GUIDE TO THE DEBT MANAGEMENT PERFORMANCE ASSESSMENT (DEMPA) TOOL

Transcription

1 GUIDE TO THE DEBT MANAGEMENT PERFORMANCE ASSESSMENT (DEMPA) TOOL Revised December 2009 Ecnmic Plicy and Debt Department (PRMED) Banking and Debt Management Department (BDM)

2 TABLE OF CONTENTS Abbreviatins and Acrnyms 4 Acknwledgments 5 1 Intrductin 6 2 Assessment Methdlgy Perfrmance Indicatrs Link between DeMPA and PEFA Hw t Scre the Perfrmance Indicatrs 10 3 Perfrmance Indicatrs Gvernance and Strategy Develpment 12 DPI-1 Legal Framewrk 12 DPI-2 Managerial Structure 15 DPI-3 Debt Management Strategy 18 DPI-4 Evaluatin f Debt Management Operatins 20 DPI-5 Audit Crdinatin with Macrecnmic Plicies 23 DPI-6 Crdinatin with Fiscal Plicy 23 DPI-7 Crdinatin with Mnetary Plicy Brrwing and Related Financing Activities 27 DPI-8 Dmestic Market Brrwing 27 DPI-9 External Brrwing 29 DPI-10 Lan Guarantees, On-lending, and Derivatives Cash Flw Frecasting and Cash Balance Management 34 DPI-11 Cash Flw Frecasting and Cash Balance Management Operatinal Risk Management 36 DPI-12 Debt Administratin and Data Security 36 DPI-13 Segregatin f Duties, Staff Capacity, and Business Cntinuity 39 Guide t the Debt Management Perfrmance Assessment Tl Page 2 OF 47

3 3.6 Debt Recrds and Reprting 42 DPI-14 Debt Recrds 42 DPI-15 Debt Reprting 44 Annex 46 Guide t the Debt Management Perfrmance Assessment Tl Page 3 OF 47

4 ABBREVIATIONS AND ACRONYMS BDM DeM DeMPA DMFAS DPI DRI DRP DSA IMF INTOSAI N/R PEFA PI PRMED SAI T-bill T-bnd UNCTAD Banking and Debt Management Department (Wrld Bank) debt management Debt Management Perfrmance Assessment (Tl) Debt Management Financial Analysis System Debt Management Perfrmance Indicatr Debt Relief Internatinal disaster recvery plan debt sustainability analysis Internatinal Mnetary Fund Internatinal Organizatin f Supreme Audit Institutins nt rated r assessed Public Expenditure and Financial Accuntability (Prgram) Perfrmance Indicatr (PEFA) Ecnmic Plicy and Debt Department (Wrld Bank) supreme audit institutin Treasury bill Treasury bnd United Natins Cnference n Trade and Develpment Guide t the Debt Management Perfrmance Assessment Tl Page 4 OF 47

5 ACKNOWLEDGMENTS The Guide t the Debt Management Perfrmance Assessment Tl (Guide) was prepared under the leadership f Dana Weist f the Ecnmic Plicy and Debt Department (PRMED) f the Wrld Bank. The cre team cmprised Tmas I. Magnussn f the Banking and Debt Management Department (BDM) f the Wrld Bank; Abha Prasad (PRMED); Francis Rwe (PRMED); and Ian Strkey, external cnsultant. The Guide benefited frm a number f written cmments prvided by the Mnetary and Capital Markets, Fiscal Affairs, and Statistics Departments f the Internatinal Mnetary Fund (IMF); Debt Relief Internatinal (DRI); the Debt Management Financial Analysis System (DMFAS) Prgramme f the United Natins Cnference n Trade and Develpment (UNCTAD); and the Debt Management Divisin f the Cmmnwealth Secretariat. Guide t the Debt Management Perfrmance Assessment Tl Page 5 OF 47

6 1 INTRODUCTION The purpse f this dcument is t prvide guidance and supplemental infrmatin t assist with cuntry assessments f debt management (DeM) perfrmance, using the Debt Management Perfrmance Assessment (DeMPA) Tl. The DeMPA is a methdlgy used fr assessing public DeM perfrmance thrugh a cmprehensive set f 15 perfrmance indicatrs spanning the full range f gvernment DeM functins. It is based n the principles set ut in the Internatinal Mnetary Fund (IMF) and Wrld Bank s Guidelines fr Public Debt Management, initially published in 2001 and updated in It is mdeled after the Public Expenditure and Financial Accuntability (PEFA) framewrk fr perfrmance measurement f public financial management. The DeMPA has been designed as a user-friendly tl fr undertaking an assessment f the strengths and weaknesses in gvernment DeM practices. This Guide t the Debt Management Perfrmance Assessment Tl (Guide) prvides additinal backgrund and supprting infrmatin s that a nn-specialist in the area f DeM may undertake a cuntry assessment effectively. The Guide can be used by assessrs in preparing fr and undertaking an assessment. It is particularly useful fr understanding the ratinale fr the inclusin f the indicatrs, the scring methdlgy, the list f supprting dcuments and evidence required, and the questins that culd be asked fr the assessment. The Guide principally prvides detailed backgrund infrmatin and ratinale fr each Debt Management Perfrmance Indicatr (DPI). It als aids each cuntry assessment by prviding the fllwing: A list f supprting dcumentatin that shuld be requested fr examinatin Indicative questins that culd be asked in relatin t each perfrmance indicatr (the list is nt exhaustive and shuld nt be used as a template) 2 2 ASSESSMENT METHODOLOGY 2.1 PERFORMANCE INDICATORS The DeMPA is primarily cncerned with the management f central gvernment debt and cvers all the central gvernment DeM functins cmprehensively, as well as related activities such as issuance f lan guarantees, n-lending, and cash flw frecasting and cash balance management. Because it is ften the respnsibility f the central gvernment t reprt n ttal public debt, ttal nnfinancial public sectr debt and lan guarantees are included in DPI-15, titled Debt Reprting. It 1. The Guidelines are available n the Web sites f the Wrld Bank, and IMF, 2. In additin, a list f key references is prvided in the annex. Guide t the Debt Management Perfrmance Assessment Tl Page 6 OF 47

