GOOD DEBT MANAGEMENT PAYS
(Article Reference: Document No.3, January 1993)

REQUIREMENTS FOR EFFECTIVE DEBT MANAGEMENT
by Nihal Kappagoda[1]

Effective debt management requires a capacity to monitor and manage a country's debt comprehensively and efficiently. This could be achieved by implementing debt management projects which include the following components[2] :

a) a well-defined legal and institutional framework to monitor the contracting of loans, their utilisation and repayment;

b) the administrative arrangements for the compilation of data required for debt monitoring and management;

c) facilities for the storage, retrieval and analysis of debt data, either by a manual system or computer software;

d) the organisational arrangements for debt management which involves the creation and staffing of a Debt Management Office (DMO) in an appropriate location; and

e) training in aspects of debt management that are relevant to the needs of the borrowing country.

The Legal and Institutional Framework
An appropriate legislative and institutional framework for external borrowing requires separate legislation for borrowing by the government (for its use or on-lending), parastatal and private sectors, and the Central Bank. This legislation has to be backed by regulations and procedures for the approval of each category of borrowing and service payments. Legislation covering the issue of government guarantees (generally by the Ministry of Finance), its criteria and procedures for their approval is also required. Additionally, procedures are necessary for making withdrawal applications for each loan.

There are several agencies of a government that share responsibility for part or whole of the external borrowing process. These would invariably be the Ministry of Finance and the Central Bank, possibly the Ministry of Planning (where the planning function has not been integrated with the Ministry of Finance), and the Treasury or the Accountant-General's office. In some instances, an autonomous body is set up with special responsibility for external debt either by legislation or administrative order. Additionally, agencies responsible for funnelling borrowed funds to projects and programmes would have to be established.

The legal framework for government borrowing is generally set out in a Foreign Loans Act for foreign borrowing and a Domestic Loans Act for domestic borrowing. Subject to the satisfaction of certain conditions, these Acts authorise the Minister of Finance to raise loans on behalf of the government for specific purposes. They may require the Ministry of Finance to seek the views of the Central Bank on the terms and conditions of the loans, obtain the approval of the Cabinet and/or Parliament or equivalent body for the borrowing and table the agreement in Parliament after signature (in some countries the agreement itself has to be approved by Parliament). It may also be necessary to ensure that the borrowing will not result in the total outstanding debt, exceeding the amount specified in the Act or in a decision of the Cabinet or relevant policy committee.

---

Mr. Nihal Kappagoda - From 1982 to 1989, Mr. Kappagoda was Director of the Technical Assistance Group (TAG) of the Commonwealth Secretariat. Earlier, Mr. Kappagoda served in his country's administration as Director, External Resources and with the Asian Development Bank in Manila. At present, Mr. Kappagoda is a Consultant Economist residing in Ontario, Canada. Mr. Kappagoda has published various articles on development and finance in his country and abroad.

---

[1] Mr. Kappagoda is a consultant economist residing in Ontario, Canada. Mr. Kappagoda has published various articles on development and finance in his country and abroad.

[2] Though each would need to be tailored to the country's needs.

>>Next: Requirements for effective debt management (continued) | back to Table of Contents