By: Udaibir Das
This article originally appeared in the OMFIF on May 28, 2024.
Elevating to autonomous, system-wide financial stewardship is not just advisable but essential
In 2024, the world faces an unprecedented financial challenge. Global debt has soared to a staggering $310tn, catapulting the global debt-to-gross domestic product ratio to an alarming 340%. This colossal debt burden has proven to be a formidable obstacle, with debt risks looming large. The current situation is critical and incomplete.
If debt is an economy’s lifeblood, then liabilities are its pulse. A complete picture of a country’s debt plus other liabilities will become accurate only after including hidden liabilities such as undisclosed debts, opaque financial obligations, unhedged exposures and economic leverage. Some other financial commitments include pension obligations, deferred tax liabilities and non-contractual obligations to suppliers and foreign investors. The actual financial burden that every country faces is much higher than what the global debt number tells us.
The tail wagging the dog
Historically, sovereigns relied on public debt management to secure funding, control risk and minimise costs for debt-related public liabilities. While public debt remains only part of a country’s liabilities, it now intersects all core economic policies and markets. Debt management is no longer a narrow, government-controlled technical function secondary to fiscal and monetary policies. The vast scale and diverse use of total debt has created a scenario where debt management increasingly shapes broader economic and financial policies, governance and capital market dynamics. The tail (debt management) now wags the dog (macro-financial stability).
To effectively manage debt and all liabilities, a top-down, country-wide reform is necessary to move towards a comprehensive liability management function. With the increasing blurring of lines between public and private debt and financial obligations, the need for an integrated approach to debt and liability monitoring, surveillance, transparency, disclosure, contingency planning and risk management is greater.
Both public and private borrowers face the dilemma of balancing short-term gains against long-term costs and risks. However, individual choices often lead to system-wide distortions. Unhedged or riskier funding structures in both sectors significantly heighten a country’s macroeconomic and external vulnerability – a risk we cannot ignore.
The current arrangement ignores the vital financial resilience link between debt and liability management and the public and private sector financial asset positions. Borrowing collateralised by public assets and foreign exchange reserves disrupts decisions regarding the management of a country’s financial and nonfinancial assets. Liabilities from public-private partnership projects are notorious for misreporting debt service obligations and leverage, owing to poor coordination, procedures and institutional capacity, affecting both sectors’ financial positions.
A whistleblower role
A forward-looking and augmented debt management function must go beyond borrowing and funding the government. It must become a strategic part of a country’s economic and financial institutional architecture that helps a country keep macro-financial interactions stable and assured.
Hidden, undisclosed and opaque debt has exacerbated vulnerabilities in many countries. Frequent misreporting or a lack of reliable statistics afflict contingent liabilities with insufficient control over nonfinancial and subnational-level debt. A complete profile of public and private liabilities and leverage is necessary to detect problems early and act promptly.
A dedicated system-wide debt and liability monitoring and management function could combine different types of a country’s balance sheet vulnerabilities, including those arising from the private sector and households. While liability management could remain with the respective economic agent, integrated monitoring of such exposures and risks will facilitate borrowing and hedging strategies and send out early alerts to governments, businesses and households to avoid unmanageable debt.
The reformed function could act as a ‘whistleblower’ on a country’s explicit and latent sources of debt vulnerabilities and financial obligations, with powers to check and balance the system.
An autonomous approach
Some countries have granted autonomy to their public debt management agencies, but the degree of independence varies, and accountability needs to be clarified. An autonomous function will insulate a country’s debt and other liabilities from political pressures, determine how best to meet its direct and indirect financial obligations and create space to fund sustainable development, infrastructure and other social priorities. Such a mechanism could also be reassuring for long-term investors and agencies that monitor a country’s solvency.
The Covid-19 pandemic underscored the importance of robust debt management strategies for both the public and private sectors to manage systemic crises and assure funding under stressed conditions.
Central bank balance sheets’ use (or misuse) for political or economic reasons further strengthens the case for an autonomous and accountable debt and liability management function. Such a function would lend support to central bank independence. Often, central banks are compelled to hold substantial amounts of debt, find unorthodox ways to fund a government or even use foreign exchange reserves and exchange interventions to support the private sector in servicing its external liabilities.
An autonomous, system-wide debt and liability function could also rein in who has the authority to incur debt and other liabilities. It could keep a national register to track, control and advocate for mandatory parliamentary reporting of system-wide debt and liabilities and how they tally with the asset side of the country’s balance sheet.
The liability of a sovereign could well be an asset of a private entity. The augmented function could introduce legislatively backed controls on the amount and type of liabilities outstanding, potentially preventing more borrowings than required. The integrity of such a function will require a strong governance and accountability framework.
Perspective from developing countries
There is a strong case for re-evaluating debt management within the economic policy framework of countries in debt distress or developing countries with market access. Multiple instances have shown unknown amounts in the debt and liability profile. Hidden debt is a problem, and more disclosure requirements and understanding of liabilities are needed. Much will depend on the macroeconomic environment, institutional and governance framework, the legal framework’s robustness and debt-related integrity practices.
Thanks to the stellar work of the International Monetary Fund and the World Bank, some developing countries have made strides in establishing more autonomous public debt management functions as part of broader public financial management and financial reforms. A few also adopt a more integrated view of public and private debt.
While institutional capacity is the cornerstone of effective debt management in these countries, the challenge of liability management extends beyond honing the technical skills of debt issuance to fortifying governance structures and assigning the proper role for the augmented function.
A reimagined liability management function could facilitate solutions to critical gaps plaguing debt in developing countries. These include debt transparency, the lagging implementation of good practices and guidelines, and following up on technical assistance advice.
As highlighted in a recent survey of 60 countries by IMF staff, several material shortcomings in the domestic laws facilitate recourse to opaque debt structures and complex instruments, muddying the waters of debt sustainability analyses. One of the many recommendations is enhancing the institutional arrangements for debt monitoring and management at a country level.
Seeking new ways
The traditional roles and responsibilities of debt management function are due for reassessment. As public debt and private liabilities continue to soar, the need for effective debt and liability management has never been greater. By broadening their focus, adopting an integrated approach and leveraging technology, national legislators can help ensure economic stability and growth. Countries could even undertake constitutional reform to set up a system-wide and autonomous debt management function under accountable governance.
Some may find no need for reform or change and dislike the concept. Let that be the privilege enjoyed by those who remain guided by the medieval days of debt management. For those seeking new ways to secure the future of the generations ahead, it is time to implement a reformed national debt and liability management function. Our intergenerational economic and social health depends on it.
Udaibir Das is a Visiting Professor at the National Council of Applied Economic Research, a Senior Non-Resident Adviser at the Bank of England, a Senior Adviser of the International Forum for Sovereign Wealth Funds, and a Distinguished Fellow at the Observer Research Foundation America.