7 shuld be nted that the DeMPA des nt assess perfrmance in managing the wider public debt if that debt is nt guaranteed by the central gvernment. The DeMPA, hwever, is flexible and can be bradly applied t assess DeM perfrmance in subnatinal gvernments. The DeMPA perfrmance indicatrs aim t measure gvernment DeM perfrmance and capture the elements recgnized as being indispensable t achieving sund DeM practices. Each indicatr cmprises dimensins fr assessment that reflect established sund practice. The bjective is t have a set f perfrmance indicatrs that cver the full range f central gvernment DeM activities, including all critical activities, while ensuring that the assessment and the number f indicatrs are manageable. The DeMPA perfrmance indicatrs encmpass the cmplete spectrum f gvernment DeM peratins and the verall envirnment in which these peratins are cnducted. Althugh the DeMPA des nt specify recmmendatins fr refrms r capacity- and institutin-building needs, the perfrmance indicatrs d stipulate a minimum level that shuld be met under all cnditins (see sectin 2.3). Cnsequently, an assessment shwing that the minimum requirements are nt met clearly indicates an area requiring refrm, capacity building, r bth. 2.2 LINK BETWEEN DEMPA AND PEFA The DeMPA is mdeled after the PEFA Perfrmance Indicatrs (PIs). While the PEFA indicatrs cver critical aspects acrss public financial management, the DeMPA fcuses n gvernment DeM nly. It is imprtant that the assessr be aware f the links between the tw indicatrs, because a PEFA assessment f a cuntry will aid in a DeMPA assessment f that cuntry and vice versa. As a practical first step, the assessr shuld determine whether a PEFA assessment has been undertaken in the cuntry. If s, the assessr shuld cntact the PEFA Secretariat fr any publicly available infrmatin n the results. Alternatively, if a DeMPA assessment precedes a PEFA assessment, the assessr shuld cnvey the results if publicly disclsed by the cuntry t the PEFA Secretariat. The direct link between the tw tls is the recrding and management f cash balances, debt, and guarantees indicatrs in PEFA. A number f indicatrs in the DeMPA are essentially a mre detailed drill-dwn frm this PEFA indicatr. Strng links are fund between PEFA indicatrs n audit and fiscal planning and DeMPA indicatrs n audit and crdinatin with macrecnmic plicies. Other PEFA indicatrs that crrespnd t individual DeMPA indicatrs are shwn in table 1. Table 1. Links between DeMPA and PEFA PEFA PI-12: Multiyear Perspective in Fiscal Planning, Expenditure Plicy, and Budgeting Dimensin (ii): Scpe and frequency f debt sustainability analysis DeMPA DPI-6: Crdinatin with Fiscal Plicy Dimensin 2: Availability f key macr variables and a debt sustainability analysis, and the frequency with which it is undertaken Guide t the Debt Management Perfrmance Assessment Tl Page 7 OF 47

8 PEFA PI-16: Predictability in the Availability f Funds fr Cmmitment f Expenditures Dimensin (i): Extent t which cash flws are frecast and mnitred DeMPA DPI-11: Cash Flw Frecasting and Cash Balance Management Dimensin 1: Effectiveness f frecasting the aggregate level f cash balances in gvernment bank accunts Guide t the Debt Management Perfrmance Assessment Tl Page 8 OF 47

9 PEFA PI-17: Recrding and Management f Cash Balances, Debt, and Guarantees Dimensin (i): Quality f debt data recrding and reprting DeMPA DPI-14: Debt Recrds Dimensin 1: Cmpleteness and timeliness f central gvernment debt recrds Dimensin 2: Cmplete and up-t-date recrds f all hlders f gvernment securities in a secure registry system DPI-15: Debt Reprting Dimensin 1: Meeting f statutry and cntractual reprting requirements f central gvernment debt t all dmestic and external entities Dimensin 2: Meeting f statutry and cntractual reprting requirements fr ttal nnfinancial public sectr debt and lan guarantees t all dmestic and external entities Dimensin 3: Quality and timeliness f the publicatin f a debt statistical bulletin (r its equivalent) cvering central gvernment debt Dimensin (iii): Systems fr cntracting lans and issuance f guarantees DPI-1: Legal Framewrk Dimensin 1: The existence, cverage, and cntent f the legal framewrk DPI-2: Managerial Structure Dimensin 1: The managerial structure fr central gvernment brrwings and debt-related transactins Dimensin 2: The managerial structure fr preparatin and issuance f central gvernment lan guarantees DPI-3: Debt Management Strategy Dimensin 1: The quality f the debt management strategy dcument Dimensin 2: The decisin-making prcess, updating, and publicatin f the debt management strategy Additinal references include the fllwing: DPI-8: Dmestic Market Brrwing Guide t the Debt Management Perfrmance Assessment Tl Page 9 OF 47 DPI-9: External Brrwing DPI-10: Lan Guarantees, On-Lending, and Derivatives

