Management of External Debt -

International Experiences and Best Practices

Dr. Tarun Das*,

Economic Adviser, Ministry of Finance, India
And Resource Person, UNITAR, Geneva.

November 2005

_______________________________________________________________________

* This report expresses personal views of the author and should not be attributed to the
views of the Ministry of Finance, Government of India or the UNITAR. The author
would like to express his gratitude to the UNITAR for providing an opportunity to
prepare this report and the Ministry of Finance, Government of India for granting
necessary permission for that.

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 Management of External Debt -
International Experiences and Best Practices

Dr. Tarun Das, Economic Adviser, Ministry of Finance, India

And Resource Person, UNITAR, Geneva.

Contents

1. Conceptual Issues
1.1 Definition of external debt
1.2 Debt Sustainability and Fiscal Deficit
1.3 Debt Sustainability and Current Account Deficit
1.4 Liquidity versus Solvency

2. Risk and Debt Sustainability Measurements

2.1 Economy wide model in ALM framework
2.2 Different Types of Risk
2.3 Risk Management
2.4 Sustainability Indicators
2.5 World Bank Classification of External debt

3. Inter Country Comparisons

3.1 Top ten debtor countries
3.2 Selected countries in Asia and Pacific
3.3 South Asia, and East Asia & Pacific

4. International Best Practices

4.1 New Zealand
4.2 Australia
4.3 Ireland
4.4 European Union
4.5 India

5. External Debt situation in Indonesia

6. Lessons from international best practices

Selected References
Statistical Tables

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 1. Conceptual Issues

Debt sustainability basically implies the ability of a country to service all debts – internal
and external on both public and private accounts- on a continuous basis without affecting
adversely its prospects for growth and overall economic development. It is linked to the
credit rating and the creditworthiness of a country. However, there is no simple answer to
the question- what should be the sustainable or optimal level of debt for a country?
Before discussing various measures for sustainable debt management, it is useful to
clarify certain basic concepts regarding measurement of external debt.

1.1 Definition of external debt

The Guide on external debt statistics jointly produced by the Bank for International
Settlements (BIS), Commonwealth Secretariat (CS), Eurostat, International Monetary
Fund (IMF), Organisation for Economic Co-operation and Development (OECD), Paris
Club Secretariat, United Nations Conference on Trade and Development (UNCTAD) and
the World Bank and published by the IMF (2003) defines “Gross external debt, at any
time, as the amount of disbursed and outstanding contractual liabilities of residents of a
country to non-residents to repay the principal with or without interest, or to pay interest
with or without principal”.

This definition is crucial for collection of data and analysis of external debt:

1. First, it talks of gross external debt, which is directly related to the problem of
debt service, and not net debt.

2. Second, for a liability to be included in external debt it must exist and must be
outstanding. It takes into account the part of the loan, which has been disbursed
and remains outstanding, and does not consider the sanctioned debt, which is yet
to be disbursed, or the part of the debt, which has already been repaid.

3. Third, it links debt with contractual agreements and thereby excludes equity
participation by the non-residents, which does not contain any liability to make
specified payments.

4. Fourth, the concept of “residence” rather than “nationality” is used to define a

debt transaction hereby excluding debt transaction between foreign-owned and
domestic entity within the geographical boundary of an economy. Besides, while
borrowing of overseas branches of domestic entities including banks would be
excluded from external debt, borrowing from such overseas branches by domestic
entities would b included as part of external debt.

5. Fifth, it talks of contractual agreements, and excludes contingent liabilities. For a

liability to be included in external debt, it must exist at present and must have
contractual agreement.

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 6. Finally, the words “principal with or without interest” include interest free loans
as these involve contractual repayment liabilities, and the words “interest with or
without principal” include loans with infinite maturity such as recently popular
perpetual bonds as these have contractual interest payments liabilities.

