Helsinki, Finland September 10-12, 2012

1. Debt Management Offices Helsinki, Finland September 10-12, 2012 Annual Meeting of the INTOSAI Working Group on Public Debt 10.09.2012| ASF

2. 1. Background information

3. 1. Background information Public debt allows cost of current government expenditure projects to be postponed in time.

4. 1. Background information These public projects are of different nature: Public investment expenditures Increases in expenditure 3. Countercyclical public expenditures

5. 1. Background information Negative consequences of a poorly managed public debt

6. 1. Background information Managers of public debt and public officers must supervise: • Level of indebtedness remains on a sustainable path. • Risk management strategy to avoid excessive debt levels.

7. 2. Effective Debt Management

8. 2. Effective Debt Management Effective Debt Management Office Functions are: Executive Debt Management Operational Debt Management

9. 2. Effective Debt Management Executive Debt Management Main purpose: The establishment of the normative framework overseeing any kind of debt acquired by the government.

10. 2. Effective Debt Management Executive Debt Management Responsible for the executive functions: A group of high-ranking officials called the Executive Board on Debt Management (EBDM).

11. 2. Effective Debt Management Executive Debt Management Executive debt management functions include: i) Policy function ii) Regulatory function iii) Resourcing function

12. 2. Effective Debt Management Executive Debt Management i) Policy function Involves the formulation of national debt policies and strategies in agreement with a country’s overall macroeconomic policy.

13. 2. Effective Debt Management Executive Debt Management ii) Regulatory function The establishment and review of the administrative and legal framework, rules and procedures of the debt management units.

14. 2. Effective Debt Management Executive Debt Management iii) Resourcing function Ensure the existence of qualified personnel. Supply maintenance and technical support for the debt management system.

15. 2. Effective Debt Management Operational Debt Management Main purpose: To perform the operational functions within the guidelines provided by the EBDM.

16. 2. Effective Debt Management Operational Debt Management Responsible for the operational functions: The DMO perform the basic operational debt managements functions: iv) Recording, analyzing and operating

17. 2. Effective Debt Management Operational Debt Management Responsible for the operational functions: The DMO’s senior staff ensures that the guidelines issued by the EBDM are applied and followed. v) Controlling, coordinating and monitoring functions

18. 2. Effective Debt Management Operational Debt Management iv) Recording, analyzing and operating functions Recording: Collect and provide detailed information on debt on a loan-by-loan basis.

19. 2. Effective Debt Management Operational Debt Management iv) Recording, analyzing and operating functions Analyzing: Macroeconomic analysis to explore available options through given economic and market outlook.

20. 2. Effective Debt Management Operational Debt Management iv) Recording, analyzing and operating functions Operating: All activities related to borrowing, such as negotiating, utilization of loan proceeds and debt service.

21. 2. Effective Debt Management Operational Debt Management v) Controlling, coordinating and monitoring functions Supply substantive feedback to the EBDM for the implementation, evaluation and revision of the debt strategy.

22. 3. Location and organizational structure of DMO

23. 3. Location and organizational structure of DMO Location of the DMO The DMO’s physical location in the national organizational set-up is linked to the role that the office has been given.

24. 3. Location and organizational structure of DMO Location of the DMO Most frequent models of location of the DMOs are: Office at the Central Bank Office at the Ministry of Finance Autonomous Debt Office

25. 3. Location and organizational structure of DMO Location of the DMO i) Office at the Central Bank Operational debt management functions have been located inside the Central Bank given the interface between monetary policy and debt management.

26. 3. Location and organizational structure of DMO Location of the DMO i) Office at the Central Bank Nevertheless, literature suggests a conflict of interests when the Central Bank has a dual mandate for conducting monetary and debt policy.

27. 3. Location and organizational structure of DMO Location of the DMO i) Office at the Central Bank Conflict of interests The Central Bank may be reluctant to increase interest rates to control inflationary pressures since it would have an adverse effect on its domestic liability portfolio.

28. 3. Location and organizational structure of DMO Location of the DMO i) Office at the Central Bank Conflict of interests It may be tempted to manipulate financial markets to reduce interest rates at which the government debt is issued or to inflate away the value of nominal debt.