10 PEFA PI-21: Effectiveness f Internal Audit Dimensin (i): Cverage and quality f the internal audit functin Dimensin (iii): Extent f management respnse t internal audit functins PI-22: Timeliness and Regularity f Accunt Recnciliatin Dimensin (i): Regularity f bank recnciliatins PI-25: Quality and Timeliness f Annual Financial Statements Dimensin (i): Cmpleteness f the financial statements PI-26: Scpe, Nature, and Fllw-Up f External Audit Dimensin (i): Scpe/nature f audit perfrmed (including adherence t auditing standards) Dimensin (ii): Timeliness f submissin f audit reprts t legislature Dimensin (iii): Evidence f fllw-up n audit recmmendatins DeMPA DPI-5: Audit Dimensin 1: Frequency f internal and external auditing f central gvernment debt management activities, plicies, and peratins, as well as publicatin f external audit reprts Dimensin 2: Degree f cmmitment t address the utcmes frm internal and external audits DPI-11: Cash Flw Frecasting and Cash Balance Management DPI-15: Debt Reprting Dimensin 3: Quality and timeliness f the publicatin f a debt statistical bulletin (r its equivalent) cvering central gvernment debt DPI-5: Audit Dimensin 1: Frequency f internal and external auditing f central gvernment debt management activities, plicies, and peratins, as well as publicatin f external audit reprts Dimensin 2: Degree f cmmitment t address the utcmes frm internal and external audits 2.3 HOW TO SCORE THE PERFORMANCE INDICATORS Each perfrmance indicatr has ne r mre dimensins, and each f these dimensins shuld be assessed separately. If a dimensin cannt be assessed, a designatin f N/R (nt rated r assessed) shuld be assigned. The scre C represents the minimum requirement fr each dimensin. The fcus shuld be t assess whether the minimum requirement fr a C scre fr each dimensin in each indicatr has been met. A minimum requirement is the necessary cnditin fr effective perfrmance under the particular dimensin being measured. It is therefre recmmended that the assessr begin with a scre f C in each indicatr when undertaking an assessment. Guide t the Debt Management Perfrmance Assessment Tl Page 10 OF 47

11 If the minimum requirement has nt been met, a scre f D shuld be assigned. This scre suggests deficiency in perfrmance and signals the need fr crrective actin. Having ascertained whether the minimum requirement has been met, the assessr then determines whether the additinal criteria fr a scre f B r A have been met. The A scre reflects sund practice fr that particular dimensin f the indicatr. The B scre lies between the minimum requirement and sund practice fr that aspect. Guide t the Debt Management Perfrmance Assessment Tl Page 11 OF 47

12 3 PERFORMANCE INDICATORS 3.1 GOVERNANCE AND STRATEGY DEVELOPMENT DPI-1 LEGAL FRAMEWORK RATIONALE AND BACKGROUND The first ratinale fr DPI-1 is t ensure that the legal framewrk clearly sets ut the authrity t brrw (in bth dmestic and freign markets), undertake debt-related transactins (such as currency and interest rate swaps), and issue lan guarantees. Stemming frm its cnstitutinal pwer t apprve central gvernment tax and spending measures, the parliament r cngress has, as a rule, the ultimate pwer t brrw n behalf f the central gvernment. The first level f delegatin f the brrwing pwer therefre cmes frm the parliament r cngress dwn t the executive branch (fr example, t the president, t the cabinet r cuncil f ministers, r directly t the minister f finance). This delegatin is fund in the primary legislatin, nrmally in a separate law n public debt r similar law; in the budget system law, tgether with the annual budget act; r in a fiscal respnsibility act. In mst cases, the delegatin f the brrwing pwer is restricted by a statement f the purpses fr which the executive can brrw (fr example, t finance the budget deficit r t refinance maturing lans) r by a limit n the annual net brrwing r the utstanding debt. The main reasn t include brrwing purpses in the primary legislatin is t safeguard against brrwing fr speculative investments and brrwing t finance expenditures that have nt been included in the annual budget r apprved by the parliament r cngress in sme ther fashin. If the executive branch f the gvernment were allwed t brrw t finance expenditures nt apprved by the parliament r cngress, the whle budget prcess wuld be meaningless, and eventually the parliament r cngress wuld be frced t raise taxes r cut expenditures t service the debt cntracted t finance such expenditures. Anther cmmn cnstraint is the retentin by the parliament r cngress f the pwer t ratify certain lan agreements, particularly lans raised abrad. This ratificatin prcedure shuld be limited preferably t lan agreements that are classified as treaties (fr example, internatinal agreements cncluded between svereign gvernments r agreements between a svereign gvernment and anther subject f internatinal law, such as the Wrld Bank). Fr practical reasns, hwever, it is cmmn that the executive delegates the brrwing pwer t implementing entities which cntract n behalf f the central gvernment. This delegatin is fund in secndary legislatin, such as executive rders, decrees, rdinances, and s frth. It is imprtant that the line f delegatin is clear, bth fr internal cntrl and fr due diligence purpses. All creditrs and lenders require a legally binding and enfrceable cntract with the central gvernment in its capacity as the brrwer. The same parameters apply t the issue f lan guarantees. Lan guarantees nrmally cannt be issued by the executive withut apprval by the parliament r Guide t the Debt Management Perfrmance Assessment Tl Page 12 OF 47

13 cngress. In the rare cases when these guarantees can be issued cnstitutinally by the executive withut any delegatin frm the parliament r cngress, it wuld be sufficient t check that the issuing entity is prperly authrized thrugh the secndary legislatin. Undertaking f debt-related transactins such as swaps nrmally des nt require the apprval f the parliament r cngress. The secnd ratinale fr DPI-1 is t ensure that the legal framewrk, at least fr the higher scres, als includes specified brrwing purpses; clear DeM bjectives; a requirement t develp a DeM strategy; a reprting requirement t the parliament r cngress; and a requirement fr an external audit f the DeM activities, plicies, and peratins. Specific examples f brrwing purpses fund in legislatin are t finance budget and cash balance deficits; refinance and prefinance utstanding debt; finance investment prjects apprved by the parliament r cngress; finance hnring f utstanding guarantees; fulfill requirements by the central bank t replenish freign currency reserves; fulfill requirements by the central bank t issue Treasury bills (T-bills) and Treasury bnds (T-bnds) t supprt mnetary plicy bjectives (fr example, t drain excess liquidity frm the dmestic market); and eliminate the effects caused by natural r envirnmental disasters. Cmmn DeM bjectives fund in mdern legislatin are that central gvernment s funding needs always be met, the cst f the debt be minimized frm a mediumterm r lng-term perspective, the risks in the debt prtfli be kept at acceptable levels, and the develpment f the dmestic debt market be prmted. These gals shuld have certain rbustness in rder t serve as anchr fr the DeM strategies. It is preferable and increasingly cmmn t specify the central gvernment s DeM gals and bjectives in the primary legislatin. This apprach gives them particular prminence and prevents ad hc and frequent changes. A cmparisn can be made with the regulatry framewrk fr mnetary plicy, in which the primary gal f mnetary plicy (fr example, price stability) is by rule specified in the primary legislatin (the central bank act). Once the DeM bjectives are set, they must be translated int an peratinal strategy that sets ut the medium-term framewrk fr hw the gvernment will achieve its DeM bjectives. In accrdance with existing sund internatinal practice, a requirement in the primary legislatin t develp a DeM strategy has als been included in this indicatr fr the highest scre. Reprting t the parliament r cngress increases transparency and strengthens accuntability. This reprting requirement is cmmnly fund in any plicy-based legislatin that includes lnger-term bjectives. In the area f central gvernment brrwing, the reprting requirement is augmented by the fact that the parliament r cngress delegates its brrwing pwer t the executive and, cnsequently, has a legitimate interest in knwing hw the executive has used this pwer and whether the gals have been achieved r at least that the strategy eventually will lead t this achievement. The requirement fr external audit is nrmally fund in the general public audit act, nt in the specific DeM legislatin r in the budget laws. Guide t the Debt Management Perfrmance Assessment Tl Page 13 OF 47