Three other concepts- one relating to interest payments, another relating to currency and
another relating to short-term debt need some clarification. While calculating interest, in
general an accrual method rather than the actual cash-flow method is used. As regards
currency, debt is made in different currencies and it is a common practice to convert all
debt in a single foreign currency, say US dollar, and also in domestic currency. In some
cases, debt from non-residents could be denominated in terms of domestic currency. As
per definition of external debt, such debt should form a part of external debt, even though
it may not be fully convertible.

In general, short-term debt is defined as debt having original maturity of less than one
year. However, Southeast Asian crisis highlighted the necessity to monitor debt by
residual maturity. Short-term debt by residual maturity comprises all outstanding debt
having residual maturity of less than one year, irrespective of the length of the original
maturity. Residual maturity concept is distinctly superior to original maturity concept.

1.2 Debt Sustainability and Fiscal Deficit

Debt sustainability is closely related to the fiscal deficit, particularly to the primary
deficit (i.e. fiscal deficit less interest payments). Sustainability requires that there should
be a surplus on primary account. It also requires that the real economic growth should be
higher than the real interest rate. Countries with high primary deficit, low growth and
high real interest rates are likely to fall into debt trap.

1.3 Debt Sustainability and Current Account Deficit

Economic theory states that high fiscal deficit spills over current account deficit of the
balance of payments. Persistent and high levels of current account deficit is an indication
of the balance of payments crisis and needs to be tackled by encouraging exports and
non-debt creating financial inflows.

1.4 Liquidity versus Solvency

One important conceptual issue relates to the distinction between debt service problems
due to liquidity crunch and those due to insolvency. These concepts are borrowed from
the financial analysis of corporate bodies, but there are distinctions between firms and
countries (Raj Kumar 1999). If a firm has positive net worth but faces difficulty to meet
the obligations of debt service, it is considered to be solvent but to have liquidity
problem. When it has negative net worth, it is insolvent.

There is difficulty to apply these concepts to a country, as it is difficult to value all the
assets of a country such as natural resources, wild life, antics in museum, heritage

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buildings and monuments. Besides, firms can disappear due to insolvency problems, but
a country cannot become bankrupt nor disappear nor are overtaken or merged purely on
account of financial problems. So we need to consider medium and long term prospects
of a country in terms of growth and balance of payments.

2 Debt Sustainability Measurements

There are broadly two approaches to determine debt sustainability of a country. One is to
develop a comprehensive macroeconomic model for the medium term particularly
emphasizing fiscal and balance of payments problems, and another is to assess various
risks associated with debt and to monitor various debt sustainability ratios over time.

2.1 Economy wide model in ALM framework

Economy wide model in general is constructed in the Asset and Liability Management
(ALM) Framework and is aimed at minimizing cost of borrowing subject to specified
risks or to minimize risk subject to specified cost. Benefits of such models are quite
obvious in the sense that the model can be used not only for debt management but also
for determination of optimal growth, fiscal profiles, medium term balance of payments
etc. However, building up such models requires not only huge data but also expertise on
the part of modelers for which there may be constraints in developing countries.

2.2 Different Types of Risk

There should be a framework that identifies and assesses the financial and operational
risks for the management of external debt. Risks can be grouped in three broad heads viz.

(A) External market based risks which include

 Liquidity risk
 Interest rate risk
 Credit risk
 Currency risk
 Convertibility risk
 Budget/ Fiscal risk

(B) Operational and Management Risks which include

 Operational risk
 Control systems failure
 Financial error risk, and

(C) Country specific and political risks.

Box-1 provides a brief discussion the nature and implications of these risks.

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 Box 1. Risks for Management of External Debt

(A) External Market-Based Risks

(A1) Liquidity risk. The pledging of reserves as collateral with foreign financial institutions as
support for loans to either domestic entities, or foreign subsidiaries of the reserve management
entity, renders reserves illiquid until the loans are repaid. Liquidity risks also arise from the
direct lending of reserves to projects (particularly in real estate and share markets) with returns
in domestic currency or to enterprises, which are subject to shocks in external and domestic
markets and are unable to repay their liabilities in time.

