In 2016, the discovery of two large, previously unreported loans sparked an economic crisis in Mozambique. Donor support to the country froze. The government was forced to make deep cuts in public spending.
More recently, when Chad and Zambia asked to restructure their debt under the G-20’s Common Framework for Debt Treatments, they ran into an obstacle. Their respective debt offices lacked a complete and up-to-date accounting of what was owed exactly to whom. The lack of information delayed the restructuring negotiations. It took more than six months for the countries’ financial advisers to assemble the necessary information.
These episodes expose the dangers to creditors and borrowers from undisclosed debt—and they have prompted urgent calls for greater debt transparency. Yet, those warnings have so far gone unheeded. Public debt of low-income economies remains difficult to pin down either because data continue to be incompletely reported in official statistics or are hidden through confidentiality clauses.
Three facts in particular ought to make us all sit up and pay attention. First, 40% 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% of GDP in some instances. Third, 15 low-income countries today have debt that is collateralized 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 precedent in modern times. Significant investment will be needed to sustain economic growth in the aftermath of Covid-19.
The evidence 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, however, 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:
- Domestic debt. 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 recognized by the debtor country or are contracted off budget. In addition, they often carry steeper interest rates than comparable, noncollateralized financing sources.
- Nonmarketable external debt. 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 overcollateralized repos with own securities.
- 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-authorization 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.
International financial institutions are also crucial to good outcomes on debt transparency and sustainability. We think global practices for data collection on debt ought to be standardized 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.