14 The key requirement fr DPI-1 is t review the legislatin t see whether it meets the list f requirements and the criteria t be assessed. It is als imprtant t determine the extent f adherence t the legislatin, because in sme cuntries, the legislatin may be sufficient but may nt be fully enfrced. SUPPORTING DOCUMENTATION The fllwing supprting dcumentatin shuld be available: A cpy f all primary legislatin, which shuld be available n the Web sites f the gvernment, ministry f finance, principal DeM entity, r central bank A cpy f all secndary legislatin, which shuld be available n the Web sites f the gvernment, ministry f finance, principal DeM entity r with the ther DeM entities, r central bank. If the list is extensive (fr example, mre than 20 different dcuments in sme cuntries), then it may be sufficient t btain a cpy f the mst significant r relevant dcuments, tgether with a list f all secndary legislatin. INDICATIVE QUESTIONS TO ASK The fllwing questins culd be asked: Is there clear authrizatin in primary legislatin t apprve brrwings and lan guarantees n behalf f the central gvernment assigned t the cabinet r cuncil f ministers r directly t the minister f finance? If s, which legislatin prvides authrizatin and what sectins r clauses? Is there clear authrizatin in secndary legislatin frm the executive branch f gvernment t the implementing entities t undertake brrwing and debt-related transactins and t issue lan guarantees n behalf f the central gvernment? If s, which legislatin prvides authrizatin and what sectins r clauses? What sectins r clauses in the legislatin cver the fllwing? Specified brrwing purpses Clear DeM bjectives Requirement t develp a DeM strategy Annual mandatry reprting cvering evaluatin f utcmes against stated bjectives and the determined strategy Requirement fr external audit Has there been any instance in the past five years in which the laws have nt been fllwed? If s, what were the instances, why were the laws nt fllwed, and what were the cnsequences? Guide t the Debt Management Perfrmance Assessment Tl Page 14 OF 47

15 DPI-2 MANAGERIAL STRUCTURE RATIONALE AND BACKGROUND The ratinale fr DPI-2 is t ensure that the managerial structure fr debt management is clearly divided between the plitical level (the parliament r cngress, the president, the cabinet r cuncil f ministers, and the minister f finance) that sets the verall lng-term central gvernment DeM bjectives and apprves the strategy and the entities respnsible fr implementing the DeM strategy. The advantage f this apprach is that majr decisins abut the verall vlume f indebtedness and the acceptable risks in the debt prtfli in terms f their effect n the budget, taxes, gvernment spending prgrams, r ther such fiscal indicatrs are assigned t plitical decisin makers while allwing technical prfessinals t seek the ptimum risk-adjusted utcme within thse parameters. This structure als decreases the risk that fiscal plicy advisers view DeM plicy as an pprtunity t reduce debt service csts and thereby reduce the budget deficit in the shrt term by increasing market risks in the debt prtfli (that is, undue plitical interference). When cuntries have access t credit markets, it is easy t reduce the budget s debt service csts in the shrt term (fr example, by brrwing in a lwinterest currency, brrwing shrt, r brrwing at a flating interest rate). The budget debt service csts culd pssibly be reduced even further with the help f derivatives such as swaps and ptins. When plitically expedient, any head f funding can be pressed t chse such a brrwing strategy t sften internal budget cnstraints. But such a shrt-term strategy will substantially increase the risks in the debt prtfli and the vulnerability f the cuntry. Other types f behavir that shuld be avided by the minister f finance r the fiscal plicy adviser (at the plitical level) are invlvement in the discussins f any cutff price after the bids have been received in the auctin f gvernment securities, selectin f brrwing currencies in single lan transactins, and selectin f the lead manager fr brrwings in the internatinal capital markets. Undertaking a cncessinal lan frm a multilateral creditr that includes a range f plicy triggers, hwever, clearly has plitical implicatins and may very well be subject t plitical scrutiny withut being qualified as undue interference. Similarly, large public bnd issues, brrwing frm new surces, r brrwing thrugh new structures may nt be delegated t the same level as rutine dmestic T-bnd and T-bill auctins. Anther ratinale fr DPI-2 is t ensure that the implementing entities (the DeM entities) regularly exchange debt infrmatin and clsely crdinate their respective activities t avid ver-brrwing and t keep track f the prtfli risks. This aspect is particularly imprtant when the DeM activities are steered by a DeM strategy and fllw a brrwing plan. Fr the highest scre, the executin f the strategy is delegated t a principal DeM entity, cmmnly called the debt management ffice. Lan guarantees are typically issued t supprt a certain beneficiary r prject r a specific sectr f the ecnmy. Because this is a plitical decisin per se, there is n need t separate the plitical decisin making frm the issuance f the guarantee. Hwever, nce the plitical decisin has been made t leave preparatin and the actual issuance f the lan guarantees t a prfessinal entity (a principal Guide t the Debt Management Perfrmance Assessment Tl Page 15 OF 47