In fact, one of the major factors leading to East Asian financial crisis in 1997-1998 was that
short-term external borrowing was invested in protected or illiquid sectors having low return and
long gestation period (real estate and petrochemicals in Indonesia, Thailand, Malaysia), sectors
with high or excess capacity having low or negative returns (steel, ships, semiconductors,
automobiles in Korea), non-tradable (such as land, office blocks and condominiums in Thailand)
that generate return in domestic currency and did not generate foreign exchange; in
automobiles and electronics with inadequate attention to profitability, and
speculative and unproductive lending in share markets. This created liquidity
problem due to maturity mismatch between assets and liabilities of the
financial intermediaries.

(A2) Interest rate risks. While fixed interest rate has the advantage of having fixed obligations
of interest payments over time, there may be a substantial loss in a regime of falling interest
rates and global trends of soft interest rates. Solution lies to have a proper mix of variable and
fixed interest rates.

Losses may also arise on assets from variations in market yields that reduce the value of
marketable investments below their acquisition cost. Losses may also arise from operations
involving derivative financial instruments.

(A3) Credit risk. Losses may arise from the investment of reserves in high-yielding assets that
are made without due regard to the credit risk associated with the asset. Lending of reserves by
the Central Bank to domestic banks and overseas subsidiaries of reserve management entities,
may also expose reserve management entities to credit risk.

(A4) Currency risk. Some element of currency risk is unavoidable with external debt. But,
there are instances to denominate debt in a few currencies in anticipation of favorable exchange
rates. Subsequent adverse exchange rate movements may lead to large losses.

(A5) Convertibility risk: Easy convertibility of domestic currency may lead to flight of capital
at the slight anticipation of crisis.

(A6) Budget/ Fiscal Risk: Fiscal risk may arise from unanticipated shortfalls in revenue or
expenditure overruns. Government should consider both budget and off-budget liabilities and try
to minimise contingent liabilities, which may represent a significant balance sheet risk for a
government and are a potential source of future fiscal imbalances. Sound public policy
requires that a government needs to carefully manage and control the risks of their
contingent liabilities. The most important aspect of this is to establish clear criteria as to

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when government guarantees will be used and to use them sparingly.
Experience in the industrialised countries suggests that more complete disclosure, better
risk sharing arrangements, improved governance structures for state-owned entities and
sound economic policies can lead to substantial reductions in the government’s exposure
to contingent liabilities.

(B) Operational and Management Risks

(B1) Operational Risk is the risk that arises from improper management systems resulting in
financial loss. It is due to improper back office functions including inadequate book keeping and
maintenance of records, lack of basic internal controls, inexperienced personnel, and computer
failures. Probability of default is high with inadequate operational and management systems.

(B2) Control system failure risks arise due to outright fraud and money laundering because of
weak or missing control procedures, inadequate skills, and poor separation of duties.

(B3) Financial error risk. Incorrect measurement and accounting may lead to large and
unintended risks and losses.

(c) Country specific and political risks influence multinational companies choice
between exports and investments, and act as deterrents for foreign investment, whereas
scale economies, lower wages, fiscal incentives, high yields, trade openness and
agglomeration effects stimulate non-debt creating financial flows. Foreign capital is
attracted by countries which allow free repatriation of capital and profits, and donot
insist on appropriation of private capital in public interest.

2.3 Risk Management

Although there is no unique solution to tackle various types of risk, general risk
management practices of the government aim at minimizing risk for government bodies
and public enterprises. These include development of ideal benchmarks for public debt
and monitor and manage credit risk exposures. Typical risk management policies are
summarized in Table-1.

