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PERFORMANCE AUDIT OF PUBLIC DEBT AN EXERCISE OF REFERENCE TERMS. 1. Introduction. June, 2003. June, 2004. PERFORMANCE AUDIT OF PUBLIC DEBT AN EXERCISE OF REFERENCE TERMS. 2. Map . 1. Introduction. Reference terms map . 3. Six lines of work. 1. Introduction.

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PERFORMANCE AUDIT OF

PUBLIC DEBT

AN EXERCISE OF REFERENCE TERMS


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1. Introduction

June, 2003

June, 2004

PERFORMANCE AUDIT OF PUBLIC DEBT

AN EXERCISE OF REFERENCE TERMS

2


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Map

1. Introduction

Reference terms map

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Six lines of work

1. Introduction

  • 1. Conceptual framework

  • 2. Normative and legal framework

  • 3. Reference terms for debt management

  • Reference terms toevaluate vulnerability and sustainability

  • 5. Behavior of the actors

  • 6. Accountability

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Future work agendas

1. Introduction

  • A. Evaluation of social and economic impacts

  • of public debt in indebted countries

    • Up to what point, has public debt contributed to

    • economic development in emerging countries?

    • Up to what point has the debt service impeded

    • their development?

    • What has been the purpose of indebtedness?

    • How different would the current conditions be if

    • the resources had not been available?

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Future work agendas

1. Introduction

  • B. Crowding out effect

    • Do the resources which are handed over by the

    • private investors to the government imply a

    • higher multiplicative effect in the capital

    • formation process?

    • Which is the allocation made by the

    • government and which would be the one made

    • by the private investors?

    • Who is more efficient at investing?

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2

Conceptual

framework

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Main requirements for a sound definition of debt

2. Conceptual framework

  • Precise

  • Clear

  • Consistent throughout the time

  • Suitable for the analysis

  • Comprehensive

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Debt definition must allow to assess

2. Conceptual framework

  • Debt management

  • Vulnerability

  • Sustainability

  • The actors’ competence

  • Accountability

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Conceptualization must embrace debt arising from

2. Conceptual framework

  • Central government

  • Organizations and firms

  • Governmental financial system

  • State and municipality governments

  • Monetary authority

  • Contingent liabilities

  • Potential existence of hidden liabilities

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3

Normative and legal framework

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3. Normative and legal framework

Laws and administrative norms

Operations and activities regulation

Public debt management

Laws and administrative norms with a general scope

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3. Normative and legal framework

Coordination of mandates and functions

Faculties

Normative

and

legal

framework

Debt management entities

Accountability

Coordination

Information sharing

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3. Normative and legal framework

Responsibilities designation process

Congress

Debt approval

Executive

Branch

Debt contracting

management

accountability

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3. Normative and legal framework

The normative and legal framework should

establish at least, the following:

  • Formulation of policies and strategies on public debt

  • Explicit definition on objectives and debt allocation

  • Entity or federal agency designed to acquire credits on behalf of the nation and to look after debt payments

  • Entity responsible for the approval of debt contracts

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3. Normative and legal framework

The normative and legal framework should

establish at least, the following

  • Entities authorized to sign contracts for debt

  • Establishment of the entity in charge of recording and managing public debt

  • Cases and conditions in which the government acts as guarantor

  • Obligations regarding publication of reports on the debt status and, in general, on public access to information

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4

Reference Terms for Debt Management

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Debt management concept

4. Reference terms for debt management

Necessary operations to obtain financial resources, in the amount and time required, and to fulfill the debt service at the lowest possible cost

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4. Reference terms for debt management

Debt management

  • Medium and long-term plan design:

  • Debt structure in accordance to

  • currencies, holders, rates, terms,

  • instruments and contractor entities

  • Risk evaluation

  • Prudent management practices

  • Recording, control, monitoring processes

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Debt plan

4. Reference terms for debt management

  • Statement and execution of a strategy

  • to manage the debt in order to

  • determine:

    • Agreed financing

    • Risk and cost goals

    • Compliance of payments obligations

    • any other debt management goals

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Debt management plan must comprise

activities oriented

4. Reference terms for debt management

  • To guarantee liquidity of the

  • government’s treasury

  • To maintain equilibrium

  • between costs, rates, terms

  • and risks

  • To establish adequate

  • coordination with external

  • markets

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Debt management plan must comprise

activities oriented

4. Reference terms for debt management

  • To establish and maintain an

  • effective internal capital market

  • To have an adequate recording

  • system

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Debt structure assessment must consider

