).

Debt reporting

The SAMA publishes data on public debt in the annual Financial Stability Reports. Data oncontingentliabilitiesisnotpublished.

Debt management strategy (incl. risk management)

OneofthemostimportantobjectivesofSAMAistheapplicationofmarket­orientedpracticesin domestic debt markets, which play an important role for cost­effectiveness anddiversification indebtmanagement(Al­Sayari2003).TheMoFiscurrentlydefiningthedebtmanagementpolicy.Untilnow,thereisnopubliclyavailablecomprehensivedebtmanagementstrategy, which outlines the specific objectives and indicators for public debt and riskmanagement.

The CMA supports enhancing the stability of the capital market, developing debt (includingsukuk)andderivativemarkets, improvinginternalefficiencyandeffectivenessandreformingexternal risk management in accordance with the Strategic Plan 2015­2019 (SAMA 2016a,CMA2016).

ImprovingPublicDebtManagementIntheOICMemberCountries

168

Borrowingandrelatedfinancialactivities

Operations (incl. Islamic finance)

Bond markets in Saudi Arabia have undergone a rapid evolution since 1988, when the firstsovereign bonds were issued. Issuance procedures, pricing mechanisms, maturity selectionandtheutilizationofReposarefieldsthathaveexperiencedmajorchangesinthelast15years(Al­Sayari 2003). While the government has mainly used its deposits at the central bank tocoverthedeficitinthepast,thebondmarketinSaudiArabiaisontherise.

GovernmentDevelopmentBonds(GDBs)werelastlyissuedin2007.MaturitiesofGDBsrangedfrom two to ten years (Al­Darwish et al. 2014). The investors in GDBs included domesticfinancial institutions, banks and foreign investors (Al­Sayari2003). The first sovereignbondissuance since 2007 took place in mid­2015 as financing needs increased following thedeclining oil prices. The issuance in the amount of $4 billion was sold to domestic quasi­sovereignfinancialinstitutions(Reuters2015).Theseconventionalbonds,whichwereissuedwithmaturitiesofsevenandtenyears,hadaninitialyieldof2.57%and2.88%(Reuters2015).Theyieldcurveofgovernmentbondsshowsanormalpositiveslope(seeFigure4­42).

Figure 4-42: Saudi Arabia - Yield Curve of GDBs (2007) and Government Bonds (2015)

Note: The yield curve for the GDBs is based on data from 2007, when they were lastly issued. Source: SAMA (2016b), Reuters (2015).

Tosupportthedevelopmentofthedomesticdebtmarketandtoconductmonetarypolicy,theSAMAusesitsowninstruments:RepoandreverseRepoovernightoperations,andSAMABillsand SAMA Murabaha with maturities ranging from one week to one year (Al­Darwish et al.2014).ThereturnofSAMABillsequals80%oftheSaudiInterbankBidRate.ThisrateisthekeyinterbankrateinSaudiArabia,andservesasabenchmarkforcommercialandconsumerlendingrates.SIBORisinfluencedbythepolicyofSAMA,whichsetsthereverseReporate.Thereverse Repo rate is the key policy rate and marks the rate that commercial banks in SaudiArabiagetontheirdepositswithSAMA.ChangesinthereverseReporatecanthereforeaddorreduce liquidity in the markets. As the SAMA uses an exchange rate anchor in its monetarypolicy framework the reverse Repo rate is set with reference to the target rate of the U.S.FederalReserve(Algahtani2015).

Figure 4­43 shows yields on SAMA Bills with three different maturities over time. Yieldsdrastically declined in 2008/2009, which is a result of the reduction of interest rates (Repoand reverse Repo rate) by the SAMA following the financial crisis and the subsequentreductionofthetargetrateoftheU.S.FederalReserve.Between2010andthemiddleof2015,

4.70004.80004.90005.00005.10005.20005.30005.40005.50005.6000

Twoyears Threeyears Fiveyears Sevenyears Tenyears

Yie

ld (

in %

)

Maturity

ImprovingPublicDebtManagementIntheOICMemberCountries

169

yields on SAMA Bills were stable but in the second half of 2015, yields began to increase.Currently, yields on SAMA Bills with one year maturity note at 1.755%. Interest rates ongovernmentbondsarelikelytoincreasefurther,becauseratingagencieshavedowngradedthecreditworthinessofSaudiArabiaasaresponsetothedrawbackofdeposits,whichwereusedto cover the decline in oil revenues (Financial Times 2016). However, the SAMA (2016a)expects that overall investor confidence in Saudi Arabia will not diminish further as thespeculative behaviour in the foreign exchange market was quickly self­corrected because oftheSAMA’sstrongcommitmenttoitsfixedexchangeratepolicy.

Figure 4-43: Saudi Arabia - Yields on SAMA Bills

Source: Investing (2016).

Figure4­44showsthattheyieldcurvesofSAMABillshadapositiveslopeinallyearsexceptfor2008.Theflatyieldcurvein2008canbeseenasanindicatorfortheanticipationofslowereconomicgrowthduringtheglobalfinancialcrisis.

Figure 4-44: Saud Arabia - Yield Curves of SAMA Bills

Source: Investing (2016).

SaudiArabia isoneof the leadingcountries inIslamic finance(COMCEC2014).SaudiArabiadoes,however,notofficiallyrecognizetheconceptofIslamicbanking.Insteaditisarguedthat“all banks operating in Saudi Arabia are by definition Islamic” (Warde 2000, p. 208).33Althoughsomecommercialbankshaveaninternalsharia­board,thereisnosuchboardonthe

33 Critics argue that banks in Saudi Arabia can circumvent Islamic banking practices, for instance by declaring interest

incomeas“specialcommissionincome”,“servicecharges”oras“book­keepingfees”(Warde2000,p.208).

0.01.02.03.04.05.06.0

Pe

rce

nt

1Y

3M

1M

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1M 2M 3M 6M 9M 1Y

Yie

ld (

in %

)

Maturity

2006

2008

2010

2012

2014

2016

ImprovingPublicDebtManagementIntheOICMemberCountries

170

national level, which approves new financial instruments and proves sharia compliance(COMCEC2016a).IslamicfinanceinstrumentsrepresentagrowingsectorintheSaudiArabianbankingindustry.ConsideringtheglobalIslamicfinancemarket,SaudiArabia’sshareofglobalIslamic bankingassets represents 19%. If oneconsiders thedomicileof assets,SaudiArabiaevenrepresents40%ofIslamicfundassetsintheworld.Withinitsownjurisdiction,theshareforIslamicbankinginitstotaldomesticbankingsectorequals49%(IFSB2016).

In 2015, domestic sukuk bonds in the amount of $4.5 billion were issued, consisting ofcorporate34 and quasi­sovereign bonds (IIFM 2016). Quasi­sovereign sukuk in Saudi Arabiarefertogovernment­backedIslamicbondsorbondsissuedbystate­ownedcompanies.Amongthe first issuersofquasi­sovereignsukukweretheSaudiGeneralAuthority forCivilAviation($4billionin2012)andtheSaudiElectricityCompany($1.75billionin2012),whichserveasabenchmarkforsovereign­guaranteedsukuk issuancessincethen(IIFM2016,Hamdan2012).In2015,internationalissuesofquasi­sovereignsukukwerecarriedoutbytheArabPetroleumInvestmentsCorporationintheamountof$500millionandtheIslamicDevelopmentBankintheamountof$1billion(IIFM2016).35

TheMoFusedshariacompliantproductsforthefirsttimewiththeissuanceofFloatingRateNotes (FRNs) in 1997 and later with the issuance of short­term murabaha in 2002.36 InJanuary 2016, the government started to issue also long­term murabaha (IMF 2016b). Thegeneral rise in popularity of corporate and quasi­sovereign sukuk and other Islamic financeinstrumentsinSaudiArabiaareanindicatorthatIslamicbondswillplayalsoabiggerroleinpublicdebtmanagementinthefuture.

Domestic debt market

Until 2016, public debt in Saudi Arabia was completely domestic. The main holders ofgovernmentdebtarebanksandpensionfunds,holdingover90%ofgovernmentdebt.In2016,Saudi Arabia began to issue international bonds to finance budget deficits. Diversifying theeconomyand raising non­oil revenue is a priority since low oilprices havehit the economy(KerrandMoore2016)andinternationalinvestors’demandforgovernmentbonds,especiallyfromAsianinvestors,appearstobeveryhigh(Martin2016).Thelowpublicdebtlevelopensopportunitiesto issuebothdomesticand internationalbondstohelpfinancetheanticipatedbudgetdeficits(SAMA2016a).

Foreign borrowing

While Saudi Arabia already took an international loan in the amount of $10 billion from aconsortiumofcommercialbanksinApril2016(EIU2016),thefirstinternationalbondsaleofSaudi Arabia took place in later­2016 (to the amount of $17.5 billion). The bonds hadmaturities of5 to30 years and yields between2.4%and 4.5%.This internationalbond salewasthebiggestinternationaldebtissuancebyanemergingcountrysofar.

34 Corporate issuers in 2015 were Arab National Bank ($533 million), Almarai Company ($427 million), National

CommercialBank($1,007million),RiyadBank($1,070million)andSaudiBritishBank($411million)(IIFM2016).

35Inaddition,theIslamicDevelopmentBankalsoissuedadomesticsukukin2015equalto$514million(IIFM2016).

36AlthoughGDBsarenotdefinedasIslamicBonds,theyhavethefeaturethattheyare“zakah(compulsoryalms)deductible”

fordomesticinvestors(Al­Sayari2003).

ImprovingPublicDebtManagementIntheOICMemberCountries

171

C) Policy Recommendations

SaudiArabia ispreparingitseconomyforcontinued lowoil­prices.Thegovernmenthas justrecently established a DMO and the legal framework and strategies for public debtmanagementareintheprocessofdevelopment.It isrecommendedthatthelegalframeworkwill clearly define the authority for borrowing, undertaking debt related transactions andissuingloanguarantees(seealsoIMF2016b).Atransparentmedium­termdebtmanagementstrategy following the guidelines set by the IMF and the World Bank would strengthen theconfidenceofinvestors.

Itisrecommendedtofurtherdevelopmarketbasedfinancinginordertopreventadeclineofgovernmentdepositsinthebankingsystem(IMF2015a).TheestablishmentofthenewDMOcanbeaccompaniedbytheestablishmentofanefficientandmarket­basedapproachfordebtissuance. Moreover, the development of a medium­term fiscal framework and an integratedasset­liability management approach is important (IMF 2016c). Additionally, it isrecommended to improve data collection and transparency of financial data (IMF 2015b).Publicdisclosuremayinclude,forexample,technicalinformationabouttheissuanceofbonds.

Becauseofthecomparablylowdebtlevelandlargedepositsofthegovernment,SaudiArabiaisinacomfortablesituationregardingpublicdebtmanagement.Thecountryhasapotentiallylarge domestic investor base, which includes, besides the banking system, the AutonomousGovernment Institutions (AGIs) and wealthy individuals (IMF 2016b). So far, however,governmentdebtismainlyheldbybanksandpensionfunds.Theissuanceofgovernmentdebthelpstoestablishabenchmarkyieldcurveandsupportsthedevelopmentofthedomesticdebtmarket(IMF2016c).Reformstoencouragethedevelopmentofthesukukmarketmayhelptodiversifytheinvestorbaseasthereisastrongdemandforsharia­compliantfinanceproducts.

Although the reliance on the domestic debt market may promote financial stability, it isrecommendedtoachieveabalancebetweendomesticandinternationalborrowing,asanover­reliance on domestic borrowing by the public sector may lead to crowding­out of privatesector credit. Exchange rate risk is low in Saudi Arabia because the country has a well­establishedexchangeratepeganda largeportionofgovernmentrevenue isdenominated inforeigncurrencies(seealsoIMF2016b).

ImprovingPublicDebtManagementIntheOICMemberCountries

172

4.2 Comparison of Public Debt Management Practices

While all case study countries have established legal and organizational debt managementframeworks, actual debt management practices differ among the countries. All case studycountries have created debt management units, in most cases located at the Ministry ofFinance,orareintheprocessofdoingso.Thecentralbankoftenactsasafinancialadvisortothe government. In some countries, however, the breakdown of competencies still remainsvague.Inthesecountries,responsibilitiesarenotclearlydistributed,asadditionalinstitutions,such as the central bank, departments in other ministries and committees, pursue debtmanagement functions besides the debt management unit. Several institutions involved inpublic debt management make it difficult to evaluate the degree of accountability of theindividualinstitutions.Aslongasalldebtmanagementresponsibilitiesarenotcentralizedatadebt management unit, adequate and systematic communication between the variousembeddedinstitutionsisveryimportant.

The World Bank has conducted Debt Management Performance Assessments in the Africancountries Gambia, Mozambique, Togo, Uganda, Nigeria and Sudan,37 and also in Albania andKazakhstan. Several of these countries subsequently have established centralized DebtManagement Offices (DMOs) and developed debt management strategies. In oil­producingcountries, such as Saudi Arabia, Iran and Oman, public debt management hasbeen of lowerimportance in the past, because public debt levels have historically been relatively low.Following the decline in oil revenues since 2014 and the consequent financing pressure onpublic revenues, governments in these countries, however, have begun to create centralizeddebtmanagementunits.

In almost all case study countries public disclosure of legal and organizational structures ofpublic debt management, operations and strategies might be improved. For example,contingent liabilities such as debts of state owned enterprises (SOEs), government loanguarantees,andarrearsmightbeincludedindebtreports.Insomereports,dataisnotup­to­date. Improvingpublicdebtdisclosurerequiressettingupcomprehensivedebtdatabases. Insome case study countries, debt management responsibilities and operations lacktransparency. Case study countries that have not yet published their debt managementstrategies in English are encouraged to do so to establish or facilitate communication withinternationalinvestors.

Table4­12showsthedifferencesindebtlevelsandstructuresamongthecasestudycountries.Whiletheupper­middleandhighincomecountrieshavesharesofexternaldebtintotaldebtbelow50%,theAfrican lowand lower­middle incomecountriesGambia,Mozambique,Togo,UgandaandSudanhavesharesofexternaldebtofabout50%orevenhigher.Highsharesofexternal debt indicate an underdeveloped domestic debt market. The high share of debtdenominatedinforeigncurrenciesexposesthesecountriestoexchangeraterisk.Nigeriaisanexception among the African countries with external public debt amounting to only 18% oftotalpublicdebt.

External public debt of the low and lower­middle income countries with high shares ofexternalpublicdebt is largelyheldbyofficialcreditorssuchas internationalorganizations38

37IntheOICclassificationSudanbelongstotheArabregion.

38 E.g. the Islamic Development Bank, the International Development Association (IDA), the Arab Bank for EconomicDevelopment in Africa (BADEA),, the European Investment Bank (EIB), the International Fund for AgriculturalDevelopment(IFAD),theAfricanDevelopmentFund(ADF)andtheOPECFundforInternationalDevelopment(OFID).

ImprovingPublicDebtManagementIntheOICMemberCountries

173

and governments. Regarding private credit, these countries have difficulties to financethemselves on international capital markets. Official creditors lend at preferential interestratesandat longermaturities thanprivatecreditors.Consequently, thecasestudycountrieswith a high share of external public debt have lower interest rates and longer averagematuritiesintheirgovernmentdebtportfolio.

Other case study countries such as Egypt and Lebanon strongly rely on the domestic debtmarket. High interest rates on government debt andpreferences forsafe lendingreduce theincentivesofbankstoprovidecredit to theprivatesector inthesecountries,givingrisetoacrowding­out of bank loans to the private sector. Banks tend to invest in short­terminstrumentstoavoidassetandliabilitymismatcheswithshort­termbankdeposits.

Table 4-12: Comparison of Debt Levels and Structures in Case Study Countries (2015)

Country Income group

Debt (% of GDP)

Share of ext. debt

(% of total)

Avg. interest rate (%)

ATM (years)

Debt maturing in 1

year (% of total)

ATR (years)

Fixed rate

debt (% of total)

Gambia Low 91.6 54.8 6.0 7.5 7.3 97.1Mozambique Low 74.8 83.2 2.9 13.5 2.7 12.6 Togo Low 61.9 46.9 3.3 5.7 18.9 5.7 88.8Uganda Low 35.4 62.9 4.0 11.9 14.1 11.6 Egypt Lower­

middle87.7 8.7 11.3 2.2 55.1 2.2 100.0

Indonesia Lower­middle

27.3 58.7 9.4 8.8 86.3

Nigeria Lower­middle

11.5 18.1 10.8 7.2 36.1 7 99.0

Sudan Lower­middle

68.9 88.8

Albania Upper­middle

71.9 46.9 4.9 55.9 3.2

Iran Upper­middle

17.1 13.6*

Kazakhstan Upper­middle

23.3 26.0 100.0

Lebanon Upper­middle

139.1 13.8 6.4 4.3 20.4 4.3 100.0

Turkey Upper­middle

32.6 35.1 6.4 67.6

Oman High 20.6 59.8 100.0Saudi Arabia High 5.8 0.0 Note: ATM = Average Time to Maturity; ATR = Average Time to Refixing, * = value for 2013. Sources: WEO (2016), World Bank, public debt management strategies, calculations by the Ifo Institute.