Table-1 Policies for Risk Management

Type of Risk Risk Management Policies

1. Liquidity risk (a) Monitor debt by residual maturity

(b) Monitor exchequer cash balance and flows
(c) Maintain certain minimum level of cash balance
(d) Maintain access to short-term borrowing
(e) But, fix limits for short-term debt
(f) Pre-finance maturing debt
(g) Do not negotiate for huge bullet loans
(h) Smooth the maturity profile to avoid bunching of debt services

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 (i) Develop liquidity benchmarks
2. Interest rate risk (j) Fix benchmark for ratio of fixed versus floating rate debt
(k) Maintain ratio of short-term versus long-term debt
(l) Use interest rate swaps
3. Credit risk (m) Have credit rating of various scrips by major credit rating
organizations such as S&P’s, Moody’s, Japan Bond Research
Institute etc.
(n) Identify key factors that determine credit-rating
(o) Develop a culture of co-operation and consultation among different
departments and with credit rating organisations
(p) Set overall and individual counter-party credit limits
4. Currency risk (q) Fix benchmark for the ratio of domestic and external debt
(r) Fix ratios of short-term and long-term debt
(s) Fix composition of currencies for external debt
(t) Fix single currency and currency pool debt
(u) Use currency swaps and have policies for use of market derivatives
(v) Try to have natural hedge by linking dominant currency of exports
and remittances to the currency denomination of debt
5. Convertibility risk (w) It is better to have gradual and cautious approach towards capital
account convertibility.
(x) The liberalisation of capital accounts should be done
in an orderly manner in line with the strengthening of
domestic financial systems through adequate
prudential and supervisory regulations.
(y) The golden rule is to encourage initially non-debt
creating financial flows (such as foreign direct
investment and portfolio equity investment) followed
by long term capital flows.
(z) Short term or volatile capital flows may be liberalised
only at the end of capital account convertibility.
6. Budget Risk (aa) Enact a Fiscal Responsibility Act.
(bb) Put limits on debt outstanding and annual borrowing as a
percentage of GNP or GDP
(cc) Use government guarantees and other contingent liabilities (such
as insurance and pensions etc.) judiciously and sparingly
(dd) Fix limits on contingent liabilities
(ee) Fix targets on fiscal deficit and primary deficit
(ff) Fix limits on short term borrowing
(gg) Monitor debt service payments

7. Operational risks (hh) Allow independence and transparency of different offices

(such as front, back, middle and head offices) dealing with
public debt
(ii) Strengthen capability of different offices
(jj) Try to achieve general political consensus in policy
formulations.

8. Country specific (kk) Have stable and sound macro-economic policies

and political risk (ll) Have co-ordination among monetary and fiscal authorities

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 (mm)Try to achieve general political consensus for policy
formulation.

2.4 Sustainability Indicators

Debt sustainability indicators are the most widely used ratios for debt management. These
indicators express outstanding external debt and debt services as a percentage of gross
domestic product or other variables indicating the strength of the economy. Some
commonly used debt sustainability indicators are given in Table-2.

Table-2: Debt Sustainability Indicators

Purpose Indicators

1. Solvency ratios (a) Interest service ratio – the ratio of interest payments to
exports of goods and services (XGS).
(b) External debt to GDP ratio
(c) External debt to exports ratio
(d) External debt to revenue ratio
(e) Present value of debt services to GDP ratio
(f) Present value of debt services to exports ratio
(g) Present value of debt services to revenue ratio
2. Liquidity (h) Basic debt service ratio- Ratio of total debt services
monitoring ratios (interest payments plus repayments of principal) to XGS
(i) Cash-flow ratio for total debt or the total debt service
ratio (i.e. the ratio of total debt services to XGS)
(j) Interest payments to reserves ratio.
(k) Ratio of short-term debt to XGS
(l) Import cover ratio- Ratio of total imports to total foreign
exchange reserves.
(m) International reserves to short-term debt ratio
(n) Short-term debt to total debt ratio
3. Debt burden ratio (o) Total external debt outstanding to GDP (or GNP) ratio
(p) Total external debt outstanding to XGS ratio
(q) Debt services to GDP (or GNP) ratio
(r) Total public debt to budget revenue ratio
(s) Ratio of concessional debt to total debt
4. Debt structure (t) Rollover ratio- ratio of amortization (i.e. repayments of
indicators principal) to total disbursements
(u) Ratio of interest payments to total debt services
(v) Ratio of short-term debt to total debt
5. Public sector (w) Public sector debt to total external debt
indicators (x) Public sector debt services to exports ratio
(y) Public sector debt to GDP ratio
(z) Public sector debt to revenue ratio