16 guarantee entity), it is desirable t assess and price the credit risk, mnitr this risk during the term f the guarantee, crdinate the brrwings f the guarantee beneficiaries with central gvernment brrwing, and prperly recrd these guarantees. Crdinatin with central gvernment brrwing is particularly imprtant when undertaking market brrwings. Frm the creditrs r investrs pint f view, whether the central gvernment brrws directly r whether it supprts brrwing by anther entity thrugh a svereign lan guarantee des nt make much difference. In bth cases, the credit risk is the same, and cnsequently, the credit risk premium wuld be similar. Hwever, if the underlying lan is substantially mre expensive than the central gvernment wuld have negtiated because f the inexperience f the guaranteed beneficiary, this factr can adversely affect the future pricing f the central gvernment s wn market brrwing. Similarly, if bth the central gvernment and the guaranteed beneficiary enter the same market because f lack f prir cnsultatin whenever a favrable market pprtunity arises, it likely will lead t mre expensive lans fr bth and create an impressin f disrganizatin, as cmpared t an rderly crdinatin f their market peratins. In additin, crdinatin is imprtant in sme legal clauses (fr example, waiver f svereign immunity), which shuld preferably be drafted similarly whether they are included in the terms and cnditins f a central gvernment lan r bnd issue r in the terms and cnditins f a central gvernment lan guarantee. Sme cuntries use the principal DeM entity t prepare and issue the lan guarantees nce the plitical decisin t supprt a certain beneficiary r prject by guarantees has been made. Apart frm the technical skill nrmally fund at the principal DeM entity, this apprach als wuld ensure prper crdinatin with central gvernment brrwing. In cuntries withut adequately trained staff in finance, this managerial structure is particularly relevant, as is reflected in the highest scre. In the DeMPA Tl, lan guarantees d nt include exprt credit guarantees. SUPPORTING DOCUMENTATION The fllwing supprting dcumentatin shuld be available: The rganizatinal chart and secndary legislatin setting ut the entities invlved in DeM and the preparatin and issuance f lan guarantees and their respective rles and respnsibilities A cpy f the agency agreement between the principal DeM entity and the central bank (if such an agreement exists). INDICATIVE QUESTIONS TO ASK The fllwing questins culd be asked: Which entities have respnsibility fr DeM activities? What are the respective rles and respnsibilities? What is the prcess, and wh is respnsible fr negtiating and cntracting new lans (cncessinal, multilateral, bilateral, cmmercial, dmestic, and s frth)? Guide t the Debt Management Perfrmance Assessment Tl Page 16 OF 47

17 What rle des the minister f finance and the cabinet r cuncil f ministers play in any new brrwing, particularly with regard t the authrizatin t brrw and during the cntract negtiatin and transacting prcess? If there are tw r mre DeM entities, what debt and ther infrmatin is exchanged between the entities respnsible fr DeM activities? Hw frequently is this infrmatin exchanged? D the entities clsely crdinate their respective activities t avid verbrrwing and keep track f the prtfli risks? Wh is respnsible fr signing lan agreements? Are there frmal delegated authrities t issue lan guarantees? If s, hw are these lan guarantees prepared and authrized? Wh is respnsible fr apprving and signing lan guarantees? Are brrwings by the beneficiary f lan guarantees crdinated with central gvernment brrwing, and hw? Guide t the Debt Management Perfrmance Assessment Tl Page 17 OF 47

18 DPI-3 DEBT MANAGEMENT STRATEGY RATIONALE AND BACKGROUND The ratinale fr DPI-3 is t ensure that the gvernment prepares and publishes a DeM strategy that is based n the lnger-term DeM bjectives and set within the cntext f the gvernment s fiscal plicy and budget framewrk. The cntent f the strategy will vary frm cuntry t cuntry, depending n the stage f develpment r DeM refrm, the surces f funding, and the transactins used t manage central gvernment debt. The expected cntent f the DeM strategy is set ut in the DeMPA, DPI-3. The key risk indicatrs will vary depending n the cuntry s debt prtfli and scpe t manage risk. The analytical basis fr determining the risk indicatrs shuld be disclsed t enhance transparency in the frmulatin f DeM strategy. The fllwing indicatrs are mst likely t be assessed: Ttal debt service under different scenaris, particularly sensitivity t interest rate and exchange rates Maturity prfile f the debt under different scenaris Strategic benchmarks such as the fllwing: Share f freign currency t dmestic debt Currency cmpsitin f freign currency debt Minimum average maturity f the debt Maximum share f debt that is allwed t fall due during ne and tw budget years Maximum share f shrt-term t lng-term debt Maximum share f flating rate t fixed rate debt Minimum average time t interest rate re-fixing Fr cuntries that have limited access t market-based debt instruments and rely mainly n external fficial cncessinal finance, all f these risk-based parameters may nt be equally relevant. In such cases, the mst relevant parameters t cntaining the risks t the debt prtfli will prbably be meeting f the cncessinality requirements, currency cmpsitin, amunt f debt that must be refinanced ver a particular time, and mnitring f debt sustainability. It is imprtant t have a rbust prcess in place fr strategy develpment. The strategy is essentially a decisin n the gvernment s preferred risk tlerance that must be updated frequently preferably yearly t reflect changed circumstances (an iterative prcess). On the basis f existing gd internatinal practice, the implementing DeM entities prepare a feasible strategy prpsal, the central bank checks that the strategy will nt cnflict with mnetary plicy implementatin, and the cabinet r cuncil f ministers r the minister f finance apprves the strategy dcument. Fr extra quality assurance, sme cuntries have als set up a specialized advisry bard t cmment n the draft strategy befre it is apprved. The key requirement fr DPI-3 is t identify whether a frmal DeM strategy has been prduced. If s, it is necessary t identify what the strategy cvers, what the prcess Guide t the Debt Management Perfrmance Assessment Tl Page 18 OF 47