Given the different debt levels and structures, debt management strategies vary among thecase study countries. Out of the 15 case study countries, eleven countries have developedformal debt management strategies (see Table 4­13). Uganda, Egypt, Indonesia, Nigeria,Albaniaand Lebanonhavepublishednumerical targets forrisks in thepublicdebtportfolio.Turkeyhassetnumericaltargetsbutdoesnotdisclosethesenumbers.Gambia,MozambiqueandTogohavesetgeneralobjectivesbutdonotformulatespecifictargets.SaudiArabia,Sudan,Kazakhstan,andOmanhavenotordonotdisclosetargets.

ImprovingPublicDebtManagementIntheOICMemberCountries

174

Table 4-13: Comparison of Debt Management Objectives in Case Study Countries

Country Formal DeM strategy

Targets Currency risk Interest rate risk Refinancing risk

Gambia yes no ­ Increase ext.borrowing(concessional)

Mozambique yes no Togo yes no ­ Extend concessional

and semi­concessionalext. borrowing whichgenerally has highermaturities;­ Target maturities of 3­10 years for dom.borrow.

Uganda yes yes ­Dom.toext.debt:40:60;­ FX share: Max.80%

­ ATR: Min. 10years

­ATM:Min.3years;Debt maturing in 1 year:15%

Egypt yes yes ­Dom.toext.debt:85:15

­ Share of fixedratedebt:100%

­ATM:2.5years­Debtmaturingin1year:Max.50%

Indonesia yes yes ­FXshare:39% ­ Share of fixedratedebt:89%

­ATM:9years;­ Debt maturing in 3years:22%

Nigeria yes yes ­Dom.toext.debt:60:40;­Dom.debtmixof75:25 for long andshort­termdebts.­ Increase ext.borrowing(concessional)

­ ATR: Min. 10years

­ATM:Min.10years;­Debtmaturingin1year:Max.20%

Sudan no no Albania yes ­ FX proportion:

50­55%­ ATR: Min. 3years

­ATM:Min.4.7years;­Debtmaturingin1year:Max.26%

Iran no no Kazakhstan yes no Lebanon yes yes ­ Increased ext.

borrowing­ ATR: Min. 4.3years

­ATM:Min.4.3years

Turkey yes yes* ­ Make borrowingmainlyinTL

­ Fixed rate TLinstruments asmajor source ofdom. cashborrowing;­ Decrease shareof debt withinterest raterefixing<1year

­ Increase averagematurity of dom. cashborrowing;­ Decrease share of debtmaturing within 12months.

Oman no no Saudi Arabia no no

Note: * not published; ATM = Average Time to Maturity; ATR = Average Time to Refixing. Sources: Public debt management strategies, ifo Debt Management Survey (2016).

ImprovingPublicDebtManagementIntheOICMemberCountries

175

4.3 Comparison of Islamic and Conventional Finance Practices

InIranandSudanthewholefinancialsystemreliesonIslamicprinciples.IranhasthelargestshareofworldwideIslamicbankingassets(about37%).SaudiArabiaisalsooneoftheleadingcountries in Islamic finance, holding the second largest share of worldwide Islamic bankingassets (about 19%). Consequently, these countries also use Islamic finance instruments forpublicdebtmanagement.However,debt­to­GDPratiosinIranandSaudiArabiaareverylow,amounting to 17.1% and 5.8% in 2015. Public debt in Saudi Arabia is completely domestic,whiletheshareofdomesticpublicdebtinIranaccountsformorethan90%.Butthedecliningoil revenues give rise to additional borrowing needs and Iran and Saudi Arabia plan to tapinternationaldebtmarkets.Toprepareinternationalbondissuances,legalandorganizationalstructuresfordebtmanagementarebeingestablishedatthemoment.Incontrast,Sudanhasarelativelyhighdebtratio(68.9%)andabout90%ofpublicdebtisexternal.

The central bank of Saudi Arabia issues SAMA Bills whose returns depend on the SaudiInterbank Bid Rate and SMAM Murabaha. The government has issued GovernmentDevelopment Bonds (GDBs).Although GDBs are not defined as Islamic bonds, theyhave thefeature that they are “zakah (compulsory alms) deductible” for domestic investors. ThegovernmenthasalsoissuedshariacompliantFloatingRateNotes(FRNs)andmurabaha.Thegeneral rise in popularity of corporate and quasi­sovereign sukuk and other Islamic financeinstruments in Saudi Arabia indicates that Islamic bonds will play also a bigger role in thefutureofthecountry’spublicdebtmanagement.

ThegovernmentofIranhasmainlyborrowedfromdomesticIslamicbanksbytakingoutloanswith fixed rates of return in the past. In 2015, Iran has started to expand its Islamic bondmarket. There are various types of instruments such as murabaha, musharakah, ijarah, anddifferent types of sukuk with various maturities. Sovereign sukuk, ijarah, and SovereignSettlementBillswereissuedforthefirsttimewiththebeginningoftheIranianfiscalyearinMarch2016.IslamicTreasuryBills(ITBs)wereintroduced,too,describingzerocouponbondssold at a discount to their face values. The acquired profit is non­taxable and they are non­transferable. ITBs have a one year maturity and are traded predominantly at the Iran FaraBourse.

The government and the Central Bank of Sudan (CBoS) use various short­ and long­termIslamicfinanceinstrumentsfordebtandliquiditymanagement.ThecentralbankusesCentralBank ijarah Certificates (shihab) for open market operations whose returns are fixed anddistributedmonthly.Furthermore,theCBoSusessukukbondsforthemanagementofliquidity.The government uses two types of sukuk: Short­term Government Musharaka Certificates(GMCs),alsocalledshahama,whichareissuedbytheMoFandNationalEconomyandmainlyused for liquidity and cash management, and long­term Government Investment Certificates(GIC),alsocalledbeshra.Thenominalvalueoftheinstrumentisdistributedinprofitsquarterlyor bi­annually. The market for GICs has been stagnating since its introduction in 2003,especially compared to the market for GMCs, which has been growing steadily since 1999becauseofthespecificcharacteristicsoftheseinstrumentssuchashighprofitability,lowrisk,short­termmaturityandhighliquidity.

The remaining case study countries mainly use conventional finance instruments for publicdebt management such as short­term T­Bills and long­term T­Bonds. But also other OICcountries with conventional finance systems have introduced Islamic finance instruments.CountriessuchasGambia,TogoandOmanhavealreadyissuedsukuk.OthercountriessuchasEgypt,Kazakhstan,Mozambique, Nigeria and Ugandahave created legalprerequisites touseIslamicfinanceinstrumentsand/orareplanningtoissuesukukinthenextyears.

ImprovingPublicDebtManagementIntheOICMemberCountries

176

5 Policy Recommendations

5.1 Measures to Improve Public Debt Management

GeneralRecommendations

Most OIC member countries have established legal and organizational debt managementframeworksandcreatedDebtManagementOffices(DMOs)orare intheprocessofdoingso.While these are important measures for successful public debt management, some areas ofimprovementconcerningpublicdebtmanagement inOICmembercountriesstillremainandwillbeindicatedbelow.ThepolicyrecommendationsgivenarebasedonglobalbestpracticesanddescriptiveanalysesofpublicdebtmanagementpracticesinOICmembercountries.

In someOIC membercountries the delineationof authorities forpublic debt management isnot clear­cut. Public debt management functions are often not fully centralized at the DMO,with ministerial departments, the central bank and committees pursuing debt managementfunctions in addition. However, a large number of institutions involved in public debtmanagement hampers coordination and makes it difficult to evaluate the degree ofaccountability of the respective institutions. As long as all relevant debt managementresponsibilities are not centralized at a debt management unit, adequate and systematiccommunicationbetweenthevariousembeddedinstitutionsisrecommendable.Ingeneral,allOICmembercountriesareadvisedtosetupDMOs,iftheyhavenotdonesoalready,andtogivethemclearlydefined,comprehensiveoperationalresponsibilities.

All OIC member countries are encouraged to create Medium­Term Debt ManagementStrategies (MTDSs) following guidelines from the World Bank and the IMF. A clearcommitment to the public debt management strategy might be helpful in attracting foreigninvestorsandimprovingthefunctioningofdomesticdebtmarkets.Countriesthathavenotyetpublished their debt management strategies are advised to do so for a facilitatedcommunication with international investors. Public disclosure of legal and organizationalstructures of public debt management, operations as well as general strategies might bestrengthenedinOICmembercountries.Forexample,debtsofstate­ownedenterprises(SOEs),government loans or investment guarantees, and arrears should be included in debtmanagement reports. Improving public debt disclosure can be supported by setting upcomprehensive debt databases. In some OIC member countries the general level oftransparency on debt management responsibilities and operations could be enhanced.Delegating public debt management to a clearly specified organizational unit, e.g. the DMO,creates transparent responsibilities and is conducive to foster accountability in public debtmanagement.

CentralbankindependencecouldbestrengthenedinsomeOICmembercountries.Wheneverthe central bank purchases substantial amounts of sovereign bonds, it potentially poses theriskthatmonetaryandfinancialpoliciesarenotclearlyseparated.Asaresult,thecentralbankmightnotbeabletoimplementanindependentmonetarypolicy,asrecommendedbycurrentscientificliterature(e.g.CroweandMeade2008).

Publicdebtmanagementisrecommendedtofurtherdiversifytheinvestorbase,ifpossible.Itis furtheradvisable to clearlydetermine and implementaspecificcountry’soptimal balancebetween debt denominated in domestic currency and foreign currencies. Foreign currencydenominateddebt maybesubject toexchange raterisks,but typicallycomesat lower(real)interest rates. This balance depends inter alia on the development of the domestic capital

ImprovingPublicDebtManagementIntheOICMemberCountries

177

market,andtherelativecostsofborrowingathomeandabroad.Likewise,a longermaturitystructurereducestherefinancingrisk,butentailshighercostsonaverage.

Islamicsovereignbonds(sukuk)arelikelytogaingreaterpopularityinOICaswellasnon­OICcountries.Animportantfactoristhegrowingpreferenceforshariacompliantfinanceproductsby important international investors such as state funds. Moreover, the issuance of sukukbondscanservemarketdevelopmentpurposesbydiversifyingdomesticcapitalmarketsandattracting new (international) investors that wants to invest in sharia compliant financialinstruments from all over the world. Investors can also benefit from new sovereign sukukissuances due to additional opportunities to diversify their portfolios. Hence, several OICmembercountriesareplanningtoissuenewsovereignsukukorexpandtheiralreadyexistingportfolio.Infrastructureprojectsareespeciallysuitableasunderlyingstructuresforsovereignsukukgiventheasset­backeddesignofthesebonds.InseveralIslamicmarkets,fundinggapsfor infrastructure projects exist. Pairing the expected rise in infrastructure investments indevelopingandemergingcountrieswiththeimportantroleIslamicbankingisplayinginmanyof these markets, sukuk issuances related to infrastructure are expected to further increase.However, it should be noted that Islamic finance instruments do not necessarily minimizefinancingcostsastheyofteninvolveadditionaladministrativeexpensesandgreaterlegalandaccountingchallenges.The limitedtradability, thecomparativelyhigh issuancecostsandtherather small volume of existing sukuk may constrain market liquidity and hence agovernment’sflexibilityinconductingandfinancingfiscalpolicymeasures.Hence,theissuanceof such bonds comes with both, risks and benefits. Overall, OIC member countries areencouragedtoassess theircountry'spotentialfor issuingsuchbondsand(further) integrateIslamicfinanceinstrumentsintotheirpublicdebtmanagementpractices,ifpossible.

Table 5­1 summarizes the main challenges and obstacles of public debt management in OICmembercountries.

Table 5-1: Challenges and Obstacles to Public Debt Management

Area vulnerable to obstacles

Challenges Examples of

countries facing risks

(1)Outsideincidents

Macroeconomic shocks might affect the structure ofpublicdebt.Risks: Exchange rate risk due to debt denoted in foreign

currencywithrisinginterestrate Higher refinancing risk for countries with short

maturityofdebtandhighannualdebtroll­overrate Interest rate risk increases for debt held by the

privatesectorifadverseeconomicshocksoccur Risk enhanced by strong economic dependencyon

exogenous variables, e.g. prices for naturalresources

Gambia,Mozambique,Togo,Uganda,Sudan,SaudiArabia,Nigeria

(2)Institutionalframework

Coordination and responsibility issues concerningpublicdebtmanagement

Risks:

Unclearinstitutionalresponsibilitiesforpublicdebtmanagement- Information flow between the institutions may

notbeideal

Azerbaijan,Bahrain,Chad,Kazakhstan,Malaysia,Oman,SaudiArabia,Sudan,UnitedArabEmirates

ImprovingPublicDebtManagementIntheOICMemberCountries

178

Area vulnerable to obstacles

Challenges Examples of

countries facing risks

- Accountabilitymaybeambiguous DMOsmaybedependentonpoliticalconstraints

Lackingformaldebtmanagementstrategy:MTDSandnumericalstrategictargetsarenotyetimplemented.

Risks:

Difficultiesinattractingforeigninvestors

(3)Domesticpublicdebtmarkets

Dependency on external borrowing caused byunderdevelopeddomesticpublicdebtmarket

Problems:

Insufficient market infrastructure, e.g. lack ofinformationaltransparency

Immaturesecondarymarkets Limitedmarketsize Smallinvestorbase

Risks:

Limited diversification of investor base whichincreasesidiosyncraticrisks

Increaseddependencyonglobalmarketconditionsaffected by macroeconomic trends which are lessrelatedtocurrentcountry­specificconditions

Afghanistan,Algeria,Azerbaijan,BurkinaFaso,Comoros,Djibouti,Gabon,Guyana,KyrgyzRepublic,Mali,Mauretania,Mozambique,Niger,Senegal,SierraLeone,Sudan,Tajikistan,Uzbekistan

(4)Debtstructure

Short average maturity of public debt, especiallyconcerningdebtheldbytheprivatesector

Risks:

Refinancingrisk Potentially harms further development of the

domesticdebtmarket

Domestic banking sector holds great share of totalpublicdebt

Risks:

Crowding­outofbankloanstotheprivatesector

Albania,Bahrain,Egypt,Gambia,Iran,Lebanon,Kazakhstan,Nigeria,Qatar,SaudiArabia,Syria,Togo,Yemen

SpecificRecommendations

The following main areas of improvement of public debt management in the OIC membercountriescanbeidentified.

(1) Institutional framework of public debt management

In several OIC member countries the delineation of competences between differentinstitutionsinvolvedinpublicdebtmanagementremainsvague.Especiallythepartiallackofcompetence centralization at a DMO might prove to be challenging for further improvingpublic debt management functions. Moreover, 38% of OIC member countries have not yetdeveloped a specified MTDS according to international standards. Among the OIC member

ImprovingPublicDebtManagementIntheOICMemberCountries

179

countrieswithsuchformal publicdebtmanagementstrategies, abouta thirdhas notyet setnumericalstrategictargets.

Inseveralcountriesendowedwithnaturaloilresources,publicdebtmanagementhasnotbeena particularly high priority in the past given their comparatively low public debt ratios.However,theneedtoestablishnewsourcesforfinancingbudgetdeficitsintimesofdecliningoil revenues since 2014 has encouraged some of the national administrations to createcentralizeddebtmanagementunitsandtapinternationaldebtmarkets.Asthesenationshavepredominantly relied on domestic financing in the past, the establishment of a DMO maysupportthepreparationandexecutionofinternationalbondsales.

Weak public debt management capacities may decrease the government’s borrowingcredibility,therebyresultinginhighriskpremiaespeciallywithregardstolong­termfunding.Disseminatinginformationondebtoperations,adoptingtransparencyinprimaryauctionsanddevelopingsecondarymarketsmayimprovetheaccesstodebtmarkets.Unifyingtreasuryorcentral bank securities to boost secondary market trading prospects and strengtheningmonetarypolicymayimprovefundingpossibilities,too.

AllOICmembercountriesareencouragedtosetupneworinstitutionallystrengthenexistingpublic DMOs, and to develop formal debt management strategies following internationalstandards, including quantitative strategic targets. To support this transition process, OICmembercountries thathavealreadyprofessionalized public debt management practices canadvise other countries inestablishing institutional frameworks forpublicdebt management.Existinginstitutionalsettingsandpublicdebtmanagementdocumentsmightbeconsideredasexamples by countries that are in the process of further implementing formal public debtmanagement. Often, countries have gained valuable experiences regarding public debtmanagement in the past, such as long­term strategy development, risk management,monitoringorinstitutionalcoordination.Thus,thesecountriesmaybeabletoofferadvicewithregards to a certain area of debt management, or present cases of challenging experiencesfromwhichlessonscanbelearned.