4.1 Debt structure

  • Currencies and holders

  • Interest rates

  • Terms

  • Instruments

  • Government entities

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Indicators

4.1 Debt structure

  • Share of short-term to long-

  • term debt

  • Profile of maturing debts

  • Portfolio diversification

  • Ratio of internal debt to

  • external debt

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Concept

4.2 Risk assessment

  • Process whereby situations and events that might prevent the debt management authorities from meeting their obligations are defined, as well as the probability of such contingencies occur

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Most frecuent risks

4.2 Risk assessment

  • Market risk

  • Rollover risk

  • Liquidity risk

  • Risk of not attaining desired

  • fiscal revenue goals

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Most frecuent risks

4.2 Risk assessment

  • Credit risk

  • Settlement risk

  • Risk of natural disasters or

  • adversities and anomies

  • Country risk

  • Operational risks

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Operational risks

4.2 Risk assessment

  • Lack of clarity on the functions

  • and responsibilities

  • Staff with not enough training

  • Risks related to procedures

  • Documentation risks

  • Fraud risks

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The auditor must prove the existence of sensible practices on debt management

4.3 Sensible practices on debt management

  • A legal and normative framework

  • that clearly establishes

  • attributions of those who are

  • allowed to contract debt

  • Debt managers should be able to

  • identify and weigh tradeoffs between

  • costs and risks

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The auditor must prove the existence of sensible practices on debt management

4.3 Sensible practices on debt management

  • Debt management must be

  • linked to a clear

  • macroeconomic framework

  • Authorities must pay attention to

  • the elaboration of a strategy that

  • includes prudential debt

  • management practices

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Basic quality criteria on debt management

4.4 Recording, control and monitoring

  • Data provided to the legislative branch and the citizenry must be:

    • Accurate

    • timely

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INTOSAI, IMF, IADB and WB have promoted: on debt management

4.4 Recording, control and monitoring

  • Creating manuals of

  • procedures

  • Issuing of norms

  • Looking forward to guarantee data’s high quality

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    Recommendations on debt management

    4.4 Recording, control and monitoring

    • Crossed verifications

    • Periodic conciliation of data

    • coming from different sources

    • Independent evaluation

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    Sound debt management practices on debt management

    4.4 Recording, control and monitoring

    • Uniform accounting system

    • Integrated database

    • Clear-cut forms and reports

    • (in content and shape)

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    Main objective of inner control activities on debt management

    4.4 Recording, control and monitoring

    • To provide reliable reports to those in charge of debt management for the decision-making process regarding:

      • Financing contracts

      • Budget

      • Cash flow

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    Main objective of inner control activities on debt management

    4.4 Recording, control and monitoring

    • Verify the existence of record, control and supervision manuals in order to clarify every operation as well as to show the fiscal contingencies that might become obligations for the government

    37


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    5 on debt management

    Reference terms to assess debt vulnerability and sustainability

    38


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    Two groups of indicators to verify the status of the public debt

    • Reference terms to evaluate debt

    • vulnerability and sustainability

    Vulnerability

    Static indicators

    Risk that current conditions might disturb the debt status

    Dynamic indicators

    They measure the government’s capacity to face negative situations in future scenarios

    Sustainability

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    5.1 debt

    Vulnerability

    indicators

    40


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    Vulnerability analysis debt

    5.1 Vulnerability indicators

    Vulnerability analysis demands the construction of indicators that measure and prevent any situation that might compromise a government regarding its debt payment

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    Vulnerability (Static) indicators debt

    5.1 Vulnerability indicators

    • Can the government meet its

    • obligations given the actual

    • conditions?

    • Are there elements or

    • phenomena that might disturb

    • the prevailing situation?