19 fr frmulating and apprving the strategy was, hw frequently the strategy has been prduced, and whether the strategy is publicly available. SUPPORTING DOCUMENTATION A cpy f mst recent DeM strategy shuld be available. INDICATIVE QUESTIONS TO ASK The fllwing questins culd be asked: Has the gvernment prepared a DeM strategy? If s, Hw was the strategy prduced? Which entities r peple were respnsible fr prducing the strategy, and what were their respective rles? Wh authrized r apprved the strategy? What analysis was undertaken in frmulating the strategy? Hw was the analysis undertaken, wh was respnsible fr setting ecnmic and budget parameters, and wh was respnsible fr debt frecasts? Has the central bank been cnsulted in frmulating the strategy? Is it cnsistent with mnetary plicy implementatin? Des the strategy cver the items required t meet the minimum requirements under DPI-3, Dimensin 1? Des the strategy express the directin that the key risk indicatrs shuld mve tward (DPI-3, Dimensin 1, scre C)? Was the strategy made publicly available? If s, when was it published, and in what frmat? Hw has the strategy been implemented? Hw ften will the strategy be prepared r updated? Guide t the Debt Management Perfrmance Assessment Tl Page 19 OF 47

20 DPI-4 EVALUATION OF DEBT MANAGEMENT OPERATIONS RATIONALE AND BACKGROUND The ratinale fr DPI-4 is t ensure that the principal DeM entity (r DeM entities) is accuntable fr its activities by evaluating utcmes against stated bjectives and ensuring cmpliance with the gvernment s DeM strategy. This apprach prmtes transparency in DeM peratins and gd gvernance thrugh greater accuntability f the principal DeM entity (r DeM entities). Likewise, because f bth the delegated structure described under DPI-1 and the ability t increase transparency and accuntability, it is cmmn fr the executive branch t send a yearly reprt t the parliament r cngress describing the chsen strategy and the ratinale behind it and explaining the way in which the strategy decisin has assisted in achieving the DeM bjectives. This reprt can be part f budget reprting. The key requirement fr DPI-4 is t identify whether these evaluatin reprts have been prduced. Apart frm these reprts, the gvernment as a rule als publishes annual financial statements r gvernment accunts that include infrmatin n debt and DeM activities. Hwever, these dcuments nrmally fcus n financial infrmatin, and little, if any, infrmatin n perfrmance r cmpliance with the DeM strategy is included. SUPPORTING DOCUMENTATION Cpies f the annual evaluatin reprts shuld be available. INDICATIVE QUESTIONS TO ASK The fllwing questins culd be asked: Is an annual reprt n DeM activities prepared by the principal DeM entity (r the DeM entities) and sent t the cabinet r cuncil f ministers r the minister f finance? If s, Des this reprt cntain an evaluatin f hw the DeM activities have cmplied with the gvernment s DeM strategy? Is this reprt submitted t the parliament r cngress? Is this reprt made available publicly? Guide t the Debt Management Perfrmance Assessment Tl Page 20 OF 47

21 DPI-5 AUDIT RATIONALE AND BACKGROUND The ratinale fr DPI-5 is t ensure that gvernment DeM activities, plicies, and peratins are subject t scrutiny by the natinal audit bdies. Standards f external audit practice shuld be cnsistent with internatinal standards, such as thse set by the Internatinal Organizatin f Supreme Audit Institutins (INTOSAI). The accuntability framewrk fr DeM can als be strengthened by public disclsure f audit reviews f DeM peratins cnducted thrugh regular audits f debt managers perfrmance and f systems and cntrl prcedures. Transparency f DeM peratins is enhanced if the results f external audits are made available t the public. It shuld be nted that the audits required under this perfrmance indicatr are different frm the annual audits f the gvernment s financial statements and activities. Financial audits will be assessed under the PEFA Public Financial Management Perfrmance Measurement Framewrk (PI-9, PI-10, PI-25, and PI-26). The scpe f DeM audits shuld include the cntrl envirnment, risk assessment, cntrl activities, infrmatin and cmmunicatin, and mnitring. The key requirement fr DPI-5 is t identify whether regular internal audits (fr example, by the internal audit functin f the principal DeM entity r the ministry f finance) and peridic external auditing (fr example, by the cuntry s supreme audit institutin [SAI] r, as in many cuntries, the ffice f the auditr general) have been undertaken, and if s, what was the nature f these audits, wh undertk the audits, and what was the respnse t address the utcmes r findings f the audits. It is recmmended that the assessment include a meeting with a representative f the SAI (nrmally the auditr general). In additin t receiving answers t the fllwing questins, the meeting must als aim t gain an understanding f the legal status and independence f the SAI, its resurces and wrklad, and its knwledge and understanding f the INTOSAI s Guidance fr Planning and Cnducting an Audit f Internal Cntrls f Public Debt. SUPPORTING DOCUMENTATION The fllwing supprting dcumentatin shuld be available: A cpy f audit legislatin, which may be available n the gvernment r SAI Web site, A cpy f any perfrmance audits f DeM activities undertaken within the past five years, and A cpy f any fllw-up respnse t a perfrmance audit, particularly t nte the reactin and cmmitment t address the audit findings. INDICATIVE QUESTIONS TO ASK The fllwing questins culd be asked: What is the gvernment s cmmitment t the SAI in terms f resurces, budget, independence, reprting, and willingness r cmmitment t address audit findings? Guide t the Debt Management Perfrmance Assessment Tl Page 21 OF 47

22 What is the status f the auditing f the gvernment s financial statements? (This infrmatin can be useful even thugh it is nt assessed because it ften explains why in many cases mst f the resurces are fully cmmitted t financial audits and little r n time r resurces are available fr perfrmance audits.) Have any external audits (perfrmance r special audits) been undertaken by the SAI n DeM activities? If s, when, what was the prcess, what were the findings, and hw have they been addressed? Have these been publicly disclsed, and if yes, where? Is there an internal audit functin in the principal DeM entity r the ministry f finance? If s, What are the mandate, rles, and respnsibilities f this functin? What internal audits are undertaken, hw frequently, and what is the basis f determining the audit prgram? What are the legal status, pwers r authrity, and degree f independence f the internal audit functin? What are the reprting lines and prcedures fr internal audit reprts? What is the principal DeM entity s (r DeM entities ) cmmitment t address audit findings? Have any internal audits (perfrmance r special audits) been undertaken by the internal audit functin n DeM activities? If s, when, what was the prcess, what were the findings, and hw have they been addressed? Guide t the Debt Management Perfrmance Assessment Tl Page 22 OF 47