The process of training specialized staff, developing administration capacities of the middleoffice or the creation of risk quantification models could be accompanied by the advice of acentralized institution. Given their commonalities, this especially opens the room forcooperation among the OIC member countries. Therefore, it might be useful to bring OICmembercountries together fordevelopingsolutions forpublicdebt management challenges.CooperationcouldbecoordinatedbyCOMCEC,forexamplebysettingupworkshopsoronlinetraining courses on public debt management. These activities could be conducted incooperationwiththeWorldBank,theIMFandotherinternationalinstitutions.

(2) External borrowing

Several low­ and lower­middle income OIC member countries at least partially depend onexternal borrowing. The high share of external debt is often a result of underdevelopeddomestic debt markets. In addition, these countries may have difficulties in accessinginternational capital markets. As a consequence, external public debt is often held bymultilateral or public creditors such as international organizations and governments. Thesecountries may benefit from concessional lending, targeted development aid programs orpreferentialsupportforaccesstotheinternationalfinancialmarkets.However,thehighshareofdebtdenominatedinforeigncurrenciesexposesthesecountriestosignificantexchangeraterisk.

ImprovingPublicDebtManagementIntheOICMemberCountries

180

Furthermore,development and economicaidgrantsmaybesubject toconstraints regardingpre­specifiedinvestmentprojects,therebylimitingthegovernment’spolicyspace(seePanizza2010).Therefore,inordertoincreasespendingflexibility,itmightbebeneficialtoincreasetheshare of debt held domestically. However, domestic debt tends to be more expensive thanexternal debt in developing countries. Insufficient transparency or a challenging politicalenvironmentincreasestheinterestrateswhengovernmentsturnfromexternal(concessional)financingtodomesticdebtfinancing.

Some countriesmay consider convertingor rollingover Eurobonds into long­term domesticcurrency liabilities, preferably in close cooperation and communication with theirinternational partners. Such a change­of­strategy could help in establishing much­neededdomestic accountability channels to replace the weaker external accountability channelsresulting fromastreamliningofconditionalityof international financial institutions.Thekeychallenge here is resolving the time inconsistency problem associated with nominal debtcontracts. However, thismaybe innovativelyresolved byallocatinga shareof the bonds forcivilservantsaspartofacivilservicepayincrease.

(3) Domestic borrowing

Domesticdebtmarketsareanimportantsourceoffinancialfundingforgovernments.Awell­functioning domestic market for public debt helps to reduce the risks linked to public debt,becauseitprovidesadditionaldiversificationopportunities.Fordomesticcreditorsitiseasierandlessexpensivetobuysovereignbondsiftheyaretradedonthedomesticmarket.Domesticcreditors,inturn,areasourceoffundingthatreactslesstoglobalmarketconditionsandmaybelessvolatilethanexternalsources.Thedomesticdebtmarketmightbestrengthenedbye.g.improving legal and regulatory frameworks, promoting market infrastructure, maintainingpolitical stability and developing a predictable public debt management. Low and stableinflationratesaswellasanindependentcentralbankmayhelptokeepsavingsinthedomesticfinancialmarket.Ahighshareofsecuritiesinthetotaldomesticdebtsectorandahighshareoffixedvs.floatingbondsusuallydescribeagoodqualityofthedomesticbondmarket(seealsoAbbasundChristensen2010).

SomeOICmembercountriesareheavilyindebtedinthedomesticbankingsector.Highinterestratesongovernmentdebtandpreferencesforsafe lendingreducetheincentivesofbankstoprovidecredittotheprivatesectorinthesecountries,leadingtoacrowding­outofbankloanstotheprivatesector.Sincebanksmanageonlyalimitedamountofsavings,buyinggovernmentdebt decreases their liquidity which otherwise could have been used to finance domesticinvestment via credits to local firms or consumers. Banks tend to invest in short­terminstruments to avoid asset and liability mismatches with short­term bank deposits. Thisincreasesinterestraterisksandrefinancingrisksofthegovernment’sdebtportfolio.

Whenasubstantialpartofpublicdebtisheldbydomesticbanks,aviciouslinkbetweenpublicfinances and the bankingsector exists: public default would damage the banking sector anddifficulties in the banking sector endanger government’s success in placing its bonds on thedomestic market. Given that the domestic investor base is often limited, access to foreigninvestorshelpstobreakthevicious linkbetweendomesticcommercialbanksandthepublicsector.

A domestic creditor composition with a large share of non­banking investors is favorable(Christensen 2005, Abbas and Christensen 2010). The investors’ base can be broadened byreforming the legal framework to grant pension funds, insurance companies and foreigninvestors access to the domestic debt market (Christensen2005, Maanaet al. 2008, Panizza

ImprovingPublicDebtManagementIntheOICMemberCountries

181

2010). Pension funds with maturity matching needs (given long­term domestic currencyliabilities) and foreign investors seeking higher returns are likely to demand for long­termlocalcurrencybondsthereforelengtheningthematuritystructureofpublicdebtandreducingthe refinancing risk. Foreign investors are also expected to foster an improvement andinnovationinfinancialtechnologyviaspill­overeffectsaswellastopromotecompetitionandthusincreaseefficiencyinthemarket(Christensen2005,Maanaetal.2008).

OIC member countries are advised to achieve a balance between domestic and foreignborrowing,where thespecificoptimal sharedepends on the exposureof acountry toglobalmarkets and macroeconomic conditions. To mitigate risks, it is generally recommended thatcountries do not depend fully or to a large extent on either borrowing strategy. Some OICmembercountries havealreadysuccessfully issued Eurobonds and public debt managementmaytrytoturnthisinstrumentoffinancingintoastandardprocedure.Countrieswithahighshare of domestic debt may potentially use swaps of domestic currency debt to foreigncurrencydebt,whichgenerallyhasloweryieldsandhighermaturities.

OIC member countries can use sukuk in addition to conventional bonds to diversify thegovernment’sdebtportfolioandattractnewinvestors,domesticallyandfromother(Islamic)countries. In particular,countries that rely to a great extent on the domestic banking sectorcan benefit from these instruments. Countries thatmainly rely on concessional lending mayalsouseIslamicfinanceproductstoattractprivateinvestors.

(4) Maturity structure

TheaveragematurityforprivatecreditinOICmembercountriesisshorterthantheworldwideaverage. Furthermore, many OIC member countries benefit from concessional lending withfavorableborrowingconditionssuchas longmaturities.Whenthesecountries increasetheirshareofprivatelending,theymightfacerefinancingproblems.

Governments often issue short­term bonds rather than long­term bonds. Interest rates ofshort­term bonds are usually lower than long­term ones when the markets have concernsabout political and macroeconomic risks, but are subject to a greater refinancing risk.Moreover,itmaypreventtheestablishmentanddevelopmentofadomesticdebtmarketwhichis supposed to satisfy the investors’ and government’s financing needs in the long­run(Christensen2005,Maanaetal.2008,Panizza2010).Hence,governmentsareencouragedtoexpandthematuritymixoftheirpublicdebtportfolioandconsiderissuingbondswithgreatertimehorizons.

Countries with high refinancing risk may lengthen maturities of public debt by preferringlonger­termT­Bondsovershort­termT­Bills.Incountrieswithlowsharesofforeigncurrencydebt,thisobjectivecouldbeachieved,forexample,throughswapsofdomesticcurrencydebttoforeigncurrencydebtwithgenerallylongermaturity.Publicbudgetmanagementmightalsobenefit from the current low interest rate environment to lengthen the average maturity ofdebttoreducerefinancingriskandreducethenumberofbondsissuedannually.Animportantindicatorforthequalityofthedomesticdebtmarketishowmuchthebondmaturitystructuremirrors the government expenditure structure (Abbas and Christensen 2007). This asks forinstitutionalized information flow between the DMO and those offices responsible forgovernment expenditures, while respecting the organizational independence of public debtmanagementactors,especiallyfortheDMO.

ImprovingPublicDebtManagementIntheOICMemberCountries

182

5.2 Macroeconomic Risk Management

Macroeconomic risks resulting, for instance, from the real business cycle, exchange ratechangesandotherdevelopmentsinthefinancialsectorandshockscausedbynaturaldisasters,changes incommoditypricesand increasedprotectionismare likelyto influencepublicdebtdevelopmentstoalargeextent.Forexample,theglobalfinancialcrisisstartingin2007intheUnited States gave rise to debt crises in many countries all over the world. Thus,macroeconomicriskmanagementisanimportantcomplementtopublicdebtmanagement.Ingeneral, the same institutions responsible for public debt management are also the mainauthorities for macroeconomic risk management, i.e. mainly the Ministries of Finance,MinistriesoftheEconomy,centralbanksandcoordinationbodiesonhighgovernmentlevel.

The main tools in macroeconomic risk management are information and analytical systemsbasedonadequatefrequencydata(quarterlyormonthly)providingearlywarningindicators.These indicators enable policy makers to react to crises with adequate control measures.SeveralbestpracticesareusedinternationallyandOICmembercountriesarerecommendedtoconsiderthefollowingpractices:

TheOECDdevelopedasystemofindicatorsprovidingearlysignalsforchangesintherealeconomy (business cycle). Data is generated by simple “Business Tendency Surveys”monthly or quarterly conducted among a representative sample of enterprises. Thesurveysarecarriedoutintheindividualcountriesbyapartlystandardizedquestionnairetakingcareofindividualcountrycharacteristics.

A well­known methodological framework for currency risk analysis is the so­called“Signal­Approach”(Kaminskyetal.1998).Thismethodisbasedonstatisticalanalysesofacountry’shistoricalexperienceswithcurrencycrisesidentifyingtypicalriskfactors.

For more general financial risks, the IMF (2015) developed the “Financial SoundnessIndicators” based on regular data supplies. These indicators are usually produced andanalyzed by central banks. Guidelines on how to prepare these indicators are availablefromtheIMF.

Morerecently,theEUdevelopedamethodologytodetectmacroeconomicrisksatanearlystage bya “Scoreboard Approach”. Thisalert system uses a scoreboardof indicators (aswell as detailed country studies to consider specific country conditions). Each indicatorincorporates a threshold value and a major deviation from this threshold is seen as awarning signal. The indicators are distinguished between internal and external factors.Hence,includingexternalriskfactorssystematicallyintotheanalysisispossible.

Macroeconomiccrisisriskanalysismethodsarebeingcontinuously improved.SuchmethodsareconsideredimportantforcrisismanagementandappliedbymostOECDmembercountriesas well as a number of emerging economies. It is recommended to apply some of thesemethods in OIC member countries as well. COMCEC may potentially provide liaison fortrainingstoenabletheimplementationofthesemethods.

ImprovingPublicDebtManagementIntheOICMemberCountries

183

Table5­2summarizesthepolicyrecommendations.

Table 5-2: Summary of Policy Recommendations

Area of improvement of public debt management

Policy recommendation Examples of

countries concerned

(1)InstitutionalframeworkIndicators: Nocentralizeddebt

managementunit Noformaldebt

managementstrategy Lowtransparency

Strengthen the institutional framework of publicdebtmanagement.Measures: CreatingcentralizedDMOs Centralbankindependency Developing MTDSs including (numerical)

strategictargets Improvingpublicdisclosureon

­ Debtdataanddebtreports­ Informationonissuanceprocedures­ Debtmanagementstrategy

Workshops within COMCEC might be useful tobring OIC member countries together fordeveloping solutions of public debt managementproblemsaccordingtotheirdiverseexperiences.

Azerbaijan,Bahrain,Chad,Kazakhstan,Malaysia,Oman,Qatar,SaudiArabia,UnitedArabEmirates

(2)Strongrelianceonexternalborrowing/underdevelopeddomesticdebtmarketsIndicator: Highshareofexternal

debtintotaldebt

Developthedomesticdebtmarket.Measures: Improvinglegalandregulatoryframeworks Establishing a reliable public debt management

strategy Improving the dissemination of information on

debtoperations Adopting transparency in primary auctions and

developingsecondarymarkets Converting foreign grants into long­term

domesticcurrencybonds Information exchange within COMCEC onproblemsinthedomesticdebtmarket.

Afghanistan,Algeria,Azerbaijan,BurkinaFaso,Comoros,Djibouti,Gabon,Guyana,KyrgyzRepublic,Mali,Mauretania,Mozambique,Niger,Senegal,SierraLeone,Sudan,Tajikistan,Uzbekistan,

(3)Strongrelianceonthedomesticbankingsector/riskofcrowding­outofprivatecreditIndicator: Highshareofdomestic

debtintotaldebt

Broadenanddiversifythecreditorbase.Measures: Granting pension funds, insurance companies,

retail investors and foreign investors access tothedomesticdebtmarket

Attracting foreign investors by issuing e.g.Eurobondsandsukuk

Balancebetweendomesticandforeignborrowing Fruther development of the sukuk bond market as

well as additional consideration of the financial debt structure

Information exchange within COMCEC on theissuance of different types of bonds such asEurobondsandsukuk

Bahrain,Egypt,Gambia,Iran,Kazakhstan,Lebanon,Nigeria,Qatar,SaudiArabia,Syria,Yemen

ImprovingPublicDebtManagementIntheOICMemberCountries

184

Area of improvement of public debt management

Policy recommendation Examples of

countries concerned

(4)RefinancingriskIndicator: Shortaveragetimeto

maturity

Lengthentheaveragematurityofpublicdebt.Measures: Preferring the issuance of long­term bonds over

short­termbills(benefittingfromthecurrentlowinterestrateenvironment)

Swaps of domestic currency debt to foreigncurrencydebtwithgenerally longermaturity(incountries with low shares of foreign currencydebt)

Albania,Egypt,Gambia,Lebanon,Togo

(5)Macroeconomicriskmanagement

Applymacroeconomicriskmanagementmethods.Measures: Businesstendencysurveys Signalapproach Financialsoundnessindicators Scoreboardapproach

Algeria,Bangladesh,Jordan,Malaysia,Nigeria,Tunisia

ImprovingPublicDebtManagementIntheOICMemberCountries

185

References

1Introduction

Allen,R.,Hemming,R.,andPotter,B.H.(2013).The International Handbook of Public Financial Management, Basingstoke:PalgraveMacmillan.

Bangura,S.A.,Kitabire,D.,andPowell,R. (2000).ExternalDebtManagement inLow­IncomeCountries.IMF Working PaperNo.00/196.

Barro,R.J.(1979).OntheDeterminationofthePublicDebt.Journal of Political Economy, 5,pp.941­971.

BlanchardO.,ChouraquiJ.­C.,HagemannR.P.,andSartorN.(1990).TheSustainabilityofFiscalPolicy:NewAnswerstoanOldQuestion.OECD Economic Studies,15,pp.7­36.

BohnH.(1998).TheBehaviorofU.S.PublicDebtandDeficits.Quarterly Journal of Economics,113,pp.949­963.

Bohn H. (2008). The Sustainability of Fiscal Policy in the United States. In: R. Neck and J.­E.Sturm,eds.,Sustainability of Public Debt.Cambridge:MITPress,pp.15­49.

Burnside, C. (2005). An Introduction to Fiscal Sustainability in Theory and Practice. In C.Burnside, ed., Fiscal Sustainability in Theory and Practice. Washington, DC: World BankPubn,pp.1­10.

Cabral,R.(2015).How Strategically is Public Debt Being Managed Around the Globe? A Survey on Public Debt Management Strategies.Washington,DC:WorldBankPubn.

IMF(2007).Manual on Fiscal Transparency.Washington,DC:InternationalMonetaryFund.

IMF (2014). Revised Guidelines for Public Debt Management. Washington, DC: InternationalMonetaryFund. Melecky,M.(2007).ACross­CountryAnalysisofPublicDebtManagementStrategies. World Bank Policy Research Working Paper No. 4287.

Missale,A.(1999).Public Debt Management.Oxford:OxfordUniversityPress.

Missale,A.(2000).OptimalDebtManagementwithaStabilityandGrowthPact.Public Finance and Management, 1,pp.58­91.

Tobin, J. (1963).AnEssayonPrinciplesofDebtManagement.In:CommissiononMoneyandCredit, ed., Fiscal and Debt Management Policies. EnglewoodCliffs: Prentice Hall, pp. 143­218.

Togo,E.(2007).CoordinatingPublicDebtManagementwithFiscalandMonetaryPolicies:AnAnalyticalFramework.World Bank Policy Research Working PaperNo.4369.