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    Vulnerability (Static) indicators debt

    5.1 Vulnerability indicators

    • Total debt indicators -foreign and domestic debt:

      • Maturityprofiles

      • Payment Schedules

      • Sensitivity to interest rate

      • Debt composition in foreign currency

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    Vulnerability (Static) indicators debt

    5.1 Vulnerability indicators

    • Total debt indicators -foreign and domestic debt:

    • These are useful indicators to define

    • debt evolution and payment

    • capacity

    • They provide signs on the decline of

    • economic conditions that government

    • and economy may face

    44


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    Vulnerability (Static) indicators debt

    5.1 Vulnerability indicators

    • Total debt indicators:

      • Ratio of debt to GDP

      • Ratio of deficit to GDP

      • Ratio of financial coststo GDP

      • Ratio of tax revenue to debt

      • Ratio of total revenue to debt

    45


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    Vulnerability (Static) indicators debt

    5.1 Vulnerability indicators

    • Total debt indicators

      • Rate of growth of total debt as

        compared to that of GDP

      • Quality of assets and out of

        balance positions

    46


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    Vulnerability (Static) indicators debt

    5.1 Vulnerability indicators

    • Total debt indicators

      • Profitability and liquidity

      • Rhythm and quality of credit growth

    47


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    Vulnerability (Static) indicators debt

    5.1 Vulnerability indicators

    • Total debt indicators

      • Averager maturity

      • Duration

    48


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    Vulnerability (Static) indicators debt

    5.1 Vulnerability indicators

    • Total debt indicators:

      • Foreign currency denominated

      • debt / total debt

      • Indexed Interest rate debt /

      • total debt

    49


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    Vulnerability (Static) indicators debt

    5.1 Vulnerability indicators

    • External debt indicators

      • External debt / GDP

      • External public debt service /

        income from exports

      • Foreign currency denominated

        debt / total debt

    50


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    Vulnerability (Static) indicators debt

    5.1 Vulnerability indicators

    • External debt indicators

      • International reserves / short-

        term debt

      • Weighted average interest rate

    51


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    Vulnerability (Static) indicators debt

    5.1 Vulnerability indicators

    • Structure indicators

      • Ratio of market debt to external debt

      • Ratio of non-market debt to external debt

      • Structure according to instruments

      • Structure according to terms

    52


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    Vulnerability (Static) indicators debt

    5.1 Vulnerability indicators

    • Domestic debt indicators

      • Domestic debt/GDP

      • Foreign-held debt/ internal debt

      • Indexed debt / internal debt

      • Foreign currency denominated

        debt/internal debt

    53


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    Vulnerability (Static) indicators debt

    5.1 Vulnerability indicators

    • Domestic debt indicators

      • Average maturity

      • Duration

      • Weighed average interest rate

    54


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    Vulnerability (Static) indicators debt

    5.1 Vulnerability indicators

    • Domestic debt indicators

    • These indicators must consider contingent liabilities with high materialization probability, such as

      • pensions plans

      • guarantees

      • judiciary resolutions

      • financial rescues.

    55


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    5.2 debt

    Sustainability

    indicators

    56


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    Sustainability - Concept debt

    5.2 Sustainability indicators

    Governments’ fiscal sustainability

    The present value of its future revenues is greater than its expenditures, including the debt service

    Pv (revenues) > Pv (expenditures, debt service)

    57


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    Sustainability - Measurements debt

    5.2 Sustainability indicators

    Measurements help answer questions such as:

    Can the government keep the same path of expenditures and revenues or an adjustment has to be made in order to keep the ratio debt/GDP constant?

    58


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    Sustainability - Measurements debt

    5.2 Sustainability indicators

    Measurements help answer questions such as:

    Can the current fiscal policy be kept without an explosive growth of the public debt?

    Does the government need to increase taxes or decrease expenditure to avoid an explosive debt trend?

    59


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    Sustainability - Measurements debt

    5.2 Sustainability indicators

    Central scenario

    Macro-economic

    conditions

    Sustainability

    indicators

    Analysis

    There’s the possibility or the risk that macroeconomic conditions might have significant changes. Therefore, a evaluation on the public finances sustainability in presence of these changes must be made

    60


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    Starting point of the sustainability analysis debt

    Pv(revenues) Pv(expenditure, debt service)

    5.2 Sustainability indicators

    Government budget constraint

    The present value of future revenues must be equal to or greater than its expenditures, including debt service

    61


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    Starting point of the sustainability analysis debt

    5.2 Sustainability indicators

    Government budget constraint

    According to Blanchard, ceteris paribus, fiscal policy is sustainable if real debt does not grow faster than the interest rate.