23 3.2 COORDINATION WITH MACROECONOMIC POLICIES In the brad plicy framewrk, it is imprtant that debt management is carried ut in crdinatin with fiscal and mnetary plicy. All three elements (debt management and fiscal and mnetary plicies) have plicy interdependencies and inter-linkages that must be understd and crdinated. Infrmatin n the gvernment s liquidity needs (future and current), the medium- t lng-term fiscal strategy, and the sustainability f debt shuld be shared. DPI-6 COORDINATION WITH FISCAL POLICY RATIONALE AND BACKGROUND The ratinale fr DPI-6 is t identify the level f crdinatin and the quality and frequency f infrmatin sharing amng the different authrities. It is imprtant during the assessment t meet with fficials frm the budget and macrecnmic unit in the ministry f finance and the principal DeM entity (r DeM entities). This can assist in btaining (a) each authrity s perspective n the level and effectiveness f crdinatin; (b), where pssible, examples f infrmatin that is prvided t and frm each entity and with ther gvernment entities; and (c) details abut the frequency r regularity f infrmatin sharing. Fr the frecasts f debt service, tw brad categries f stress tests are used: sensitivity tests and scenari tests. These tests may be used either separately r in cnjunctin with each ther. Sensitivity tests are nrmally used t assess the effect f change in ne variable (fr example, a large upward shift in the yield curve r a significant depreciatin f the freign exchange rate) n the stck f debt and debt service. Scenari tests include simultaneus mves in several variables (fr example, freign exchange rates and interest rates) based n sme histrical measures r risks perceived in the current envirnment. Als, this culd cmprise a sudden r prlnged severe ecnmic dwnturn. The aim is t assess the effect n the stck f debt and debt service. It is als imprtant t track key fiscal variables that set ut the gvernment s highlevel fiscal strategy in the medium term. Fr example, these variables include the medium-term fiscal plicy bjectives and ttal central gvernment expenses, revenues, and debt level, as well as the medium-term plan (three r mre years) fr ttal expenses and revenues. The fiscal strategy is fcused n the medium- t lngterm implicatins f fiscal plicy and allws users t assess the sustainability f the fiscal and external psitin and its sensitivity t changes in plicy. A debt sustainability analysis (DSA) is ften undertaken by external agencies such as the Wrld Bank r IMF. Such an analysis wuld nt be sufficient fr a C scre because the requirement fr Dimensin 2 is that the DSA be undertaken by the gvernment. It is als imprtant t understand whether the results frm the DSA are used t infrm fiscal plicy making (that is, budget-making and debt management strategy). SUPPORTING DOCUMENTATION The fllwing supprting dcumentatin shuld be available: Guide t the Debt Management Perfrmance Assessment Tl Page 23 OF 47

24 A cpy f infrmatin shared amng the principal DeM entity and the fiscal plicy r budget authrities A cpy f the mst recent dcument detailing key macr variables actual utcmes and frecasts (fr example, central gvernment revenues, expenditures, primary balance, and central gvernment direct and guaranteed debt), the analysis f debt sustainability that is shared with the debt management entities, r bth. INDICATIVE QUESTIONS TO ASK The fllwing questins culd be asked: What debt and ther infrmatin is shared between the principal DeM entity (r the DeM entities) and the fiscal r budget authrities? Hw frequently is this infrmatin shared? Is there an established cmmittee r wrking grup that facilitates the flw f infrmatin and debt strategy crdinatin? If s, what is its cmpsitin, terms f reference, and activities? Hw des the crdinatin between DeM and macrecnmic plicy take place? Is it a frmal and institutinalized mechanism? Hw frequently des it ccur? Wh is respnsible fr preparing frecasts f ttal central gvernment debt and debt service? What assumptins are used in preparing these frecasts, and wh is respnsible fr setting the assumptins? D the frecasts include sensitivity analyses f the baseline t interest and exchange rate changes? D the frecasts include scenari analyses, including frecasts fr a wrstcase scenari? Des the gvernment regularly prepare and update a dcument detailing key macr variables actual utcmes and frecasts (fr example, revenues, expenditures, primary balance, and debt), undertake a DSA, r bth? Is this dcument r analysis published and widely distributed? When was the DSA last cnducted? Did it cver dmestic r external debt r bth? What entities r peple were invlved in cnducting the DSA, and what were their respective rles and respnsibilities? Hw was the utput used? Guide t the Debt Management Perfrmance Assessment Tl Page 24 OF 47

25 DPI-7 COORDINATION WITH MONETARY POLICY RATIONALE AND BACKGROUND The ratinale fr DPI-7 is t ensure the clarity f separatin between mnetary plicy peratins and DeM transactins and the crdinatin f DeM with mnetary plicy implementatin thrugh infrmatin sharing n current and future debt transactins and the gvernment s cash flws. It is imprtant during the assessment t meet with fficials frm bth the central bank and the principal DeM entity (r DeM entities) and t understand their perspectives n the level and effectiveness f crdinatin. It will be useful t btain examples f infrmatin that is prvided t and frm the DeM entities and the central bank, as well as the frequency r regularity f this infrmatin sharing. Examples shuld include hw the DeM entities infrm the central bank abut the central gvernment s current and future cash flws. In additin, the central bank shuld keep the central gvernment infrmed abut which transactins are fr mnetary plicy and which are fr DeM purpses. The assessrs shuld als meet with market participants t ascertain if they are infrmed as t whether the transactins in the dmestic market are fr meeting f mnetary plicy bjectives r fr DeM purpses. The central gvernment shuld avid brrwing directly frm the central bank, except in exceptinal circumstances, 3 and even then there shuld be a limit n the amunt and the perid fr repayment. The mnetary financing f the budget has adverse cnsequences in terms f inflatinary effect and, in a develping cuntry, als impses cnstraints n develpment f the dmestic debt market. SUPPORTING DOCUMENTATION The fllwing supprting dcumentatin shuld be available: A cpy f infrmatin shared between the principal DeM entity (r the DeM entities) and the central Bank A cpy f the central bank act t check the gvernment s level f access t the resurces frm the bank A cpy f the agency agreement between the gvernment and the central bank t ascertain the central bank s expected rle n behalf f the gvernment. INDICATIVE QUESTIONS TO ASK The fllwing questins shuld be asked: 3. These circumstances relate t financial emergencies triggered by, amng thers, episdes f financial distress, market panics, and liquidity squeeze. Guide t the Debt Management Perfrmance Assessment Tl Page 25 OF 47