Togo, E., Dethier, J. J., and Currie, E. (2003). Institutional Arrangements for Public DebtManagement.World Bank Policy Research Working PaperNo.3021.

Wheeler,G.(2004).Sound Practice in Government Debt Management.Washington,DC:WorldBankPubn.

World Bank (2015). Debt Management Performance Assessment (DeMPA) Methodology.Washington,DC:WorldBankPubn.

ImprovingPublicDebtManagementIntheOICMemberCountries

186

2GlobalBestPracticesinPublicDebtManagement

Afonso, A.,Gomes,P.andRother,P. (2011).Short­and Long­RunDeterminants ofSovereignDebtCreditRatings.International Journal of Finance & Economics,16,pp.1–15.

Arellano,C.,andRamanarayanan,A. (2012).DefaultandtheMaturityStructure inSovereignBonds.Journal of Political Economy,120,pp.187­232.

Bhatia,A.V.(2002).SovereignCreditRatingsMethodology:AnEvaluation.IMF Working PaperNo.02/170.

BIS (2016). Debt Securities Statistics. [online] Basel: Bank for International Settlements.Availableat:http://www.bis.org/statistics/secstats.htm[Accessedon15Feb.2017]Cabral,R. (2015). How Strategically is Public Debt Being Managed Around the Globe? A Survey on Public Debt Management Strategies.Washington,DC:WorldBank.

Cukierman, A. (1992). Central Bank Strategy, Credibility, and Independence: Theory and Evidence.Cambridge:MITPress.

Currie, E., Dethier, J. J. and Togo, E. (2003). Institutional Arrangements for Public DebtManagement.World Bank Policy Research Working PaperNo.3021.

Debortoli D., Nunes R., and Yared P. (2014). Optimal Time­Consistent Government DebtMaturity.NBER Working Paper No.20632.

Eijffinger, S.­C.­W. and de Haan, J. (2016). The Politics of Central-Bank Independence. DeNederlandscheBankWorkingPaperNo.539.

European Union (2012). Consolidated version of the Treaty on the Functioning of theEuropean Union.Official Journal of the European Union,C326,p.99

Greenwood,R.,HansonS.G.,RudolphJ.S,andSummers,L.H.(2015).TheOptimalMaturityofGovernment Debt. In: D. Wessel, ed., The $13 Trillion Question: How America Manages Its Debt.Washington,DC:BrookingsInstitutionPress,pp.1–41.

IMF (2014). Revised Guidelines for Public Debt Management. Washington, DC: InternationalMonetaryFund.

IMF and World Bank (2016). Quarterly Public Sector Debt database. [online] InternationalMonetary Fund, World Bank. Available at: http://data.worldbank.org/data­catalog/quarterly­public­sector­debt[Accessedon15Feb.2017]

WEO (2016). World Economic Outlook Entire Dataset. [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx[Accessedon14Dec.2016].

WES(2016).SpecialTopic:Publicdebtmanagement.CESifo World Economic Survey,15(4)

World Bank (2016). International Debt Statistics. [online] World Bank. Available at:http://data.worldbank.org/data­catalog/international­debt­statistics [Accessedon15 Feb.2017]

3PublicDebtManagementintheOICMemberCountries

AAOIFI(2008).Shariah Standards for Financial Institutions.Bahrain:AccountingandAuditing OrganisationforIslamicFinancialInstitutions,p.307

ImprovingPublicDebtManagementIntheOICMemberCountries

187

Alreshan,A.,Ltaifa,N.B.,Callen,T.,Mansour,M.andPiven,B.(2015).Tax Policy Reforms in the GCC Countries: Now and How? Washington,DC:InternationalMonetaryFund.

Baele,L.,Farooq,M,andOngena,S.(2014).OfReligionandRedemption:EvidencefromDefaultonIslamicLoans.Journal of Banking & Finance,44,pp.141­159.

Beck, T., Demirguc­Kunt, A. and Merrouche O. (2010). Islamic vs. Conventional Banking:Business Model, Efficiency and Stability. World Bank Policy Research Working Paper No.5446.

Bloomberg (2015). Nigeria’s Economic Expansion Slows as Oil Prices Decline. [online]Bloomberg.Availableat:https://www.bloomberg.com/news/articles/2015­02­22/nigeria­s­economic­growth­slows­to­5­94­in­fourth­quarter[Accessedon16Feb.2017]

Cabral,R.(2015).How Strategically is Public Debt Being Managed Around the Globe? A Survey on Public Debt Management Strategies.Washington,DC:WorldBankPubn.

Callen,T.,Cherif,R.Hasanov,F.,Hegzy,A.andKhandelwal,P.(2014).EconomicDiversificationintheGCC:Past,Present,andFuture.IMF Staff Discussion Note, 14/12.

Čihák,M. and Hesse, H. (2010). Islamic Banks and FinancialStability:An EmpiricalAnalysis.Journal of Financial Services Research,38,pp.95­113.

COMCEC (2016a). Developing Islamic Finance Strategies in the OIC Member Countries.Proceedings of the 6th Meeting of the COMCEC Financial Cooperation Working Group.

COMCEC (2016b). Financial Outlook of the OIC Member Countries 2016. Ankara: StandingCommittee for Economic and Commercial Cooperation of the Organization of IslamicCooperation.

Das, U.S., Papaioannou, M.G. and Trebesch, C. (2012). Sovereign Debt Restructurings 1950­2010:LiteratureSurvey,Data,andStylizedFacts.IMF Working PaperNo.12/203.

Ernst&YoungGlobalLimited(2014).World Islamic Banking Competitiveness Report 2014-15: Participation Banking 2.0.Bahamas:EYGMLimited.

Fitch Ratings (2016). Sukuk Take Record Share of 1Q16 Issuance in Key Markets. [online]Availableat:https://www.fitchratings.com/site/pr/1002847[Accessedon1Aug.2016].

Garnitz, J.,Nerb,G.,Boumans,D.,Wohlrabe,K.,Reischmann,M.,Riem,M.&Steiner,A.CESifoWorldEconomicSurveyNovember2016.CESifo World Economic Survey 16(4),pp.1­28

IIFM(2016).Sukuk Report.Manama:InternationalIslamicFinancialMarket.

IFSB(2013).Islamic Financial Services Industry Stability Report 2013.IslamicFinancialServicesBoard.

IFSB(2016).Islamic Financial Services Industry Stability Report 2016.IslamicFinancialServicesBoard.

Jobst, A., Kunzel, P.,Mills,P.,and Sy,A. (2008). Islamic Bond Issuance:WhatSovereignDebtManagers Need to Know. International Journal of Islamic and Middle Eastern Finance and Management,1,pp.330­344.

Lewis,M.K.,andAlgaoud,L.M.(2001).Islamic Banking.Cheltenham:EdwardElgarPublishing.

LópezMejía,A.,Aljabrin,S.,Awad,R.,Norat,M.,andSong,I.(2014).RegulationandSupervisionofIslamicBanks.IMF Working PaperNo.14/219.

ImprovingPublicDebtManagementIntheOICMemberCountries

188

MIFC(2013).Sukuk:GrowingRelevanceinInfrastructureDevelopment.Malaysia International Islamic Finance Centre.

Mohieldin, M. (2012). Realizing the Potential of Islamic Finance. The World Bank Economic PremiseNo.77.

OIC(2012).IslamicFinanceinOICMemberCountries.OIC Outlook Series May 2012.

OPEC (2016). OPEC Basket Price. [online] Wien: OPEC. Available at:http://www.opec.org/opec_web/en/data_graphs/40.htm[Accessedon15Feb.2017]

RAM (2017). RAM Ratings reaffirms Brunei’s gA1(pi) rating on sizeable sovereign reserves.[online] RAM Rating Services Berhad. Available at: https://www.ram.com.my/publicationview.aspx?id=49d9f6ec­404e­41e6­9832­ce71697087fe [Accessed on 15 Feb.2017]

REO(2016).Regional Economic Outlook, October 2016. [online]InternationalMonetaryFund.Available at: https://www.imf.org/external/pubs/ft/reo/2016/mcd/mreo1016.htm[Accessedon15Feb.2017]

Sommer,M.,Auclair,G..,Quayyum,S.,Tiffin,A.,andVersailles,B.(2016a).Regional Economic Outlook Update, April 2016: Middle East and Central Asia. Washington, DC: InternationalMonetaryFund.

Sommer,M.,Auclair,G.,Fouejieu,A.,Lukonga,I.,Quayyum,S.,Sadeghi,A.,Shbaikat,G.,Tiffin,A.,Trevino,J.,andVersailles,B.(2016b).Learning to Live with Cheaper Oil: Policy Adjustment in Oil-Exporting Countries of the Middle East and Central Asia.Washington,DC: InternationalMonetaryFund.

Song,I.,andOosthuizen,C.(2014).IslamicBankingRegulationandSupervision:SurveyResultsandChallenges.IMF Working Paper No.14/220.

Sundararajan,V.,Marston,D.,andShabsigh,G.(1998).MonetaryOperationsandGovernmentDebtManagementUnderIslamicBanking.IMF Working Paper No.98/144.

Reuters (2016). Kazakhstan Cuts Oil, Output Forecasts in Budget Review. [online] Reuters.Available at: http://www.reuters.com/article/kazakhstan­economy­idUSL3N1623NM[Accessedon19Aug.2016].

Reuters (2015). State of the Global Islamic Economy Report 2015/2016. New York: ThomasReuters.

WEO (2016). World Economic Outlook Entire Dataset. [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx[Accessedon14Dec.2016].

World Bank (2016). International Debt Statistics. [online] Washington, DC: World Bank.Available at: http://data.worldbank.org/data­catalog/international­debt­statistics[Accessedon15Feb.2017]

4DebtManagementinIndividualOICCountries

Islamic Republic of The Gambia

AfDB (2001). The Gambia: HIPC Approval Document Decision Point Under the Enhanced Framework. [online] African Development Bank. Available at:http://www.afdb.org/fileadmin/uploads/afdb/Documents/Financial­

ImprovingPublicDebtManagementIntheOICMemberCountries

189

Information/Gambia%20­%20Decision%20Point%20Document%20HIPC%20Framework.pdf [Accessed on 13 Oct.2016).

African Economic Outlook (2015). African Economic Outlook 2015. Khartoum: AfricanDevelopment Bank, Paris: Organisation of Economic Cooperation and Development, NewYork:UnitedNationsDevelopmentProgramme.

AFMI(2016).Country Profiles:Gambia. [online] AfricanFinancialMarketsInitiative.Availableat: http://www.africanbondmarkets.org/en/country­profiles/west­africa/gambia/[Accessedon13Oct.2016].

Central Bank of the Gambia (2016). Yield Rates on Treasury Bills and Sukuk-al-Salaam Bills.[online]Central Bankof theGambia.Available at:http://cbg.gm/index.html [Accessedon13Oct.2016].

Gelbard, E., Hussain, M., Maino, R., Mu, Y., and Yehoue, E. B. (2014). Islamic Finance in Sub­SaharanAfrica:StatusandProspects.IMF Working PaperNo.14/149.

IMF (2008). The Gambia: Enhanced Heavily Indebted Poor Countries Initiative, CompletionPointDocumentandMultilateralDebtReliefInitiative.IMF Country ReportNo.08/109.

IMF(2015).TheGambia,StaffReportforthe2015ArticleIVConsultation.IMF Country ReportNo.15/272.

MoFEA(2011).Medium Term Debt Strategy (MTDS) 2011-2014.Banjul:MinistryofFinanceandEconomicAffairs.

MoFEA (2013). Public Debt Bulletin: The Gambia, 2013. Banul: Ministry of Finance andEconomicAffairs.

MoFEA (2014). Public Debt Bulletin: The Gambia, 2014. Banjul: Ministry of Finance andEconomicAffairs.

MoFEA(2015).Medium Term Debt Strategy (MTDS) 2015-2017.Banjul:MinistryofFinanceandEconomicAffairs.

Morachiello, E., Nicolau, D., and Hegbor, C.K. (2015). Public Expenditure and Financial Accountability (PEFA) Assessment 2014: The Gambia, Final Report, Brussels: EuropeanUnion.

WEO (2016). World Economic Outlook Entire Dataset. [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx[Accessedon14Dec.2016].

World Bank (2003). The Republic of The Gambia. Country Financial AccountabilityAssessment.World Bank Report No.26046­GM.

World Bank (2010). Debt Management Performance Assessment (DeMPA), The Gambia.Washington,DC:WorldBankPubn.

Republic of Mozambique

AFMI (2016). Country Profiles: Mozambique. [online] African Financial Markets Initiative,AfricanDevelopmentBank.Availableat:http://www.africanbondmarkets.org/en/country­profiles/southern­africa/mozambique/[Accessedon13Oct.2016].

ImprovingPublicDebtManagementIntheOICMemberCountries

190

AllAfrica(2016).Mozambique: IMF Demands Forensic Audit of Ematum, Mam, Proindicus Loans.[online]AllAfrica.Availableat:http://allafrica.com/stories/201606260258.html[Accessedon13Oct.2016].

Brock, J. (2016). Mozambique's Tuna Fleet Rusts as an African Success Story Fades. [onlineReuters. Available at: http://www.reuters.com/article/us­mozambique­debt­idUSKCN0XX160[Accessedon13Oct.2016].

BVM (2016). Obrigaçõe. [online] BVM ­ Bolsa de Valores de Moçambique. Available at:http://www.bvm.co.mz/index.php/mercado/obrigacoes[Accessedon13Oct.2016].

IMF(2009).RepublicofMozambique:2009ArticleIVConsultation,FourthReviewunderthePolicySupportInstrument.IMF Country ReportNo.09/227.

IMF(2011).RepublicofMozambique:StaffReportforthe2011ArticleIVConsultation,SecondReviewunderthePolicySupportInstrument.IMF Country ReportNo.11/149.

IMF(2013).RepublicofMozambique,StaffReportforthe2013ArticleIVConsultation,SixthReviewunderthePolicySupportInstrument.IMF Country ReportNo.13/200.

IMF(2015a).RepublicofMozambique,FiscalTransparencyEvaluation.IMF Country Report No.15/32

IMF(2015b).RepublicofMozambique,StaffReportforthe2015ArticleIVConsultation,FifthReviewunderthePolicySupportInstrument.IMF Country ReportNo.16/9.

IMF(2016a).Transcript of African Department Press Briefing.[online]InternationalMonetaryFund.Availableat:http://www.imf.org/external/np/tr/2016/tr041516a.htm[Accessedon13Oct.2016].

IMF(2016b).IMFStatementonMozambique. IMF Press Release No.16/184.

IMF(2016c).IMFStaffConcludesVisittoMozambique. IMF Press Release No.16/304.

IRTI (2016). IRTI Organizes Islamic Finance Workshop in Mozambique. [online] IslamicResearch and Training Institute (IRTI). Available at:http://www.irti.org/English/News/Pages/IRTI­Organizes­Islamic­Finance­Workshop­in­Mozambique.aspx[Accessedon13Oct.2016].

MEFMI (2016). Mozambique Receive Training on Public Debt Management. [online]Macroeconomic and Financial Management Institute of Eastern and Southern Africa(MEFMI). Available at: http://mefmi.org/index.php/mediacentre/current­news/465­mozambique­receive­training­on­public­debt­management[Accessedon13Oct.2016].

MoEF(2012).Estratégia de Médio Prazo Para Gestão Da Dívida Pública.Maputo:RepúblicadeMoçambique,MinistériodaEconomiaeFinanças.

MoEF(2015).Estratégia de Médio Prazo Para Gestão Da Dívida Pública.Maputo:RepúblicadeMoçambique,MinistériodaEconomiaeFinanças.

OECD(2014).African Central Government Debt 2014, Statistical Yearbook.Paris:OrganisationforEconomicCooperationandDevelopment.

PEFA (2015). PEFA Assessment of Public Finance Management. [online] ACE InternationalConsultants and CESO Development Consultants, Public Expenditure and FinancialAccountability.Availableat:https://pefa.org/sites/default/files/MZ­Dec15­PFMPR­Public­Meth15­ENG.pdf[Accessedon13Oct.2016].

ImprovingPublicDebtManagementIntheOICMemberCountries

191

WEO (2016). World Economic Outlook Entire Dataset. [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx[Accessedon14Dec.2016].

Wernau, J. (2016). IMF Suspends Lending to Mozambique. [online] The Wall Street Journal.Available at: http://www.wsj.com/articles/imf­cancels­mozambique­credit­meeting­following­wsj­report­1460733681[Accessedon13Oct.2016].

Wernau,J.,andWirz,M.(2016).World Bank Is Suspending Direct Financial Aid to Mozambique. [online]TheWallStreetJournal.Availableat:http://www.wsj.com/articles/world­bank­is­suspending­direct­financial­aid­to­mozambique­1461775025[Accessedon13Oct.2016].

