About the Bulletin
This is the second of a series of Debt Bulletins for 2019 to be published online, at regular intervals, over the course of the year. Their aim is to provide users with analyses of developments in respect of external and public debt in individual countries and regional groups, with primary emphasis on low- and middle-income countries, and to keep them abreast of debt-related issues and initiatives.
- To this end the bulletins will:
- Complement the summary overview of borrowing trends in 121 low- and middle-income countries information presented in International Debt Statistics (IDS 2019), published in November 2018 with regional and country specific analyses on the composition and characteristics of external debt stocks and flows. The analyses will be underpinned by the detailed loan-by-loan data on stocks, transactions (commitments, disbursements and debt service payments) and loan terms captured by the World Bank Debtor Reporting System (DRS);
- Draw from the high-frequency, Quarterly External Debt Statistics (QEDS) and quarterly Public Debt Statistics (PSDS) databases to provide users with syntheses of emergent trends in external and public debt, including borrowing patterns and current debt levels in both high-income countries and low- and middle-income countries;
- Provide users with short information briefs on current issues and ongoing initiatives aimed at improving external and public debt measurement and monitoring, filling data gaps, and enhancing the coverage and harmonization of international datasets and related data dissemination.
Feature Story: Measuring Public Debt in Low- and Middle-Income Countries
When debt crises occur attention invariably centers on data deficiencies and information gaps regarding the extent and composition of public debt liabilities. These are routinely cited as one of the key underlying causes of unsustainable debt levels. The absence of high frequency data was deemed critical at the time of the Asian crisis in the late 1990s and led to establishment of the Quarterly External Debt System (QEDS) by the IMF and the World Bank in 2004. Similarly, the launch of the Quarterly Public Sector Data (QPSD) in 2010 was a response to the global effort to fill key financial data gaps that impeded rapid policy response to the 2008 global economic and financial crisis. More recently the increase in the number of low-income, IDA-eligible countries now assessed at high risk of debt distress, including several that benefitted from extensive HIPC and MDRI debt relief, has put the spotlight on the extent of potentially ‘hidden’ debt and generated calls for greater transparency in respect of public debt liabilities by both borrowers and creditors.
What are ‘public debt’ liabilities?
- Put simply, public debt comprises the debt related liabilities, domestic and external, of the public sector. The public sector comprises several components, specifically:
- Central government: ministries of state and all government-controlled tax-funded agencies responsible for carrying out policy;
- General government: the central government plus subnational entities i.e. state and local government and municipalities;
- Non-financial public sector: the general government plus all government owned non-financial corporations;
- Overall Public sector: the non-financial public sector plus government owned financial corporations and the central bank.
public debt may therefore be defined in a variety of ways: most narrowly, as only the liabilities of the central government, or at its broadest, and most comprehensive measure, the debt liabilities of the entire public sector.
Debt reporting obligations of IBRD and IDA borrowers
The World Bank Debtor Reporting System (DRS), governed by Operational Policy 14.10, obligates all IBRD and IDA borrowers to provide detailed, loan-by-loan information on their external public debt, on a quarterly basis for new commitments and an annual basis for transactions (stocks and flows) for all outstanding loans. The DRS takes a comprehensive approach and defines public sector debt as obligations of the state and local governments, obligations of any public sector entity in which the government holds a fifty percent or more share (whether, or not, the obligation relates to a loan guaranteed by the state) and any obligations of private sector entities that have benefited from a guarantee by the state.
Currently, most DRS reporters provide comprehensive, timely information on the external borrowing of the central government. Reporting regarding explicit contingent liabilities, in the form of state guarantees of repayment, in the event of default, extended to external borrowing by public and private sector entities, is also good. Under-reporting of borrowing by state and local governments is a deficiency of DRS reporting in select borrowers, but the overall extent and impact of such under-reporting is assessed as limited as in many low- and middle-income countries state and local governments are not permitted to borrow externally. By far the most significant omission in DRS reports relates to borrowing by state-owned enterprises on their own account, without benefit of a government guarantee. There have been a few widely reported instances of countries that have deliberately masked the extent of their public debt liabilities. But, in most instances any omission in reporting does not signal any unwillingness to report, but rather, reflects the legal framework that governs contracting, measuring and monitoring public debt at the national level, and the mandate of the public debt office.
Practice at the national level varies considerably but the authority of most public debt offices does not extend to oversight of the non-state guaranteed borrowing activities of state-owned enterprises or the collation of comprehensive information on their outstanding debt. Thus, complying fully with DRS reporting requirements will the debt office to liaise with other relevant government agencies, or directly with state-owned enterprises. Additional legislation may be required to ensure a regular and timely information flows particularly regarding powerful state-owned oil and mining companies or national airlines. Although non-guaranteed borrowing by state-owned enterprises constitutes only an implicit contingent liability there is a general expectation the government will step in if a default occurs and empirical evidence confirms this to be the case. The government is also called on for liability clean-up of state-owned entities being privatized.
Another category of contingent liabilities that is growing rapidly and poses a potential risk to the debt portfolio is the guarantees given in the context of public-private partnerships or external liabilities issued through off-shore or off-balance sheet mechanisms by both public and private domestic entities. Governments are often obligated to guarantee above average income streams to attract private investors and the scope of guarantees offered to make PPPs look viable may be substantial, including loan repayments, guaranteed rates of return, minimum income streams, guaranteed currency exchange rates and compensation, should new legislation affect an investment’s profitability. Some of the guarantees associated with PPPs are explicit and stated in contractual agreements but more often they are implicit contingences which may translate into financial obligations: the timing and magnitude depends on the occurrence of a future event outside the control of the government. Measurement problems are compounded by the fact that current account practice permits governments to keep the costs and liabilities associated with PPPs off-balance sheet, thus circumventing budgetary constraints and obfuscating scrutiny by the national legislature.
External Debt Trends in 2018
I.Trends in Low- and Middle-Income Countries
In 2018 low- and middle-income countries’ top ten borrowers recorded a 3.3 percent increase in external debt stocks from the end-2017 level. This is according to the information reported to the Quarterly External Debt Database (QEDS) and reflected a much slower rate of debt accumulation than 2017 when the external debt stock for these countries rose 12 percent. This increase in external debt stock is also well below half the average rate of increase in the comparable external debt stock of other low- and middle-income countries reporting to QEDS. The top ten borrowers (defined as low- and middle-income countries with the largest external debt stock at end-2017) accounted for almost three-quarters of the combined external debt stock of low-and middle-income countries at end-2018. Borrowing patterns across the major borrowers were divergent. In China a surge in bond issuance led to a 12 percent increase in external debt stock at end 2018 over the prior year level. In contrast Russia reported a 12 percent reduction in external debt stock over the same period and Brazil, Kazakhstan, South Africa and Turkey all reported moderate declines in external debt stock in 2018.