    That is equivalent to say that the real debt with respect to the GDP does not grow faster than the (positive) difference between interest rate and the economy growth rate

    62


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    Sustainability analysis debt

    5.2 Sustainability indicators

    • Debt / GDP

    • Primary deficit /GDP

    • Inter-temporal

    • government

    • budget constraint

  • Other

  • macro-economic

    • indicators and

  • variables

  • Central scenario

    • Primary surplus

    • estimate

    • needed to keep

    • debt constant

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    Sustainability analysis debt

    5.2 Sustainability indicators

    Government budget constraint

    The accumulation of interests increases debt, so in order to keep it constant, the increased interests must be compensated with a primary surplus of the same magnitude

    64


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    Sustainability analysis debt

    5.2 Sustainability indicators

    Primary surplus estimate

    The indicator shows the amount that the primary surplus must be in order to compensate the interests payments and, therefore to keep the debt constant

    65


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    Sustainability analysis debt

    5.2 Sustainability indicators

    • Expected Value

    • of the primary

    • surplus

    • Primary surplus

    • estimate

    • needed to keep

    • debt constant

    The difference between these values is an

    measure of the required fiscal adjustment to reach a sustainable path

    66


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    Intertemporal constraint Talvi and Vegh debt

    5.2 Sustainability indicators

    • Real Interest

    • payments

    • on the initial

    • government debt

    • amount

    • Permanent

    • primary

    • surplus

    If the difference equals zero, fiscal policy wil be sustainable

    If the difference is positive, the planned trajectory of revenues and expenditures will not meet the inter-temporal budget constraint, because it will not be enough to cover the interest payments

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    Budget constraint Blanchard debt

    5.2 Sustainability indicators

    Observed

    Tax rate

    • Tax rate

    • assuring the

    • sustainability of the

    • initial debt

    If the difference is positive, an adjustment implying a tax increase or an expenditure restraint will be necessary

    68


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    Scenarios analysis debt

    5.2 Sustainability indicators

    • Macro-economic scenarios

    Measurements based on the expected scenario, or on their long-run level, show sustainability, but, when facing changes in any macro-economic variable, such as the rate of growth of GDP or in the interest rate, may cause such a perturbation that might become a crisis

    69


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    Scenarios analysis debt

    5.2 Sustainability indicators

    • Stress Analysis

      • Recession

      • Shocks in interest rates

      • Shocks prices of exported raw materials

      • Currency exchange

      • Contingent liabilities

      • Market or credit risks

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    Scenarios analysis debt

    5.2 Sustainability indicators

    • The results of

      • Macro-economic scenarios

      • Stress scenarios

    Investment banks and several international agencies, use this analysis to assess public finances. In particular, the International Monetary Fund promotes the use of these indicators

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    Evaluation of debt sustainability debt

    5.2 Sustainability indicators

    • Is the government able to meet its debt

    • commitments?

    • What is the magnitude of a fiscal

    • adjustment needed in order to return to

    • a sustainable situation?

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    5.2 Sustainability indicators debt

    Debt management

    Debt managers

    Central

    bank

    authorities

    Debt managers and the central bank authorities must agree in the objectives of the debt management policy, as well as those of the economic, fiscal and monetary policies

    73


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    6 debt

    Behavior of the

    actors

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    6.1 Institutions debt

    Evaluation of the institutions

    • Outstanding curriculum

    • History of the institution

    • Controls and policies that it has

    • established

    • Political and institutional

    • management

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    6.1 Institutions debt

    Organizational Structure of the office

    • Executive body

    • Control and coordination body

    • Operational bodies: negotiation

    • and service

    • Recording body

    • Analytical body

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    6.1 Institutions debt

    Debt office and administrative cost

    A well organized debt management and administration system will improve the information flows, as well as its quality and, therefore, the suitability of the decision-making to satisfy every country’s needs

    77


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    6.1 Institutions debt

    Aspects to be evaluated

    • The competence of activities must

    • be clearly defined by laws, norms and

    • regulations

    • Existence of manuals with a detailed

    • description of responsibilities and

    • functions of the offices in charge

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    6.1 Institutions debt

    Aspects to be evaluated

    • Existence of procedures manuals

    • Existence of organizational charts

    • Description of eachpublic servant’s

    • tasks

    • Accounting system that enables to

    • identify the real cost related to debt

    • management functions

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    Administrative costs debt

    Expenditure on debt management

    Total debt

    6.1 Institutions

    A benchmarking exercise can be carried out to verify whether the country is above or below the world average.