World Bank (2008). Debt Management Performance Assessment (DeMPA) Mozambique 2008.Washington,DC:WorldBankPubn.

Togolese Republic

AFMI (2016). Country Profiles: Togo. [online] African Financial Markets Initiative, AfricanDevelopment Bank. Available at: http://www.africanbondmarkets.org/en/country­

profiles/west­africa/togo/[Accessedon13Oct.2016].

BCEAO (2016). Etats Membres. [online] Banque Centrale des Etats de l'Afrique de l'Ouest.Availableat:http://www.bceao.int/­03­Etats­Membres­.html[Accessedon13Oct.2016].

CNDP (2015). Analyse de la Viabilite de la Dette du Togo. Paris:Comité National de la DettePublique,Ministredel’EconomieetdesFinances.

IMF(2007).Togo:2007ArticleIVConsultationandFirstStaffReviewoftheStaff­MonitoredProgram:StaffReport.IMF Country ReportNo.07/217.

IMF(2008).TogoReachesDecisionPointUndertheEnhancedHIPCDebtReliefInitiative. IMF Press Release No.08/304.

IMF(2009a).Togo:SelectedIssues.IMF Staff Country Reports No.09/165

IMF(2009b).Togo:StaffReportforthe2009ArticleIVConsultationandSecondReviewUndertheThreeYearArrangementUnderthePovertyReductionandGrowthFacility.IMF Country Report No.09/194.

IMF(2011).Togo:StaffReportforthe2011ArticleIVConsultationandSixthReviewUndertheExtendedCreditFacilityArrangement.IMF Staff Country Reports No.11/240.

IMF(2013).Togo:StaffReportforthe2013ArticleIVConsultation.IMF Staff Country Reports No.14/38.

IMF (2015a). West African Economic and Monetary Union: Staff on Common Policies ofMemberCountries. IMF Country ReportNo.16/96.

IMF(2015b).Togo:StaffReportforthe2015ArticleIVConsultation.IMF Staff Country Reports No.15/309.

MoEF (2014). Key Objectives of the Ministry. [online] Ministry of Finance and EconomicPlanning. Available at: http://www.moftg.net/about_objective.htm [Accessed on 13 Oct.2016].

MoEF (2016). Strategie de gestion de la dette publique au titre de l’annee 2016. Lomé:Ministèredel’ÉconomieetdesFinances.

ImprovingPublicDebtManagementIntheOICMemberCountries

192

MoEF (2016). Grands Chantiers en Cours. [online] Ministère de l’Économie et des Finances.Availableat:http://finances.gouv.tg/fr/content/grands­chantiers­en­cours­2[Accessedon13Oct.2016).

News Ghana (2016). Togo Signs Agreement with Islamic Development Bank. [online] NewsGhana. Available at: http://www.newsghana.com.gh/togo­signs­agreement­with­islamic­development­bank/[Accessedon13Oct.2016].

Owermohle, S. (2016). Togo’s Initial Sukuk Closes Today. [online] CPI Financial. Available at:http://www.cpifinancial.net/news/post/37102/togos­initial­sukuk­closes­today[Accessedon13Oct.2016].

PEFA (2016). République Togolaise: Evaluation du Système de Gestion des Finances Publiques Selon l’Approche PEFA 2016.Public Expenditure and Financial Accountability Secretariat.

WEO (2016). World Economic Outlook Entire Dataset. [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx[Accessedon14Dec.2016].

World Bank (2010). Outil d’évaluation de la performance en matière de gestion de la dette (DeMPA), Togo.Washington,DC:WorldBankPubn.

Zodzi,J.andPeyton,N.(2016).Togo Issues First $251 Mln, 10-yr Sukuk Bond With 6.5 Pct Yield.[online] Reuters. Available at: http://www.reuters.com/article/togo­sukuk­idUSL8N1AD56X[Accessedon13Oct.2016].

Republic of Uganda

AFMI (2016). Country Profiles: Uganda. [online] African Financial Markets Initiative, AfricanDevelopment Bank Group. Available at: http://www.africanbondmarkets.org/en/country­profiles/east­africa/uganda/[Accessedon13Oct.2016].

Giokos,E.andOjambo,F.(2014).Uganda Mulls $1 Billion Eurobond Sale to Fund Infrastructure. [online] Bloomberg. Available at: http://www.bloomberg.com/news/articles/2014­09­29/uganda­mulls­1­billion­eurobond­debut­to­fund­infrastructure [Accessed on 13 Oct.2016].

IMF(1998).UgandatoReceiveUS$650MillioninDebtRelief. IMF Press Release No.98/13.

IMF (2008). Uganda, Staff Report for the 2008 Article IV Consultation And Fourth ReviewUnderthePolicySupportInstrument. IMF Staff ReportNo.09/79..

IMF(2013). Staff Report for the2013 Article IVConsultation, Sixth Reviewunder the PolicySupport Instrument,Request fora three­yearPolicySupport InstrumentandCancellationofCurrentPolicySupportInstrument.IMF Staff ReportNo.13/215.

IMF (2015a). Uganda, Staff Report for the 2015 Article IV Consultation and Fourth ReviewunderthePolicySupportInstrument.IMF Staff ReportNo.15/175..

IMF (2015b). Uganda, Staff Report for the 2015 Article IV Consultation and Fourth ReviewunderthePolicySupportInstrument–DebtSustainabilityAnalysis.IMF Country Report No.15/175.

Investing (2016). Uganda Financial Markets. [online] Fusion Media Limited. Available at:http://www.investing.com/markets/uganda[Accessedon13Oct.2016].

ImprovingPublicDebtManagementIntheOICMemberCountries

193

MEFMI (2015). Findings of the MEFMI Study on Contingent Liabilities. [online] DebtManagement Stakeholders’ Forum in Manila. Available at:https://olc.worldbank.org/sites/default/files/Contigent%20Liabilities%20Study%20inMEFMI%20Region_0.pdf[Accessedon13Oct.2016].

MoFPED (2013). Public Debt Management Framework 2013. Kampala: Ministry of Finance,Planning&EconomicDevelopment.

MoFPED (2014). Report on Public Debt, Grants and Guarantees for Financial Year 2013/14.Kampala:MinistryofFinance,PlanningandEconomicDevelopment.

MoFPED(2016).Public Debt Management Strategy (PDMS) 2016.Kampala:MinistryofFinance,Planning&EconomicDevelopment,DirectorateofDebt&CashManagement.

Mugerwa, Y. (2016). Parliament Okays Islamic Banking. [online] Daily Monitor. Available at:http://www.monitor.co.ug/Business/Parliament­okays­Islamic­banking/688322­3024830­ceunkw/index.html[Accessedon13Oct.2016].

OAG (2015). Management of Public Debt. Kampala: Ministry of Finance, Planning, andEconomic Development. Government of the Republic of Uganda, Office of the AuditorGeneral.

Ojambo, F. (2013). Uganda’s Debut 15-Year Bond Sale Seen Fetching Up to 20%. [online]Bloomberg.Available at: http://www.bloomberg.com/news/articles/2013­12­02/uganda­s­debut­15­year­bond­sale­seen­fetching­up­to­20­[Accessedon13Oct.2016].

Ojambo, F. (2015). Ugandan Government Suspends Eurobond Sale After Dollar Gain. [online]Bloomberg. Available at: http://www.bloomberg.com/news/articles/2015­06­30/ugandan­government­suspends­plans­for­eurobond­sale­over­costs [Accessed on 13Oct.2016].

Ojambo, F. (2016). Uganda Says May Start Islamic Micro-Finance Loans by Mid-2017. [online]Bloomberg.Available at:http://www.bloomberg.com/news/articles/2016­07­25/uganda­says­may­start­islamic­micro­finance­loans­by­mid­2017[Accessedon13Oct.2016].

PFMA (2015). Public Finance Management Act. Kampala: Government of the Republic ofUganda.

RepublicofUganda(2015).Report on Public Debt (Domestic and External Loans), Guarantees, Other Financial Liabilities and Grants for Financial Year 2014/15. Kampala: Ministry ofFinance,PlanningandEconomicDevelopment.

RepublicofUganda(2016).Report on Public Debt (Domestic and External Loans), Guarantees, Other Financial Liabilities and Grants for Financial Year 2015/16. Kampala: Ministry ofFinance,PlanningandEconomicDevelopment.

TheEastAfrican(2016).Bank of Uganda Clears Islamic Bank Products for Business.[online]TheEastAfrican. Available at: http://www.theeastafrican.co.ke/news/Uganda­clears­Islamic­bank­products­for­business/2558­3205786­836w84/index.html [Accessed on 13 Oct.2016].

WEO (2016). World Economic Outlook Entire Dataset. [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx[Accessedon14Dec.2016].

ImprovingPublicDebtManagementIntheOICMemberCountries

194

Arab Republic of Egypt

Abaza, D. (2015). Egypt’s Government to Issue Sukuk in FY2015/16. [online] Ahramonline.Availale at:http://english.ahram.org.eg/NewsContent/3/12/129034/Business/Economy/Egypts­government­to­issue­sukuk­in­FY.aspx[Accessedon13Oct.2016].

Abbas, S.M.A. and Christensen, J.E. (2007). The Role of Domestic Debt Markets in EconomicGrowth:AnEmpiricalInvestigationforLow­incomeCountriesandEmergingMarkets.IMF Working Paper No.07/127.

Alexbank (2015). Flash Note: Reasons & Risks of Egypt’s Public Debt. [online] Alexbank.Available at:https://www.alexbank.com/Cms_Data/Contents/AlexBank/Media/Publication/FlashNote/egypt_public_debt.pdf[Accessedon9Feb2017].

IMF (2010). Arab Republic of Egypt: 2010 Article IV Consultation: Staff Report; PublicInformation Notice on the Executive Board Discussion; and Statement by the ExecutiveDirectorfortheArabRepublicofEgypt.IMF Staff ReportNo.10/94.

IMF(2015).ArabRepublicofEgypt.IMF Country ReportNo.15/33.

IMF (2016). Egypt: IMF Reaches Staff­Level Agreement on a Three­Year US$12 BillionExtendedFundFacility.IMF Press ReleaseNo.16/375.

Jarvis, C. (2015). How Can Egypt Achieve Economic Stability and Better Living Standards Together? [online] IMF direct, International Monetary Fund. Available at: https://blog­imfdirect.imf.org/2015/02/11/how­can­egypt­achieve­economic­stability­and­better­living­standards­together/[Accessedon13Oct.2016].

MoF(2006).StatementofResponsibilities.Cairo:MinistryofFinanceoftheArabRepublicofEgypt.

MoF(2015).Medium­TermDebtManagementStrategy(MTDS).Cairo:MinistryofFinanceoftheArabRepublicofEgypt.

MoF (2016a). The Financial Monthly – July 2016. Cairo: Ministry of Finance of the ArabRepublicofEgypt.

MoF (2016b). Egypt.[online] Presentation of the Public Financial Management Reform Unit.Available at: http://www.cabri­sbo.org/uploads/files/Documents/event_2016_contingent_liabilities_session_3_institutional_arrangements_to_facilitate_coordination_Egypt_engl.pdf[Accessedon22Jan.2017].

Sakr, M. (2016). Head of IMF Mission to Egypt Urges for Measures to Reduce Budget Deficit.[online] Daily News Egypt. Available at:http://www.dailynewsegypt.com/2016/04/16/head­of­imf­mission­to­egypt­urges­for­measures­to­reduce­budget­deficit/[Accessedon13Oct.2016].

Torchia, A. (2015). Egypt Got $23 Billion in Aid from Gulf in 18 Months – Minister. [online]Reuters. Available at: http://uk.reuters.com/article/uk­egypt­investment­gulf­idUKKBN0LY0UT20150302[Accessedon13Oct.2016].

WEO (2016). World Economic Outlook Entire Dataset. [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx[Accessedon14Dec.2016].

ImprovingPublicDebtManagementIntheOICMemberCountries

195

Republic of Indonesia

DirectorateGeneralofDebtManagement(2014).State Debt Management Strategy 2014-2017.Jakarta:MinistryofFinanceoftheRepublicofIndonesia.

DirectorateofIslamicFinancing(2015).Sukuk Negara, Sharia-Compliant Financial Instrument.2nd ed. Jakarta: Directorate General of Budget Financing, Ministry of Finance of theRepublicofIndonesia.

Directorate General of Budget Financing and Risk Management (2015). Laporan tahun 2015 (Annual report 2015).Jakarta:MinistryofFinanceoftheRepublicofIndonesia.

Directorate General of Budget Financing and Risk Management (2016a). Revisi Strategi Pembiayaan Tahunan Melalui Utang Tahun 2016 (Revised Debt Financing Strategy for 2016,in Indonesian only).Jakarta:MinistryofFinanceoftheRepublicofIndonesia.

Directorate General of Budget Financing and Risk Management (2016b). Profil Utang Pemerintah Pusat Edisi Desember 2016 (Central Government Debt Profile Edition December 2016). [online] Ministry of Finance of the Republic of Indonesia. Available at:http://www.djppr.kemenkeu.go.id/page/load/1755[Accessedon2Feb..2017].

Hamilton­Hart,N.andSchulze,G.(2016).TaxingtimesinIndonesia:thechallengeofrestoringcompetitiveness and the search for fiscal space. Bulletin of Indonesian Economic Studies,52(3),pp.265–294.

IMF (2014). Government Finance Statistics Manual 2014. Washington, DC: InternationalMonetaryFund.

IMF(2016).Indonesia:2015ArticleIVConsultation.IMF Country ReportNo.16/81.

Ministry of Finance (2014). State Debt Management Strategy for 2014-2017. Jakarta:DirectorateGeneralofBudgetFinancing,MinistryofFinanceoftheRepublicofIndonesia.

MinistryofFinanceandBankIndonesia(2016).Statistik Utang Luar Negeri Indonesia (External Debt Statistics of Indonesia). Jakarta:Ministryof Financeof theRepublicof IndonesiaandBankIndonesia.

Ministry of Finance (2017a). Annual Debt Financing Strategy. [online] Directorate General ofBudget Financing and Risk Management, Ministry of Finance. Available at:http://www.djppr.kemenkeu.go.id/page/loadViewer?idViewer=6717&action=download[Accessedon13Jan.2017].

MinistryofFinance(2017b).Debt Structure.[online]DirectorateGeneralofBudgetFinancingand Risk Management, Ministry of Finance. Available at:http://www.djppr.kemenkeu.go.id/#/en/page/debtstructure[Accessedon15Jan.2017].

WEO (2016). World Economic Outlook Entire Dataset. [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx[Accessedon14Dec.2016].

WorldBank(2016a).World Development Indicators.Washington,DC:WorldBank.

WorldBank(2016b).Indonesia Economic Quarterly: Resilience through Reform.Jakarta:WorldBank.

The Federal Republic of Nigeria

ImprovingPublicDebtManagementIntheOICMemberCountries

196

CBN (2016). Guidelines for Granting Liquid Asset Status to Sukuk Instruments issued by State Governments.Garki:CentralBankofNigeria.

DMO (2008). National Debt Management Framework (2008–2012). Abuja: Debt ManagementOffice.

DMO (2012). Nigeria’s Medium-Term Debt Management Strategy, 2012-2015. Abuja: DebtManagementOffice.

DMO (2013). National Debt Management Framework 2013-2017. Abuja: Debt ManagementOffice.

DMO(2015)2015. Annual Report and Statement of Accounts.Abuja:DebtManagementOffice.

DMO(2016).Nigeria’s Debt Management Strategy, 2016-2019 Abuja: DebtManagementOffice.

Emejo, J. (2015). Nigerian Appointed Advisor to South Sudan Debt Office.[online] AllAfrica.Availableat:http://allafrica.com/stories/201512020832.html[Accessedon18Oct.2016].

IMF(2016).Nigeria:2016ArticleIVConsultation–PressRelease;StaffReport;AndStatementbytheExecutiveDirectorforNigeria.IMF Country ReportNo.16/101Mitchell,C.(2016).Oil Price Fall is Main Reason for Tough Times in Nigeria.[online]FinancialTimesSpecialReport.Available at: https://www.ft.com/content/3a47381a­7371­11e6­bf48­b372cdb1043a[Accessedon26Sep.2016].

MoF and Public Credit (2011). Contingent Liabilities:: The Columbian Experience. [online]Ministry of Finance and Public Credit ­ General Directorate of Public Credit and NationalTreasury.Treasury Bogota, Colombia. Available at:http://treasury.worldbank.org/bdm/pdf/Contingent_Liabilities_Colombian_Experience.pdf[Accessed13Oct.2016].

Nwankow, A. (2011). Stages of Nigeria’s Public Debt Management. [online] University ofNigeria. Available at:http://www.unn.edu.ng/publications/files/Public%20Lecture;%20Stages%20of%20Nigeria's%20Public%20Debt%20Management%20Dr.pdf[Accessedon26Sep.2016].

