WORKSHOP ON DEBT, FINANCE AND EMERGING ISSUES IN
FINANCIAL INTEGRATION
LONDON, 6-7 MARCH 2007
DOMESTIC DEBT AND ACHIEVING
MDGS IN LICS
Presentation by
Dinesh Dodhia
Rappidd Consultancy Ltd
Introduction
MDGs major challenge for LICs: SubSaharan Africa far from achieving by 2015.
Key requirement: Govt. & donor resources
targeted at MDGs.
Debt servicing: claim on Govt resources:
external debt (ED) reduction to HIPCs
Govt need to service domestic debt (DD),
which if freed, could be utilised for MDGs
Domestic Debt in LICs:
Some Stylised Facts
66 LICS (1995-2004) av. DD/GDP ratio &
DD//TD= about 20%.
Non-CFA African HIPCs (1980s/90s)
DD/GDP=6-9%, but DD/TD fell 22% to 6%:
End-2005 DD/GDP significant in GuineaBissau, Ethiopia, Sierra Leone, Burundi,
Zambia & Guinea.
DD taken hold in CFA HIPCs
LA HIPCs sharp increases in 2000-03, but
reduced.
Domestic Debt in LICs: Some
Stylised Facts
Other African LICs, Kenya & Nigeria
significant reliance: Kenya up Nigeria down
Asian LICs, Sri Lanka DD/GDP=47%
TD/GDP=100%
DD/GDP underestimated
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LG & SOE debt excluded
arrears & other un-securitised debt not clear
CLs can be very large.
DD/TD expected to increase with ED
reduction
Fiscal/Budgetary Impact
of Domestic Debt Burden
Non-CFA Af. HIPCs (1980-2000): despite DD/TD
decline DISP/TISP>40%
 AIDIR=21% AIFIR=1%
66 LICs (1995-2004) DISP/TISP> 40% RDIR=
3%.
Govts resorted to domestic borrowing
 to reduce external vulnerability
 cap on non-concessional external borrowing in
IMF programs.
Recently RDIR fallen, but in CP HIPCs Ethiopia,
Zambia & Tanzania DISP>FISP
Sri Lanka DISP/GDP=6%, EISP/GDP=0.7%
Fiscal/Budgetary Impact of
Domestic Debt Burden
Short maturity structure
Shallowness of financial sectors
Concentration of the investor base
Debt Sustainability &
Domestic Debt in LICs
HIPC Initiative established ED
thresholds & relief given to bring ratios
below thresholds

Did not preclude IMF considering DD
burden, when serious macroeconomic
concern (2003 programmes of Bolivia,
Ghana and Nicaragua)
Debt Sustainability &
Domestic Debt in LICs
IMF/WB DSF: forward looking DSAs assessed
in relation to indicative thresholds to establish
risks of debt distress

Advising the strategies of lending institutions,
especially IDA in determining grant/credit mix.
IMF/WB against DD in DSF due to difficulties of
determining empirical thresholds:
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lack of historical data series,
different characteristics of DD & ED
purpose of DSF to guide official lending decisions.
Debt Sustainability &
Domestic Debt in LICs
CHMF: Need to work out prudential ratios for
DD through more research & analysis.

DD/GDP=10% typical African HIPC, situation
varying according financial depth, with TPD/GDP=
40-60% depending on policies and institutions.
MDRI: bringing down NPV ED ratios well below
DSF indicative thresholds
perverse effect
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giving non-participating HIPC creditors less
incentive to provide debt relief
increasing complacency of governments on tackling
DD shortcomings
Rationale for Debt Relief,
MDGs & Domestic Debt
HIPC Initiative predated MDGs, although
underpinnings with poverty alleviation.
MDRI more explicit link
Should DD holders provide debt relief
internal borrowing: transfer of purchasing
power within country.
 Debt cancellation by DD holders: a tax.

Positive: if resources released used by
Govt for MDGs
Rationale for Debt Relief,
MDGs & Domestic Debt
Negative:
 if resources transferred affected private sector
activity, growth & poverty reduction.
 reneging trade contractual payments affected
willingness of private sector to provide future
credit to Govt
 securitised debt holders deterred from holding
future government debt, adversely impacting on
dev of financial markets.
action that serves to reduce the high DD servicing
burden, through debt restructuring: benefit to MDGs
Rationale for Debt Relief, MDGs
& Domestic Debt
Should donors reduce DD stock
If existing aid diverted to reduce DD
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Negative: resources taken away from MDGs, unless
further rebalancing of public expenditure,
Positive:
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would support private sector credit & investment, hence long
term growth, poverty alleviation & MDGs.
Government’s credit standing improved resulting in lower
future debt servicing cost
Constraint on reducing DD eased if additional
external resources utilised for DD reduction
Dealing with DD Burden:
What can LIC Governments Do?
Improve DD database
set up of machinery to verify arrears
claims, including agreement on disputed
claims, with recording on central register.
 promote centralised data on CLs

Make norms
Total public DSA
 MDG scenario
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Dealing with DD Burden:
What can LIC Governments Do?
DS dependent on macroeconomic variables,
having bearing on MDGs
Need to focus on
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Measures to enhance growth,
Maintaining strong anti-inflationary policies to ensure
low interest rates
Maintaining fiscal discipline, while enhancing MDG
related expenditures
Reforms to reduce quasi fiscal costs associated with
SOEs
Dealing with DD Burden:
What can LIC Governments Do?
Domestic Debt Restructuring
use opportunity of low inflationary &
interest rate environment to refinance
expensive debt instruments
 explore prospects for lengthening
maturity structure of DD instruments by
test issues without significant
increases in yields.
 Develop policies to broaden investor
base
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Dealing with DD Burden:
What can LIC Governments Do?
Securitize arrears to ensure orderly
settlement

Offer incentives to settle upfront a
certain proportion of arrears or all
credits up to a certain limit
seek debt reduction along the model
of Brady bonds
Domestic Debt Reduction
& Donors
Donors’ role in providing grants, other
concessional aid & exceptional
financing through debt relief
DD candidate most suited for providing
future donor debt relief
Assist LICs to clear verified arrears, fully
or partially with the remainder
securitised.
Domestic Debt Reduction
& Donors
Assist LICs to reduce high DD ratios:
options
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below a uniform threshold, (10%): added
benefit of retiring short term debt &
improving DD maturity profile
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Negative: does not distinguish between
different LIC circumstances
Reduce DD according to LIC
circumstances
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but depends on IMF diagnosis & willingness of
donors to provide additional resources.
Domestic Debt Reduction
& Donors
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Insert degree of automaticity based on
individual LIC circumstances
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DD/GDP relief not > 10%, with eligibility for
HIPCs with DD/GDP>20% or TPD/GDP 4060% depending on the quality of policies &
institutions.
Assist LICs to extend DD maturities by
guaranteeing interest payments on the
later portions of maturity
Provide TA for development of long term
institutional investors
Domestic Debt Reduction
& Donors
Provide TA for debt management
WB proposal: global debt management
partnership providing TA on a standardised
diagnostic tool & work with select group of
LICs demonstrating commitment to sound
debt management.
 Related idea: donor funded partnership for
capacity building, dissemination of
international best practices & knowledge
transfer on domestic debt management
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