    80


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    Administrative costs debt

    6.1 Institutions

    • Direct cost derived from human and material

    • resources, offices, and services

    • Payment of commissions to the agents and

    • institutions responsible for investing or those

    • derived from the opening of credit

    • Tax payments

    • Security or guarantor’s commissions

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    Goals of the human resources policies debt

    6.2 Human resources

    The goals are to support in the best possible way, the institution’s necessities for the optimal accomplishment of the aims for which the institution was created

    • It requires

      • Highly qualified personnel

      • Keep a high performance level each

        year

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    Civil Service debt

    6.2 Human resources

    More attention to employee’s development, training and welfare

    Strenghtening and planning of activities

    Civil service

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    Integrity and ethics debt

    6.2 Human resources

    Since the authorities responsible for the debt management may overlook internal controls, it is important to bear in mind that the public servants’ integrity and ethical values are essential to maintain the effectiveness of the internal controls

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    Ethics debt

    6.2 Human resources

    • Behavior of the public servants

      • Ethical norms, widely publicized

      • The International Code

        of Conduct for Public Officials

    85


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    Qualification and training debt

    6.2 Human resources

    • Competence

    • Knowledge

    • Capacities

    • Schooling

    • Training

    • Experience

    • Responsibilities

    86


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    7 debt

    Accountability

    87


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    Quality of service debt

    7 Accountability

    Objective:

    To generate the required reforms in the public sector management to improve the capacity of reaction and the sensibility of the public institutions by means of requiring and encouraging a greater labor yield

    88


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    OECD Administration as service, the public as client debt

    7 Accountability

    • Characteristic elements of a service sensible to the customer’s requirements:

      • Transparency

      • Client participation

      • Accessibility

    the citizen has the right to demand a suitable and timely accountability in relation to all the public resources that are handled

    89


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    Use of the Accountability indicators debt

    7 Accountability

    • Public debt management reports must be:

      • Transparent

      • Timely

      • Reliable

    90


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    Guidelines for public debt management debt

    7 Accountability

    Two Premises:

    1 The operations will be more effective if the goals and instruments of policy are known to the public (financial markets) and if the authorities can make a credible commitment to meeting them

    91


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    Guidelines for public debt management debt

    7 Accountability

    Two Premises:

    2 Transparency can enhance good governance through greater accountability of central banks, finance ministries, and other public institutions involved in debt management

    92


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    Actions that will contribute to achieve the Citizen-Client’s satisfaction

    7 Accountability

    • Clarity of roles, responsibilities and

    • objectives of financial agencies

    • responsible for debt management

    • The objectives of the debt management, explaining the measures on costs and the adopted risks, will be defined and revealed to the general public

    93


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    Actions that will contribute to achieve the Citizen-Client’s satisfaction

    7 Accountability

    • The substantial aspects of the debt management operations will be disclosed

    • Information on the past, current and foreseen budget activity, considering the financing and the information on the consolidated financial position of the government

    94


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    Fiscal Transparency Manual IMF Citizen-Client’s satisfaction

    7 Accountability

    Four aspect of governmental information supply

    • Annual budgetary coverage

    • Budgetary execution and

    • forecasting

    • Contingent liabilities and quasi-fiscal activities

    • Debt and financial assets

    95


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    Fiscal Transparency Manual IMF Citizen-Client’s satisfaction

    7 Accountability

    Government must regularly provide the citizens with the information on debt structure and financial assets

    96


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    Fiscal Transparency Manual IMF Citizen-Client’s satisfaction

    7 Accountability

    in order to enable the evaluation of the capacity to finance its activities and to accomplish its debt obligations, and to estimate the level of revenues that will be required to meet all the existing obligations

    97


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    PERFORMANCE AUDIT OF Citizen-Client’s satisfaction

    PUBLIC DEBT

    AN EXERCISE OF REFERENCE TERMS