Okoro, A. S. (2013). Public Debt. Understanding Monetary Policy Series No 36. Garki: CentralBankofNigeria.

Oladunjoye,M.O.(2014).SukukasaToolforInfrastructuralDevelopmentinNigeria.Journal of Islamic Banking and Finance 2,pp.335­344.

OPEC (2016). Annual Statistical Bulletin.Vienna: Organization of the Petroleum ExportingCountries.

Patience, M. (2016). Nigerian economy slips into recession. [online] BBC. Available at:http://www.bbc.com/news/business­37228741[Accessedon17Oct.2016].

Sapovadia,V.(2015).JaizBank,Nigeria:ACaseStudyonNon­InterestBank, MPRA PaperNo.68763.

SEC(2013).Rules on Sukuk Issuance in Nigeria.[online]SecuritiesandExchangeCommission.Available at: http://sec.gov.ng/rules­on­sukuk­issuance­in­nigeria­_­february­28­2013/[Accessedon18Oct.2016].

ImprovingPublicDebtManagementIntheOICMemberCountries

197

SEC(2016).SEC and DMO to Collaborate on Issuance of Nigeria’s First Sovereign Sukuk.[online]Security and Exchange Commission. Available at: http://sec.gov.ng/sec­and­dmo­to­collaborate­on­issuance­of­nigerias­first­sovereign­sukuk/[Accessedon18Oct.2016].

Uwalek, U. (2016). Interrogating Nigeria’s Debt Management Strategy 2016 – 2019. [online]Punch.Availableat:http://punchng.com/interrogating­nigerias­debt­management­strategy­2016­2019/[Accessedon29Sep.2016].

Vizcaino,B.(2016).Nigeria looks to sukuk for Infrastructure Funding Needs. [online]Reuters.Available at: http://www.reuters.com/article/nigeria­sukuk­idUSL5N18F36N[Accessed on17Oct.2016].

WEO (2016). World Economic Outlook Entire Dataset [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx[Accessedon14Dec.2016].

WorldBank(2012).Debt Management Performance Assessment (DeMPA) Nigeria. Washington,DC:WorldBank.

Republic of Sudan

Abdelaziz, K. and Noureldin, O. (2016). Sudan's Inflation Up to 16.5 Percent in July. [online]Reuters. Available at: http://www.reuters.com/article/sudan­inflation­idUSL8N1AR290,[Accessedon13Oct.2016].

AfraicanEconomicOutlook(2012).African Economic Outlook 2012: SudanKhartoum:AfricanDevelopment Bank, Paris: Organisation of Economic Cooperation and Development, NewYork:UnitedNationsDevelopmentProgramme.

African Development Bank (2014). Sudan: Country Brief 2014-2016 and Country Portfolio Performance Review.Abidjan:AfricanDevelopmentBankGroup.

African Financial Markets Initiative (2016). Sudan: Country Profile. [online]African FinancialMarkets Initiative. Available at: http://www.africanbondmarkets.org/en/country­profiles/east­africa/sudan/,[Accessedon13Oct.2016].

Central Bank of Sudan (2016a). The Economic Brief: A Periodical Brief (01). Khartoum:StatisticsDepartment,CBoS.

Central Bank of Sudan (2016b). The Economic Brief: A Periodical Review (06). Khartoum:StatisticsDepartment,CBoS.

EconomistIntelligenceUnit(2016).Sudan: Sovereign RiskLondon:EconomistIntelligenceUnit.

DMFAS (2015). Sudan Signs a New Technical Assistance Project with DMFAS. [online] DMFASProgramme. Available at: http://unctad.org/divs/gds/dmfas/news/Documents/E­news_16_Dec15_EN.pdf,[Accessedon13Oct.2016].

IDAandIMF(2013). Joint Bank-Fund Debt Sustainability Analysis - Update 2013 Washington, DC:WorldBankandWashington,DC:InternationalMonetaryFund,

IMF (2007). Sudan: 2007 Article IV Consultation and Staff-Monitored Program Staff Report.Washington,DC:InternationalMonetaryFund.

IMF (2010). Sudan: Article IV Consultation Staff Report. Washington, DC: InternationalMonetaryFund.

ImprovingPublicDebtManagementIntheOICMemberCountries

198

IMF(2012).Sudan: Staff Report for the Article IV Consultation.Washington,DC: InternationalMonetaryFund.

IMF(2013a).Sudan: Selected IssuesWashington,DC:InternationalMonetaryFund.

IMF(2013b).Sudan: Staff Report for the Article IV Consultation.Washington,DC:InternationalMonetaryFund.

IMF(2014a).Sudan: Staff Report for the 2014 Article IV Consultation and Second Review under the Staff-Monitored Program.Washington,DC: InternationalMonetaryFund.

IMF (2014b). IMF Executive Board Concludes 2014 Article IV Consultation with Sudan and Second Review under Staff Monitored Program, Press Release No.14/606.Washington,DC: InternationalMonetaryFund.

IMF (2016a). IMF Staff Completes 2016 Article IV Mission to Sudan. IMF Press Release No.16/261.

IMF(2016b). Factsheet: Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative.Washington,DC:InternationalMonetaryFund.

Leo, B. (2010). Who Are Sudan’s Two Biggest Creditors? And Why Is It Something to Worry About? [online] Center for Global Development Available at:http://www.cgdev.org/blog/who­are­sudan%E2%80%99s­two­biggest­creditors­and­why­it­something­worry­about,[Accessedon13Oct.2016].

Osman,N.A.A.(2013).The Debt Manager and Transparency: Capacity Building Need.[online]Ninth UNCTAD Debt Management Conference. Available at: http://unctad.org/divs/gds/dmfas/what/Documents/2013_Panel8.Osman_Khalid.pdf,[Accessedon13Oct.2016].

UNCTAD (2015). Tenth Debt Management Conference, List of Participants. [online] UnitedNations Conference on Trade and Development. Available at:http://unctad.org/divs/gds/dmfas/what/Documents/2015DMC_List_Participants.pdf,[Accessedon13Oct.2016].

UNDP (2014). Update on Macroeconomic Developments in Sudan. New York: United NationsDevelopmentProgramme.

Sudan Tribune (2012). International Debt. [online] Sudan Tribune. Availableat:http://sudantribune.com/spip.php?mot692,[Accessedon13Oct.2016]..

WEO (2016). World Economic Outlook Entire Dataset. [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx,[Accessedon14Dec.2016].

World Bank (2013). Debt Management Facility (DMF) News (12). [online]: World Bank.Available at: http://documents.worldbank.org/curated/en/175151468154152170/Debt­Management­Facility­DMF­news,[Accessedon13Oct.2016].

World Bank (2015). Debt Management Facility (DMF) News (20). [online] World Bank.Available at: http://documents.worldbank.org/curated/en/556301468127810039/Debt­Management­Facility­DMF­news,[Accessedon13Oct.2016].

WorldBank(2016).World Development Indicators.Washington,DC:WorldBank.

Republic of Albania

ImprovingPublicDebtManagementIntheOICMemberCountries

199

European Commission (2016). 2016 Economic Reform Programmes of Albania, the former Yugoslav Republic of Macedonia, Montenegro, Serbia, Turkey, Bosnia and Herzegovina and Kosovo.Luxemburg:EuropeanCommission.

Gustafsson, A., Macdonald, A., Braho, A. (2012). Albania - Public Expenditure and Financial Accountability Assessment (PEFA) 2011. Public Expenditure and Financial AccountabilitySecretariat.

IMF(2016).Albania­StaffReportforthe2016ArticleIVConsultation.IMF Country ReportNo.16/142.

MoF (2014). Albania Public Finance Management Strategy 2014-2020. Tirana: Republic ofAlbania,MinistryofFinance.

MoF(2016a).Medium Term Debt Management Strategy 2016-2018Tirana:RepublicofAlbania,MinistryofFinance.

MoF (2016b). Public Financial Management Strategy 2014-2020, 2015 Monitoring Report.Tirana:GovernmentofAlbania,MinistryofFinance.

MoF(2016c). Debt Indicators. [online] Republic of Albania,Ministryof Finance. Available at:http://www.financa.gov.al/en/reports/debt/debt­indicators,[Accessedon6Dec.2016].

WEO (2016). World Economic Outlook Entire Dataset. [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx[Accessedon14Dec.2016].

World Bank (2011). Debt Management Performance Assessment (DeMPA) Albania. Tirana:WorldBank.

WorldBank(2014a).Financial Sector Assessment Program, Albania – Public Debt Management, Technical Note.Washington,DC:WorldBank.

WorldBank(2014b).Islamic Banking Database.Washington,DC:WorldBank.

Islamic Republic of Iran

Ahmad,Z.(1994).IslamicBanking:StateoftheArt.Islamic Economic Studies2(1).pp.1­33.

Akrami, S. R. (2014). Public Debt Management. [online] Ministry of Economic Affairs andFinance. Available at:http://www.mefa.ir/portal/Home/ShowPage.aspx?Object=NEWS&ID=338d243a­e84a­44e8­9982­9bdce6c33f9d&WebPartID=1b97603d­14ba­4c7a­8aef­392532973b16&CategoryID=fca647a9­4af2­4117­a3e0­29e863a9be05, [Accessed on 13Oct.2016].

Atkinson,A.(2015).Country Report Iran.[online]EulerHermesEconomicResearch.Availableat: http://www.eulerhermes.com/mediacenter/Lists/mediacenter­documents/Country­Report­Iran.pdf,[Accessedon13Oct.2016].

Bova, E., Ruiz­Arranz, M., Toscani, F. and H. Elif Ture (2016). The Fiscal Costs of ContingentLiabilities:ANewDataset.IMF Working Paper No.16/14

Bozorgmehr,N.,andArnold,M.(2015).Iran to test investor confidence with debt issue.[online]Financial Times. Available at: http://www.ft.com/cms/s/0/a432dd30­6510­11e5­9846­de406ccb37f2.html,[Accessedon29Aug.2016].

ImprovingPublicDebtManagementIntheOICMemberCountries

200

CBI (2015a). Key Economic Indicators No. 83, Fourth Quarter, 1394. Theran: EconomicResearchandPolicyDepartment,CentralBankofIran.

CBI (2015b). Banking Profit Rates. [online] Central Bank of Iran. Available at:http://www.cbi.ir/simplelist/1493.aspx,[Accessedon13Oct.2016].

ExternalActionService(2012).EU imposes fresh round of sanctions on Iran.[online]EuropeanUnion. Available at: http://eeas.europa.eu/top_stories/2012/230112_iran_en.htm,[Accessedon13Oct.2016].

Fitch, A. (2015). Are You Ready to Buy Bonds From Iran? [online] The Wall Street Journal.Available at: http://www.wsj.com/articles/are­you­ready­to­buy­bonds­from­iran­1450348201,[Accessedon13Oct.2016].

Goodarzi, M. and Kalhor, N. (2016). Iran Igniting Its Debt Market Machine; Is It Well-Fueled?[online] Agah Group. Available at: http://agahgroup.com/iran­igniting­its­debt­market­machine­is­it­well­fueled/,[Accessedon13Oct.2016].

Hansen,T.S.(2015).Public Debt Management. [online] InternationalMonetaryFund.Availableat: http://mefa.gov.ir/portal/File/ShowFile.aspx?ID=dc477653­d87b­42a5­9715­92d5ddd4b8fd, [Accessed on 13 Oct. 2016].IMF (2002). Public Information Notice: IMF Concludes 2002 Article IV Consultation with the Islamic Republic of Iran. Washington, DC:InternationalMonetaryFund.

IMF (2014). Islamic Republic of Iran, Staff Report for the 2014 Article IV Consultation. IMF Country Report No.14/93.

IMF (2015a). Islamic Republic of Iran, Staff Report for the 2015 Article IV Consultation. IMF Country Report No.15/349.

IMF (2015b). Islamic Republic of Iran, Staff Report for the 2015 Article IV Consultation,InformationalAnnex.IMF Country Report No.15/349.

IMF(2015c).IslamicRepublicofIran,StaffReportforthe2015ArticleIVConsultation,PressRelease.IMF Country Report No.15/349.

IMF(2015d).Islamic Republic of Iran, Selected Issues.Washington,DC:InternationalMonetaryFund.

Iran Fara Bourse (2016). Iran Fara Bourse. [online] Iran Fara Bourse: Available at:http://en.ifb.ir/Content/PDF/IFB_EN_Site%20final%2030.08.94­%202_2.pdf [Accessed on13Oct.2016].

Iqbal, Z., and Mirakhor, A. (1987). Islamic Banking. Washington, DC: International MonetaryFund.

Kalhor,N.(2016).How Iran Plans to Cover its Budget Deficit.[online]ALMONITOR. Availableat:http://www.al­monitor.com/pulse/originals/2016/03/iran­debt­market­expansion­budget­deficit­islamic­tbills.html,[Accessedon13Oct.2016].

Ministry of Economic Affairs and Finance (2016). Introduction: Goals & Duties. [online]Ministry of Economic Affairs and Finance. Available at:http://eform.mefa.ir/portal/Home/Default.aspx?CategoryID=0ba8abcd­554c­4b11­8a9b­dffd8f97c207[Accessedon17Feb.2017].

Mojarrad,J.(2015).Statement by Jafar Mojarrad, Executive Director for the Islamic Republic of Iran.Washington,DC:InternationalMonetaryFund.

ImprovingPublicDebtManagementIntheOICMemberCountries

201

Montevalli, G. (2016). Iran Exploring Return to Global Bond Markets After 14-Year Break.[online] Bloomberg Available at: http://www.bloomberg.com/news/articles/2016­07­19/iran­exploring­return­to­global­bond­markets­after­14­year­break, [Accessed on 13Oct.2016].

Shahriari,S.,Mahoozi,S.,Rabii,R.,andEghbalnia,Y.(2016). Iran Investment Monthly.Theran:TurquoisePartners.

Tozy,S.,andIyigün,S.(2016).Iran: A New Era After Lifting Of Sanctions.Paris:Coface.

UNSecurityCouncil(2015).Resolution 2231.NewYork:UnitedNationsSecurityCouncil.

UN(2015). Tenth Debt Management Conference, List of Participants. [online] United NationsConference on Trade and Development. Available at:http://unctad.org/divs/gds/dmfas/what/Documents/2015DMC_List_Participants.pdf,[Accessedon13Oct.2016].

Versailles, B. (2016). “The Economic Implications of Iran’s Economic Sanction Relief”, iMF direct. [online] International Monetary Fund. Available at:http://www.imf.org/external/np/blog/nafida/020116.pdf,[Accessedon13Oct.2016].

Vizcaino, B. (2015). Iran's Isolated Banks May Have Slow, Painful Return to Global System.[online] Reuters. Available at: http://www.reuters.com/article/iran­banks­idUSL5N0Y32LS20150512,[Accessedon13Oct.2016].

Warde, I. (2000). Islamic Finance in the Global Economy. Edinburgh: Edinburgh UniversityPress,.

WEO (2016). World Economic Outlook Entire Dataset. [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx,[Accessedon14Dec.2016].

Wright,C.(2015).Iran Issues $300m Equivalent Domestic Bond.[online]Euromoney.Availableat: http://www.euromoney.com/Article/3503423/Iran­issues­300m­equivalent­domestic­bond.html,[Accessedon29Aug.2016].

Republic of Kazakhstan

Cox, J. (2014). Kazakhstan Ends 14-Year Absence From Bond Markets. [online] Wall StreetJournal Online. Available at: http://www.wsj.com/articles/kazakhstan­ends­14­year­absence­from­bond­markets­1412588592,[Accessedon13Oct.2016].

IMF(2015).RepublicofKazakhstan:2015ArticleIVConsultation–PressRelease;StaffReportfortheRepublicofKazakhstan.IMF Country Report No. 15/241

MoF (2011). Strategic Plan of the Republic of Kazakhstan Finance Ministry for 2011-2015.Astana:MinistryofFinanceoftheRepublicofKazakhstan.

MoF (2016). Budgeting Process, about State Securities. [online] Ministry of Finance of theRepublic of Kazakhstan. Available at:http://www.minfin.gov.kz/irj/portal/anonymous?NavigationTarget=ROLES://portal_content/mf/kz.ecc.roles/kz.ecc.anonymous/kz.ecc.anonymous/kz.ecc.anonym_budgeting/budgeting/state_securities_fdlr,[Accessedon13Oct.2016].

Moody’s (2016). Moody’s downgrades Kazakhstan’s rating to Baa3 with negative outlook, concluding review for downgrade. [online] Moody’s. Available at:

ImprovingPublicDebtManagementIntheOICMemberCountries

202

https://www.moodys.com/research/Moodys­downgrades­Kazakhstans­rating­to­Baa3­with­negative­outlook­concluding­­PR_347131[Accessedon13Oct.2016].

