World Bank has said that more than half of all low-income countries are already in debt distress or at high risk of it. It warned that growing public debt of low income countries remains difficult to pin down either because data continue to be incompletely reported in official statistics or are hidden through confidentiality clauses. The multilateral institution said that “three facts in particular ought to make us all sit up and pay attention. First, 40 per cent of low-income countries have not published any sovereign debt data for more than two years; and many of those that have published data tend to limit the information to central-government debt and standard debt instruments such as loans and securities. Second, huge discrepancies exist today in publicly available estimates of debt in low-income economies: the difference between what’s reported by national debt authorities on their websites and what’s reported by multilateral development banks can be as much as 30 per cent of GDP in some instances. Third, 15 low-income countries today have debt that is collateralised by natural resources, yet none provide details on the collateral arrangements.
“Uncertainty on that scale should not be acceptable in today’s environment. More than half of all low-income countries are already in debt distress or at high risk of it. Debt in low-and middle-income economies has climbed to levels without precedents in modern times” stating that “significant investment will be needed to sustain economic growth in the aftermath of Covid-19”. “The evidence” it said “is clear greater debt transparency allows governments to make informed decisions about future borrowing and reduces its cost in the long run. Accurate and comprehensive debt records also benefit creditors. It allows them to fully assess whether a country’s debt is sustainable. It enables them to price debt instruments more accurately. If facilitates faster and more efficient debt restructurings faster. Debt transparency also makes it easier for citizens to hold governments accountable for the debt they take on. Debt transparency, it maintained is not merely about data. It also entails transparency of borrowing operations; data may exist, but they may reflect opaque, illegitimate, or unreasonably costly borrowing practices.
“New World Bank research identifies three main areas of concern: Fiscal arrears typically go unreported because accrual-based accounting is not implemented in low-income developed countries. Moreover, only 41% of these countries use market-based auctions as the principal vehicle for issuing domestic debt—and those that use auctions divulge only spotty information to investors. Resource-backed loans, which use future revenue streams as collateral. Most of these loans are left out from statistics because they are not recognised by the debtor country or are contracted off budget. In addition, they often carry steeper interest rates than comparable, non-collateralised financing sources. Information on trading and restructuring of commercial loans is limited. Some central bank instruments may also generate “debt surprises” or dilute the rights of creditors, as in the case of unreported foreign-exchange deposits or over-collateralised repos with own securities.
The World Bank said that developing economies should: Make the needed investments in capacity and systems to produce accurate debt data. Countries should address the operational constraints limiting the regular publication of comprehensive debt reports. An annual debt publication should include core public and publicly guaranteed debt statistics at the general government level, including information on contracted individual debt instruments. The publication should provide a definition of public debt in line with international standards; Make the legal framework more conducive to transparency. The public debt-management legal framework should establish clear debt-authorisation provisions and require the disclosure of public debt information, regulating its content and frequency. It should also provide a list of permitted debt instruments, transactions, or sources of funding; and require regular audits of outstanding debt; Adopt market-based issuing mechanisms for domestic debt. To promote reforms in this area, the World Bank has recently launched a tool to track the transparency of domestic government security issuances; Develop and adopt a strict analytical and monitoring process for approval and implementation of resource-backed loans.
This should include the following steps: First, a careful assessment of how sustainability might be affected; second, a check that the proposed terms and conditions account fairly for the value of the security given; third, a check that the legal and technical dimensions of the proposed structure are fully taken into account; and fourth, careful assessment of how granting collateral might impact other financing, in the context of the country’s debt-management strategy.
Yet greater transparency should not be the responsibility of governments in borrowing countries alone. Creditors can also encourage transparent financing practices by providing detailed information about their own lending portfolio. They should limit the use of confidentiality clauses and refrain from those that require secrecy. They also ought to publish detailed information on their lending portfolio, as the G-20 Operational Guidelines for Sustainable Financing recommend. We think global practices for data collection on debt ought to be standardised and consolidated. Through a variety of tools, the World Bank is encouraging reforms by providing regular assessments of countries’ adherence to international statistical and accounting standards.