26 What debt and ther infrmatin is shared between the principal DeM entity (r the DeM entities) and the central bank? Hw frequently is this infrmatin exchanged? Is the relatinship between the central gvernment and the central bank specified in an agency agreement? Is this a frmal agreement? Is it publicly available? Has it been adhered t in the past? Des the central bank maintain gvernment DeM transactins separate frm transactins that are undertaken fr mnetary plicy purpses? If s, hw des the central bank achieve this, and what instruments des it use? What are the de fact and the de jure psitins? Wh is respnsible fr preparing cash flw frecasts? Hw frequently are these frecasts prepared, and what time perid d they cver? Is there a mechanism in place, such as a cash management cmmittee, t review the cash flw frecasts and, if necessary, set expenditure r disbursement cnstraints r bth? Des the gvernment have an verdraft r ways and means facility with the central bank? If s, Is there a ceiling impsed by legislatin, and what is the ceiling? Des the legislatin impse a tenr n the duratin f this facility, and what is the tenr? Has the gvernment used the facility, and if s, hw ften, fr what amunts, and fr what tenrs? When des the facility have t be reduced t a zer balance? Guide t the Debt Management Perfrmance Assessment Tl Page 26 OF 47

27 3.3 BORROWING AND RELATED FINANCING ACTIVITIES DPI-8 DOMESTIC MARKET BORROWING RATIONALE AND BACKGROUND The ratinale fr DPI-8 is t ensure that brrwing activities in lcal currency in the dmestic market particularly in the primary whlesale r institutinal market are transparent and predictable t prvide the gvernment with a mechanism t finance its expenditures in a cst-effective manner while minimizing the risks. Internatinal practice has shwn that the gvernment can benefit frm prviding market participants and investrs with details f brrwing plans and ther market activities well in advance and then acting cnsistently when issuing new T-bnds r undertaking ther activities (such as buyback f gvernment T-bills and T-bnds). This apprach can lead t lwer csts by prviding investrs certainty, increasing liquidity, bradening the investr base, and creating a level playing field fr investrs. The key requirement fr DPI-8 is t identify the instruments that are issued in the dmestic market and the mechanisms that the gvernment uses t issue securities (T-bills and T-bnds) in lcal currency. The fllwing mechanisms are used by gvernments t issue in the dmestic market: Auctins, in which the gvernment receives bids frm registered bidders r frm primary dealers with whm the price f the securities is arrived at n either a multiple-price r a unifrm-price basis Syndicatin, in which the gvernment appints a grup f institutins that, fr a negtiated fee, will subscribe t its bnd issues and then sell them t ther retail r institutinal investrs Tap issuance, in which the gvernment annunces the availability f a certain amunt f securities t be sld and bids are received during a specified perid. Tap sales can be set at a fixed price r at a minimum price that can be changed, depending n demand cnditins Retail issuance, in which the gvernment sets the price r yield fr the securities and sells the securities in small amunts r denminatins t retail investrs thrugh a prgram, either directly r thrugh cmmercial banks, the central bank, r bth, as agents. In additin, it is imprtant t examine the level f disclsure t the market f the gvernment s funding prgram and the peratinal prcedures. Meeting with market participants (fr example, banks, fund managers, and financial market authrities) during the assessment is useful because it prvides a view independent frm that btained frm gvernment and central bank fficials. Smetimes, gvernments als brrw directly frm lcal banks, particularly in the shrt term. This type f brrwing, dcumented by the signing f a lan cntract, is nt cvered under this indicatr. SUPPORTING DOCUMENTATION The fllwing supprting dcumentatin shuld be available: Guide t the Debt Management Perfrmance Assessment Tl Page 27 OF 47

28 A cpy f the infrmatin memrandum r prspectus fr each instrument A cpy f the perating prcedures fr investrs r participants in the primary market A cpy f the issuance prgram fr T-bills and T-bnds annunced by the principal DeM entity, the DeM entity respnsible fr the dmestic whlesale brrwing, r the central bank INDICATIVE QUESTIONS TO ASK The fllwing questins culd be asked: What instruments are issued by the gvernment in the dmestic market, and what techniques are used t issue each instrument? What percentage f gvernment debt is issued in this manner? What is the decisin-making and apprval prcess fr issuing each dmestic debt instrument? When des the gvernment annunce the dmestic brrwing plan, and what infrmatin is prvided? Hw frequently is this infrmatin updated during the fiscal year? What are the prcesses, institutin r staff rles and respnsibilities, and timetable fr cnducting auctins f T-bills and T-bnds with regard t the fllwing: Annuncement f the auctin Bidding time-perid (pening time and clsing time) Prcessing f bids Apprval f auctin cutff Annuncement t successful bidders and the market Settlement f the auctin What are the prcesses, institutin r staff rles and respnsibilities, and timetable fr issuing T-bills and T-bnds by tap issue and syndicatin, if these methds are used? Is there an infrmatin memrandum r prspectus fr each gvernment instrument? Is it published, r is a sft cpy available n the gvernment r central bank Web site? What is the cntent f the infrmatin memrandum r prspectus? Are there perating prcedures r guidelines fr the issuance f each gvernment instrument? Are these published, r is a sft cpy available n the gvernment r central bank Web site? What is the cntent f the perating prcedures? Wh is respnsible fr entering the debt issuance details in the debt recrding? What data surce is used? Wh validates the data? Guide t the Debt Management Perfrmance Assessment Tl Page 28 OF 47