NBK (2012). On holding the International Session “Islamic Modes of Finance and Sukuk”. [online] National Bank of the Republic of Kazakhstan. Available at:http://www.nationalbank.kz/cont/publish346387_8097.pdf,[Accessedon13Oct.2016].

NBK(2013).The Legislative Framework.[online]NationalBankoftheRepublicofKazakhstan.Availableat:http://www.nationalbank.kz/document/?docid=4707&switch=eng,[Accessedon13Oct.2016].

NBK(2016). Islamic Finance Overview. [online]NationalBankof theRepublicofKazakhstan.Availableat:http://www.nationalbank.kz/cont/publish791926_31340.pdf?switch=kazakh,[Accessedon13Oct.2016].

Porzecanski,K.andPronina,L.(2014).Kazakhstan Sells First Overseas Dollar Bonds in 14 Years.[online] Bloomberg. Available at: http://www.bloomberg.com/news/articles/2014­10­06/kazakhstan­sells­first­overseas­dollar­bonds­in­14­years,[Accessedon13Oct.2016].

Pronina, L. (2015). Kazakhstan Offers $4 Billion Record Bond Sale on Greek Deal. [online]Bloomberg. Available at: http://www.bloomberg.com/news/articles/2015­07­14/kazakhstan­pushes­ahead­with­dollar­bond­sales­after­greek­deal, [Accessed on 13Oct.2016].

RepublicofKazakhstan(2008).Budget Code of the Republic of Kazakhstan, No. 95-IV, unofficial translation. [online] Ministry of Justice of the Republic of Kazakhstan. Available at:http://adilet.zan.kz/eng/docs/K080000095_/info,[Accessedon13Oct.2016].

Vizcaino,B. (2015).Kazakhstan set for debut sovereign sukuk in early 2016. [online] Reuters.Available at: http://www.reuters.com/article/islam­financing­kazakhstan­idUSL8N13B01720151116,[Accessedon13Oct.2016].

WEO (2016). World Economic Outlook Entire Dataset. [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx,[Accessedon14Dec.2016].

World Bank (2011). Debt Management Performance Assessment (DeMPA), Kazakhstan.Washington,DC:WorldBank.

Lebanese Republic

Bader,M.K.I.,Mohamad,S.,Ariff,M.andHassan,T.(2008).Cost,Revenue,andProfitEfficiencyof Islamic Versus Conventional Banks: International Evidence Using Data EnvelopmentAnalysis.IslamicEconomicStudies15(2),pp.23­76.

Barrington, L. (2016). Lebanon Increases Amount of Dollar-Denominated Public Debt. [online]Reuters.Availableat:http://www.reuters.com/article/lebanon­economy­idUSL5N18O2RR,[Accessedon14Oct.2016].

Beck, T., Demirgüç­Kunt, A., and Merrouche, O. (2013). Islamic vs. Conventional Banking:BusinessModel,EfficiencyandStability.JournalofBanking&Finance37(2),pp.433­447.

Credit Libanais (2016). Dissecting the Lebanese Public Debt: Debt Dynamics & ReformMeasures.Beirut:EconomicResearchUnit,CreditLibanaisS.A.L.

ImprovingPublicDebtManagementIntheOICMemberCountries

203

DailyStarLebanon(2014).Why Islamic Finance is Failing in Lebanon.[online]TheDailyStar.Available at: http://www.albawaba.com/business/lebanon­islamic­finance­545264,[Accessedon14Oct.2016].

El Hachem, J. (2014). Unpopularity of Islamic Banking in Lebanon. [online] Islamic FinanceNews. Available at: http://www.bsabh.com/wp­content/uploads/2014/12/IFN­Unpopularity­of­ISF­Lebanon­Johnny­El­Hachem.pdf,[Accessedon14Oct.2016].

FitchRatings(2016).Fitch Downgrades Lebanon to “B-“; Outlook Stable.[online]FtchRatings,PressRelease.Availableat:https://www.fitchratings.com/site/pr/1008898, [Accessed on14Oct.2016].

Halal Times (2015). Islamic Finance in Lebanon Less Than One Per Cent of Banking Sector.[online]HalalTimes.Availableat:http://www.halaltimes.com/islamic­finance­in­lebanon­less­than­one­per­cent­of­banking­sector/,[Accessedon14Oct.2016].

Hassan,T.,Mohamad,S.,andBader,M.K.I.(2009).EfficiencyofConventionalversusIslamicBanks:EvidencefromtheMiddleEast. International Journal of Islamic and Middle Eastern Finance and Management,2(1),pp.46­65.

Henry,C.M.(2016). Islamic Finance in Movement: Public Opinion in the Arab Region(workingpaper). [online] Arab Barometer. Available at:https://www.islamicbanker.com/publications/islamic­finance­in­movement­public­opinion­in­the­arab,[Accessedon9Feb.2017].

IMF(2015a).Staff Report: LebanonWashington,DC:InternationalMonetaryFund.

IMF (2015b). Lebanon: 2015 Article IV Consultation – Press Release; Staff Report; andStatementbytheExecutiveDirectorforLebanon.IMF Country ReportNo.15/190.

MoF (2014). Debt Management Strategy 2014-2016. Beirut: Republic of Lebanon Ministry ofFinance.

Naser, D., Tabsh, I., Moukayed, E., and Najem, N. (2014a). Barriers for Implementing Sukuk(IslamicBonds)AcrossLebanon.Journal for Global Business Advancement,7(1),pp.22­37.

Naser,D.,Tabsh,I.,Moukayed,E.,andNajem,N.(2014b).PublicPerceptionsofIslamicFinanceAcrossLebanon.Journal for Global Business Advancement,7(3),pp.209­221.

Neaime, S. (2015). Twin Deficits and the Sustainability of Public Debt and Exchange RatePoliciesinLebanon.Research in International Business and Finance,33(C),pp.127­143.

WEO (2016). World Economic Outlook Entire Dataset. [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx,[Accessedon14Dec.2016].

Republic of Turkey

Erol, C., F. Baklaci, H., Aydoğan, B., & Tunç, G. (2014). Performance comparison of Islamic(participation)banksandcommercialbanksinTurkishbankingsector.EuroMed Journal of Business,9(2),pp.114­128.

Eurostat(2017).Government bond yields, 10 years' maturity - monthly data.[online]Eurostat.Available at:http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=irt_lt_gby10_m&lang=en[Accessedon16Feb.2017]

ImprovingPublicDebtManagementIntheOICMemberCountries

204

IMF(2016).Turkey:2016ArticleIVConsultation–PressRelease;StaffReport;AndStatementbytheExecutiveDirectorforTurkey.IMF Country Report No. 16/104

Henry, C. M. (2016). Islamic Finance in Movement: Public Opinion in the Arab Region. Arab Barometer Working PaperNo.4.

InternationalMonetaryFund(2016).Turkey.IMF Country Report No. 16/104.

UndersecretariatofTreasury(2015).Public Debt Management Report 2015.Ankara:RepublicofTurkeyPrimeMinistry.

UndersecretariatofTreasury(2016a).Public Debt Management Report 2016.Ankara:RepublicofTurkeyPrimeMinistry.

UndersecretariatofTreasury(2016b).Public Debt Management Report, No 131 (June).Ankara:RepublicofTurkeyPrimeMinistry.

WEO (2016). World Economic Outlook Entire Dataset. [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx,[Accessedon14Dec.2016].

Sultanate of Oman

CentralBankofOman(2011).Developing Debt Market in Oman: A Road Map.Muscat:EconomicResearchandStatisticsDepartment,CentralBankofOman.

CentralBankofOman(2016).Annual Report 2015.Muscat:CentralBankofOman.

Economist Intelligence Unit (2015). Sovereign bond issues to pick up in 2016. [online]Economist Intelligence Unit. Available at: http://country.eiu.com/article.aspx?articleid=1103790294&Country=Bahrain&topic=Economy[Accessedon2Sep.2016].

IMF(2008).Central Bank of Oman: Strengthening Liquidity Management and Developing Money and Debt MarketsWashington,DC:InternationalMonetaryFund

IMF(2009)Arab Debt Market Development initiative for Oman.Washington,DC:InternationalMonetaryFund.

IMF (2011). Oman – 2011 Article IV Consultation Concluding Statement of the IMF Mission.[online] International Monetary Fund. Available at:http://www.imf.org/external/np/ms/2011/121911.htm[Accessedon1Sep.2016].

IMF (2013). Oman – 2013 Article IV Consultation Concluding Statement of the IMF Mission.[online] International Monetary Fund. Available at:https://www.imf.org/en/News/Articles/2015/09/28/04/52/mcs051413[Accessedon1Sep.2016].

IMF (2016). Press Release: IMF Staff Completes 2016 Article IV Mission to Oman. [online]International Monetary Fund. Available at: https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr16205[Accessedon1Sep.2016].

Moody’s(2016).Moody's assigns Baa1 rating to Oman's USD Sovereign Sukuk.[online]Moody’s.Available at: https://www.moodys.com/research/Moodys­assigns­Baa1­rating­to­Omans­USD­Sovereign­Sukuk­­PR_352034[Accessedon2Sep.2016].

OmanArabBank(SAOC)(2016).UN-Audited Financial Statements for the Three Months Ended 31 March 2016.Muscat:OmanArabBank.

ImprovingPublicDebtManagementIntheOICMemberCountries

205

Rabobank (2015). Country Report Oman. [online] Rabobank. Available at:https://economics.rabobank.com/publications/2015/june/country%2Dreport%2Doman/[Accessedon1Sep.2016].

Reuters (2015). Oman’s First Sovereign Sukuk Issue Attracts Strong Orders. [online] Reuters.Available at: http://www.reuters.com/article/oman­sukuk­idUSL8N12P07720151025[Accessedon1Sep.2016].

WallStreet Journal(2016).Oman Government Sells $2.5 Billion of Global Bonds. [online]WallStreet Journal. Available at: http://www.wsj.com/articles/oman­government­sells­2­5­billion­of­global­bonds­1465480073[Accessedon2Sep.2016].

WEO (2016). World Economic Outlook Entire Dataset. [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx[Accessedon14Dec.2016].

Kingdom of Saudi Arabia

Al­Darwish,A.,Alghaith,N.,Deb,P.,andKhandelwal,P.(2014).Monetary and Macroprudential Policies in Saudi Arabia. Riyadh: Saudi Arabian Monetary Agency and InternationalMonetaryFund.

Al­Sayari, H. (2003). Saudi Arabian Banking System & Capital Markets. [online] Saudi BritishForum. Available at: http://www.sama.gov.sa/en­US/News/Pages/News14230708.aspx,[Accessedon14Oct.2016].

Algahtani,G.J.(2015).Impact of Rising Interest Rate on Saudi Economy.Riyadh:SaudiArabianMonetaryAgency.

CapitalMarketAuthority(2016).Strategic Plan 2015-2019.Riyadh:CapitalMarketAuthority.

CMA (2016).About Capital Market Authority. [online] Capital Market Authority. Available at:http://www.cma.org.sa/En/AboutCMA/Pages/default.aspx,[Accessedon14Oct.2016].

COMCEC (2014). Enhancing Financial Inclusion In the COMCEC Countries. Ankara: StandingCommittee for Economic and Commercial Cooperation of the Organisation of IslamicCooperationCoordinationOffice.

COMCEC (2016). Developing Islamic Finance Strategies in the OIC Member Countries. Ankara:Standing Committee for Economic and Commercial Cooperation of the Organisation ofIslamicCooperationCoordinationOffice.

EIU (2016). Saudi Arabia to Secure US$10bn Sovereign Loan. [online] The EconomistIntelligence Unit. Available at:http://country.eiu.com/article.aspx?articleid=1244158108&Country=Saudi%20Arabia&topic=Economy&subtopic=Forecast&subsubtopic=Policy+trends&u=1&pid=504296434&oid=504296434&uid=1,[Accessedon14Oct.2016].

Financial Times (2016). Saudi Arabia: Drip Irrigation. [online] Financial Times. Available at:https://app.ft.com/cms/s/df130230­3f77­11e6­9f2c­36b487ebd80a.html?sectionid=world,[Accessedon10Nov.2016].

Hamdan, S. (2012). Saudi Arabia Issues Its First Sovereign Islamic Bond. [online] New YorkTimes.Availableat:http://www.nytimes.com/2012/01/26/world/middleeast/26iht­m26­saudi­sukuk.html,[Accessedon14Oct.2016].

ImprovingPublicDebtManagementIntheOICMemberCountries

206

IFSB (2016). Islamic Financial Services Industry Stability Report. Kuala Lumpur: IslamicFinancialServicesBoard.

IIFM (2016). Sukuk Report, A Comprehensive Study of the Global Sukuk Market. Manama:InternationalIslamicFinancialMarket.

IMF(2015a). Saudi Arabia, Staff Report for the 2015 Article IV Consultation. IMF Country ReportNo.15/251.

IMF(2015b).SaudiArabia,SelectedIssues.IMF Country ReportNo.15/286.

IMF (2016a). Press Release No. 16/230. [online] International Monetary Fund. Available at:https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr16230, [Accessed on 14Oct.2016].

IMF(2016b).SaudiArabia,SelectedIssues.IMF Country Report No.16/327.

IMF(2016c).Press Release No. 16/368,Washington,DC:InternationalMonetaryFund.

Investing(2016).Saudi Arabia Financial Markets Data.[online]Fusion Media Limited.Availableat:http://www.investing.com/markets/saudi­arabia,[Accessedon14Oct.2016].

Kerr,S.(2016).Saudi Arabia Gears Up For Debut Bond Issue.[online]FinancialTimes.Availableat: http://www.ft.com/cms/s/0/392e6628­3bb4­11e6­8716­a4a71e8140b0.html#axzz4IiBiLnhN,[Accessedon29Aug.2016].

Kerr, S., and Moore, E. (2016). Saudi Arabia Lines Up Banks for $15bn Bond Sale. [online]Financial Times. Available at: http://www.ft.com/cms/s/0/9dd8cbfe­2755­11e6­8ba3­cdd781d02d89.html?siteedition=intl#axzz4IiBiLnhN,[Accessedon29Aug.2016].

Martin, M. (2016). Saudi Arabia Plans to Sell First International Bond. [online] Bloomberg.Availableathttp://www.bloomberg.com/news/videos/2016­08­25/saudi­arabia­plans­to­sell­first­international­bond,[Accessedon14Oct.2016].

Martin,M & Bianchi,S. (2016). Saudi Arabia Said to Hire HSBC Banker to Set Up Debt Office.[online] Bloomberg. Available at: http://www.bloomberg.com/news/articles/2016­05­30/saudi­arabia­said­to­hire­hsbc­banker­to­set­up­new­debt­office, [Accessed on 14 Oct.2016].

Narayanan,A.andSayegh,H.A.(2015).Mideast Debt, Saudi Bond Issues to Soar as Government Plugs Deficit. [online] Reuters. Available at: http://www.reuters.com/article/saudi­bonds­idUSL5N0ZV2O320150716,[Accessedon14Oct.2016].

Reuters(2015).Saudi Arabia issues first sovereign bonds since 2007.[online]Reuters.Availableat:http://www.reuters.com/article/saudi­bond­idUSL8N0ZQ03F20150710[Accessedon15Feb.2017].

SAMA (2016a). Financial Stability Report. Riyadh: Monetary Policy and Financial StabilityDepartment,SaudiArabianMonetaryAgency.

SAMA (2016b). Government Development Bonds Rates. [online] Saudi Arabian MonetaryAgency. Available at: http://www.sama.gov.sa/en­US/GovtSecurity/Pages/GovernmentDevelopmentBonds.aspx,[Accessedon14Oct.2016].

Torchia, A. (2015). Update 2, Saudi Arabia Issues First Sovereign Bonds Since 2007, More to Come. [online] Reuters. Available at: http://www.reuters.com/article/saudi­bond­idUSL8N0ZQ03F20150710,[Accessedon14Oct.2016].

ImprovingPublicDebtManagementIntheOICMemberCountries

207

Warde, I. (2000). Islamic Finance in the Global Economy. Edinburgh : Edinburgh UniversityPress.

WEO (2016). World Economic Outlook Entire Dataset. [online] International Monetary Fund.Available at: https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx[Accessedon14Dec.2016].

5.PolicyRecommendations

Abbas, S. M., and Christensen, J. (2010). The Role of Domestic Debt Markets in EconomicGrowth:AnEmpiricalInvestigationforLow­IncomeCountriesandEmergingMarkets.IMF Staff Papers57,pp.209­255.

Christensen,J.(2005).DomesticDebtMarketsinSub­SaharanAfrica.IMF Economic Review52,pp.518­538.