29. 3. Location and organizational structure of DMO Location of the DMO i) Office at the Central Bank Conflict of interests It may be tempted to inject liquidity in the market prior to debt refinancing.

30. 3. Location and organizational structure of DMO Location of the DMO i) Office at the Central Bank Reasons to separate the DMO from the Central Bank: Since the main function of the Central Bank is to implement the monetary policy, debt management policy could be seen as an instrument to reinforce the price stability objective.

31. 3. Location and organizational structure of DMO Location of the DMO i) Office at the Central Bank Reasons to separate the DMO from the Central Bank: Debt management decisions could be seen as influenced by inside information on interest rate decisions.

32. 3. Location and organizational structure of DMO Location of the DMO ii) Office at the Ministry of Finance This location has a clear system of delegation of authority from the Minister to the Head of the unit in charge of the debt.

33. 3. Location and organizational structure of DMO Location of the DMO ii) Office at the Ministry of Finance Advantages: Gives an explicit emphasis to public policy objectives in public debt management, including the development of the domestic debt market.

34. 3. Location and organizational structure of DMO Location of the DMO ii) Office at the Ministry of Finance Risk: Facing political pressure to use debt management as a vehicle for opportunistic reductions in debt servicing costs and in the budget deficit in the short term.

35. 3. Location and organizational structure of DMO Location of the DMO ii) Office at the Ministry of Finance Risk control: Political risk could be substantially reduced if the EBDM sets a clear strategy and goals for the government’s debt management.

36. 3. Location and organizational structure of DMO Location of the DMO iii) Autonomous Debt Office Autonomous Debt Management Offices (ADMO) are located outside the Ministry of Finance or the Central Bank.

37. 3. Location and organizational structure of DMO Location of the DMO iii) Autonomous Debt Office Reasons to establish an ADMO: To create better accountability and greater transparency.

38. 3. Location and organizational structure of DMO Location of the DMO iii) Autonomous Debt Office Reasons to establish an ADMO: To achieve greater sophistication of debt management, given the growing emphasis on the risk control.

39. 3. Location and organizational structure of DMO Location of the DMO iii) Autonomous Debt Office Reasons to establish an ADMO: To overcome problems of recruiting and retaining staff with special expertise.

40. 3. Location and organizational structure of DMO Location of the DMO iii) Autonomous Debt Office Advantages: Political risk decreases.

41. 3. Location and organizational structure of DMO Location of the DMO iii) Autonomous Debt Office Advantages: The ADMO will focus only on debt management.

42. 3. Location and organizational structure of DMO Location of the DMO iii) Autonomous Debt Office Advantages: The ADMO will force the rationalization of public debt management and will set up a clear governance and report structures.

43. 3. Location and organizational structure of DMO Location of the DMO iii) Autonomous Debt Office Advantages: ADMOs are more efficient because they follow market oriented principles and create an appropriate environment for quick decision-making.

44. 3. Location and organizational structure of DMO Location of the DMO iii) Autonomous Debt Office Risks: The agency risk. The risk of low coordination increases when the ADMO is further from the Ministry of Finance.

45. 3. Location and organizational structure of DMO Location of the DMO iii) Autonomous Debt Office Risks: In countries with feeble organizational structures within the government, the ADMO may face problems with data collection.

46. 3. Location and organizational structure of DMO Location of the DMO iii) Autonomous Debt Office Risks: The ADMO could be too partial in its debt management, forgetting it is part of the government and thus ignoring some aspects of the fiscal risk.

47. 3. Location and organizational structure of DMO Location of the DMO iii) Autonomous Debt Office Risk control: Setting up at the ADMO a board of directors with an experienced and reliable chairman.

48. 3. Location and organizational structure of DMO Location of the DMO iii) Autonomous Debt Office Risk control: Create an independent risk control department and an internal auditing department within the ADMO, which are reporting directly to the board.

49. 3. Location and organizational structure of DMO DMO’s organizational structure Issues concerning DMO organization are whether if it is a centralized or a decentralized system and its organizational chart.

50. 3. Location and organizational structure of DMO • DMO’s organizational structure • i) Centralized and decentralized Centralized system When the functions are performed either by the Ministry of Finance, or by an autonomous body.