Crowe,C. and Meade, E. E. (2008). CentralBank Independence and Transparency: EvolutionandEffectiveness.IMF Working PaperNo.08/119

IMF(2015).Financial Soundness Indicators and the IMF.[online]Washington,DC:InternationalMonetary Fund. Available at: https://www.imf.org/external/np/sta/fsi/eng/fsi.htm[Accessedon15Feb.2017]

Kaminsky,G., Lizondo, S., and Reinhard, C. M. (1998). Leading Indicators ofCurrency Crises.IMF Staff Papers 45.

Maana,I.,Owino,R.,&Mutai,N.(2008,June).Domestic debt and its impact on the economy-the case of Kenya. Paper Presented During the 13th Annual African Econometric SocietyConferenceinPretoria,SouthAfricafrom9to11July2008.

Panizza,U.(2010).IsDomesticDebttheAnswertoDebtCrises?iPD Working Paper Series.

ImprovingPublicDebtManagementIntheOICMemberCountries

208

Glossary Table G-0-1: General Public Debt Terms

Term MeaningArrears Thepartofadebtthatisbothunpaidandpasttheduedateforpayment.Averageinterestrate

Theweightedaveragelevelofinterestratesontheoutstandinggrosspublicsectordebtoranyspecificdebtinstrument,atnominalandmarketvalue,asatthereferencedate.

Averagetimetomaturity

Theweightedaveragetimetomaturityofalltheprincipalpaymentsinthedebtportfolio.

Averagetimetorefixing

Theweightedaveragetimeuntilalltheprincipalpaymentsinthedebtportfoliobecomesubjecttoanewinterestrate.

CouponTheyieldpaidbyafixed­incomesecurityonitsissuedate(relativetothebond'sfaceorparvalue).Thisyieldchangesasthevalueofthebondchanges.

Domesticpublicdebt

Alldebtliabilitiesofanational(federal)governmentthatareissuedunder­andsubjectto ­ national jurisdiction, regardless of the nationality of the creditor or the currencydenominationofthedebt.Termsofthedebtcontractscanbemarket­determinedorsetunilaterallybythegovernment.

Eurobond

A bond denominated in a currency other than the home currency of the country ormarket in which it is issued. These bonds are frequently grouped together by thecurrencyinwhichtheyaredenominated,suchaseurodollaroreuroyenbonds.Issuanceisusuallyhandledbyaninternationalsyndicateoffinancialinstitutionsonbehalfoftheborrower.The termEurobond refers only to the fact the bond is issued outside of thebordersofthecurrency'shomecountry;itdoesnotmeanthebondwasissuedinEuropeordenominatedinEuro.

Externalpublicdebt

Alldebtliabilitiesofanational(federal)governmentwithforeigncreditors,bothofficial(public)andprivate.Creditorsoftendetermineallthetermsofthedebtcontracts,whichare normally subject to the jurisdiction of the foreign creditorsor to international law(formultilateralcredits).

Foreigncurrencypublicdebt

Alldebtliabilitiesofanational(federal)governmentthatareexpressedin(orlinkedto)acurrencydifferentfromthenationalcurrencyofthecountry.

GovernmentBondA debt security issued by a national (federal) government to support governmentspending.

GovernmentDevelopmentBond(GDB)

Abondissuedbyanational(federal)governmenttoraise financing for fundingoneormorespecificprojectsordevelopmentworkingeographicarea.

Maturity

Thetimeuntilthedebtisextinguishedaccordingtothecontractbetweenthedebtorandthe creditor. In the statistical guidelines this time period is either from the date ofincurrenceorreference(original/remainingmaturity,respectively)of thedebt liabilitytothedateatwhichtheliabilitywillbeextinguished.

Publiclyguaranteeddebt

Debtliabilitiesofpublicandprivatesectorunits,theservicingofwhichiscontractuallyguaranteedbypublicsectorunits.Theseguaranteesconsistof loanandotherpaymentguarantees,whichareaspecifictypeofone­offguarantees.

SpecialDrawingRights(SDR)

International reserve assets created by the International Monetary Fund (IMF) andallocatedtoitsmemberstosupplementreserveassets.

Totalpublicdebt Totaldebtliabilitiesofagovernmentwithbothdomesticandforeigncreditors.Traded/tradabledebt

Debt securities traded (or tradable) in organized and other financial markets such asbills,bonds,negotiablecertificatesofdeposits,asset­backedsecurities,etc.

TreasuryBill(T­Bill)

A(usually)short­term(lessthanoneyear)marketablefixedinterestratedebtsecurityissuedbyanational(federal)government.Billsgiveholderstheunconditionalrightstoreceivestatedfixedsumsonaspecifieddate.

TreasuryBond(T­Bond)

A long­term marketable fixed interest rate debt security issued by a national (federal)government. Bonds give the holders the unconditional right to fixed payments orcontractuallydeterminedvariablepaymentsonaspecifieddateordates.

Zero­couponbondAlong­termsecuritythatdoesnotinvolveperiodicpaymentsduringthelifeofthebond.Asinglepayment,thatincludesaccruedinterest,ismadeatmaturity.

Sources: Reinhard, C., and Rogoff, R. (2011). From Financial Crash to Debt Crisis, American Economic Review 101, p. 1702; Investopedia; Task Force on Finance Statistics (TFFS).

ImprovingPublicDebtManagementIntheOICMemberCountries

209

Table G-0-2: General Islamic Finance Terms Term Meaning

Commoditymurābaḥah

Amurabaḥahtransactionbasedonthepurchaseofacommodityfromasellerorabrokeranditsresaleto the customer on the basis of deferred murabaḥah, followed by the sale of the commodity by thecustomerforaspotpricetoathirdpartyforthepurposeofobtainingliquidity,providedthattherearenolinksbetweenthetwocontracts.

Diminishingmusharakah

Aformofpartnershipinwhichoneofthepartnerspromisestobuytheequityshareoftheotherpartnerover a period of time until the title to the equity is completely transferred to the buying partner. Thetransaction starts with the formation of a partnership, after which buying and selling of the otherpartner’sequitytakesplaceatmarketvalueoratthepriceagreeduponatthetimeofenteringintothecontract. The “buying and selling” is independent of the partnership contract and should not bestipulated in thepartnershipcontract,since thebuyingpartner isonlyallowedtopromisetobuy. It isalsonotpermittedthatonecontractbeenteredintoasaconditionforconcludingtheother.

Islamicwindow

The part of a conventional financial institution (which may be a branch or a dedicated unit of thatinstitution) that provides both fund management (investment accounts) and financing and investmentthatareshariah­compliant,withseparatefunds.Itcouldalsoprovidetakafulorretakafulservices.

IjarahAcontractmadetoleasetheusufructofaspecifiedassetforanagreedperiodagainstaspecifiedrental.Itcouldbeprecededbyaunilateralbindingpromisefromoneofthecontractingparties.Asfortheijarahcontract,itisbindingonbothcontractingparties.

IstisnaaThesaleofaspecifiedasset,withanobligationonthepartofthesellertomanufacture/constructitusinghisownmaterialsandtodeliveritonaspecificdateinreturnforaspecificpricetobepaidinonelumpsumorinstalments.

Murabahah

AsalecontractwherebytheinstitutionofferingIslamicfinancialservicessellstoacustomeraspecifiedkindofassetthatisalreadyinitspossession,wherebythesellingpriceisthesumoftheoriginalpriceandanagreedprofitmargin.Themurabaḥahcontractcanbeprecededbyapromisetopurchase fromthecustomer.

Mudarabah

A partnership contract (profit sharing contract) between the capital provider (rabb al­mal) and anentrepreneur (muḍarib) whereby the capital provider would contribute capital to an enterprise oractivity that is tobe managedbytheentrepreneur.Profitsgeneratedbythatenterpriseoractivityaresharedinaccordancewiththepercentagespecifiedinthecontract,whilelossesaretobebornesolelybythecapitalproviderunlessthelossesareduetomisconduct,negligenceorbreachofcontractedterms.

Musharakah(sharikatal­aqd)

A partnership contract (profit and loss sharing contract) in which the partners agree to contributecapital to an enterprise, whether existing or new. Profits generated by that enterprise are shared inaccordance with the percentage specified in the musharakah contract, while losses are shared inproportiontoeachpartner’sshareofcapital.

ShariahOften referred to as Islamic law, deduced from its legitimate sources: the quran, sunnah, consensus(ijma),analogy(qiyas)andotherapprovedsourcesoftheshariah.

Shariahcompliantproduct

The termused in Islamic finance to indicate that a financial productor activity thatcomplieswith therequirementsoftheshariah.

Shariahboard

Acommitteeofwell­versedIslamicscholarsavailabletoanIslamicfinancialinstitutionforguidanceandsupervisioninthedevelopmentofshariahcompliantproducts.

SalamThesaleofaspecifiedcommoditythatisofaknowntype,quantityandattributesforaknownpricepaidatthetimeofsigningthecontractforitsdeliveryinthefutureinoneorseveralbatches.

SukukAnArabictermforfinancialcertificate.Itisdefinedas“Certificatesofequalvaluerepresentingundividedshares in ownership of tangible assets, usufructs and services or (in the ownership of) the assets ofparticularprojectsorspecialinvestmentactivity”.

TakāfulA mutual guarantee in return for the commitment to donate an amount in the form of a specifiedcontributiontotheparticipants’riskfund,wherebyagroupofparticipantsagreeamongthemselvestosupportoneanotherjointlyforthelossesarisingfromspecifiedrisks.

ZakahAnobligatorycontributionor taxwhich isprescribedby IslamonallMuslimshavingwealthaboveanexemptionlimitataratefixedbytheshariah.Theobjectiveistomakeavailabletothestateaproportionofthewealthofthewell­to­dofordistributiontothepoorandneedy.

Sources: Islamic Financial Services Board, Islamic Financial Services Industry Stability Report 2016, p. x; International Islamic Financial Market, Sukuk Report 2016, pp. 158-160.

ImprovingPublicDebtManagementIntheOICMemberCountries

210

Table G-0-3: Types of Sukuk

Term Meaning

Al­IjarahSukuk

An Islamic certificate for the buying and leasing of assets by the investors to theissuer and such Sukuk shall represent the undivided beneficialrights/ownership/interest in the asset held by the trustee on behalf of theinvestors.

ConvertibleorexchangeableSukuk

Convertible or exchangeable Sukuk certificates are convertible into the issuer’sshares or exchangeable into a third party’s shares at an exchange ratio, which isdeterminableatthetimeofexercisewithrespecttothegoingmarketpriceandapre­specifiedformula.

CorporateSukukIsaSukukissuedbyacorporationasopposedtothoseissuedbythegovernment.Itisamajorwayforcompaniestoraisefundsinordertoexpanditsbusinessorforaspecificproject.

DomesticSukuk ASukukissuedinlocalcurrency.GlobalSukuk BothinternationalanddomesticSukuk

HybridSukukHybrid sukuk combine two or more forms of Islamic financing in their structuresuchasistisnaaandijarah,murabahahandijarahetc.

InternationalSukuk AsukukissuedinhardcurrencysuchasUSD.

IstisnaaSukuk

Are certificates of equal value issued with the aim of mobilizing funds to beemployed for the production of goods so that the goods produced come to beownedbythecertificateholders.(Thistypeofsukukhasbeenusedfortheadvancefunding of real estate development, major industrial projects or large items ofequipment such as: turbines, power plants, ships or aircraft(construction/manufacturingfinancing).

MudarabahSukuk

Are certificates that represent project or activities managed on the basis ofMudarabahbyappointingoneofthepartnersoranotherpersonastheMudaribforthe management of the operation. (It is an investment partnership between twoentitieswherebyoneentityismainlyaproviderofcapitalandtheotherismainlythemanager)

MurabahahSukuk

Arecertificatesofequalvalueissuedforthepurposeof financingthepurchaseofgoodsthroughMurabahahsothatthecertificateholdersbecometheownersoftheMurabahahcommodity.(ThisisapuresalecontractbasedSukuk,whichbasedonthecostplusprofitmechanism).

MusharakahSukuk

Arecertificatesofequalvalueissuedwiththeaimofusingthemobilizedfundsforestablishinganewproject,financingabusinessactivityetc.,onthebasisofanyofpartnership contract so that the certificate holders become the owners of theproject. (Musharakah Sukuk is an investment partnership between two or moreentities which together provide the capital of the Musharakah and share in itsprofitsandlossesinpre­agreedratios)

Quasi­sovereignSukuk

Aresukukissuedbyapublicsectorentitythatislikesovereignsukuk.Itmaycarryexplicitorimplicitgovernmentguarantee.

SalamSukukAre certificates of equal value issued with the aim of mobilizing Salamcapital/mobilizing funds so that the goods to be delivered on the basis of Salamcometobeownedbythecertificateholders.

SovereignSukukAre sukuk issued by a national government. The term usually refers to sukukissued in foreign currencies, while sukuk issued by national governments in thecountry’sowncurrencyarereferredtoasgovernmentsukuk.

Source: International Islamic Financial Market, Sukuk Report 2016, p. 160.

ImprovingPublicDebtManagementIntheOICMemberCountries

211

Appendix A: Surveys

Figure A-0-1: CESifo World Economic Survey October 2016

ImprovingPublicDebtManagementIntheOICMemberCountries

212

Figure A-0-2: Ifo Public Debt Management Survey 2016

ImprovingPublicDebtManagementIntheOICMemberCountries

213

Appendix B: Country Samples

CountryclassificationisbasedontheWorldBankmethodthatdividescountriesintolow­income,lower middle income, upper middle­income and high­income countries based on their GrossNationalIncome(GNI)percapita,using theWorldBankAtlasmethod. Incomethresholdschangeover time. To reduce the number of groups lower middle­income and upper middle­incomecountriesaremergedintoonegrouplabeledmiddle­incomecountries.Datastartin1987.Foryearspriorto1987itisassumedthatcountriesbelongtothesameincomegroupasin1987.Countriesmay move to another category over time. This list provides the country classification as of 2015.TheOICmembercountriesarewritteninbold.

Highincome:

Australia,Austria,Bahrain,Barbados,Belgium,Brunei Darussalam,Canada,Croatia,Cyprus,CzechRepublic,Denmark,EquatorialGuinea,Estonia,Finland,France,Germany,Greece,HongKong SAR, Hungary, Iceland, Ireland, Israel, Italy, Korea, Kuwait, Luxembourg, Macao SAR,Malta, Netherlands, New Zealand, Norway, Oman, Poland, Portugal, Puerto Rico, Qatar, SanMarino, Saudi Arabia, Singapore, Slovak Republic, Slovenia, Spain, Sweden, Switzerland,Taiwan,TheBahamas,TrinidadandTobago,United Arab Emirates,UnitedKingdom,UnitedStates.

Middleincome:

Albania,Algeria,Angola,AntiguaandBarbuda,Argentina,Armenia,Azerbaijan,Bangladesh,Belarus, Belize, Bhutan, Bolivia, Bosnia and Herzegovina, Botswana, Brazil, Bulgaria, CaboVerde, Cameroon, Chile, China, Colombia, Congo, Rep., Costa Rica, Côte d'Ivoire, Djibouti,Dominica, Dominican Republic, Ecuador, Egypt, El Salvador, Fiji, Gabon, Georgia, Ghana,Grenada, Guatemala, Guyana, Honduras, India, Indonesia, Iran, Iraq, Jamaica, Jordan,Kazakhstan, Kiribati, Kosovo, Lao, PDR, Latvia, Lebanon, Lesotho, Libya, Lithuania,Macedonia, FYR, Malaysia, Maldives, Marshall Islands, Mauritania, Mauritius, Mexico,Micronesia, Moldova, Montenegro, Morocco, Namibia, Nicaragua, Nigeria, Pakistan,Palestine,Panama,PapuaNewGuinea,Paraguay,Peru,Philippines,Romania,Russia,Samoa,SaoTomeandPrincipe,Senegal,Serbia,Seychelles,SolomonIslands,SouthAfrica,SriLanka,St. Lucia, St. Vincent and the Grenadines, Sudan, Suriname, Swaziland, Syria, Thailand,Tunisia,Turkey,Turkmenistan,Tuvalu,Ukraine,Uruguay,Uzbekistan,Vanuatu,Venezuela,Vietnam,Yemen,Zambia.

Lowincome:

Afghanistan, Benin, Burkina Faso, Burundi, Cambodia, Central African Republic, Chad,Comoros,Congo,Dem.Rep.,Eritrea,Ethiopia,Gambia,Guinea,Guinea-Bissau,Haiti,Kenya,Kyrgyz Republic, Liberia, Madagascar, Malawi, Mali, Mozambique, Myanmar,Nepal, Niger,Rwanda,Sierra Leone,Tajikistan,Tanzania,Togo,Uganda,Zimbabwe.