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 (aa) Average maturity of non-concessional debt
(bb) Foreign currency debt over total debt

6. Financial sector (cc)

Open foreign exchange position- Foreign currency assets
indicators minus liabilities plus long term position in foreign
currency stemming from off-balance sheet transactions
(dd) Foreign currency maturity mismatch
(ee) Ratio of foreign currency loans for real estate to total
credits given by the commercial banks
(ff) External sector related contingent liabilities
(gg) Trends of share market prices
(hh) GDRs and Foreign currency convertible bonds issued
(ii) Inflows of FDI and portfolio investment
7. Corporate sector (jj) Leverage (debt/ equity ratio)- Ratio of debt to equity
indicators (kk) Interest to cash flow ratio
(ll) Short-term debt to total debt
(mm) Return on assets
(nn) Exports to total output ratio
(oo) Net foreign currency cash flow
(pp) Net foreign currency debt over equity
8. Dynamic ratios (qq) Average interest rate/ growth rate of exports
(rr) Average interest rate/ growth rate of GDP
(ss) Average interest rate/ growth rate of revenue
(tt) Change of PV of debt service/ change of exports
(uu) Change of PV of debt service/ change of GDP
(vv) Change of PV of debt service/ change of revenue
Source: Raj Kumar (1999) and IMF (2003)

2.5 World Bank Classification of External debt

On the basis of ratio of PV to GNI and PV to XGS (exports of goods and services), the
World Bank in their report on Global Development Finance 2005 has classified countries
into three categories viz. low indebted, moderately indebted, and severely indebted
countries as indicated in Table-3. While PV takes into account all debt servicing
obligations over the life span of debt, GNI indicates country’s total potentials and XGS
indicates foreign exchange earnings reflecting debt-servicing ability. Countries are also
classified into low and middle income depending on the level of per capita income.

Table-3 Cross classification of countries by income level and indebtedness

Indebtedness → Severely Indebted Moderately Indebted Either Less Indebted

Either PV/XGS > 220% Or 132%<PV/XGS<220% Both PV/XGS<132%
PV/GNP > 80% or 48%<PV/GNP<80% and PV/GNP<48%
Income Level ↓
Low income: GNI per Severely Indebted Moderately Indebted Less Indebted
capita less than US$765 Low income (SILI) Low income (MILI) Low income (LILI)

Middle income: GNI per Severely Indebted Moderately Indebted Less Indebted

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capita between US$766 Middle income (SIMI) Middle income (MIMI) Middle income (LIMI)
and US$9,385

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 3 Inter Country Comparisons

3.1 Top ten debtor countries

Annex-2-A and Annex-2-B provide key debt indicators for top ten debtor countries in
the world. It is observed that Brazil tops the list in terms of total external debt followed
by China, Russian Federation, Argentina, Turkey, Mexico, Indonesia, India, Poland and
Philippines in the order mentioned. It may be noted that out of ten top debtor countries in
the world, the majority of the countries (viz. Russian Federation, China, Turkey,
Indonesia, India and Philippines) are from the continent of Asia, and three countries (viz.
Brazil, Argentina and Mexico) belong to Latin America, and only one country (i.e.
Poland) belongs to Europe.

Brazil, Argentina, Turkey and Indonesia are classified as severely indebted countries,
whereas Russian Federation, Poland and Philippines are moderately indebted and China,
Mexico and India are less indebted.

India’s position has improved over the years. India ranked first in terms of total external
debt in 1980, but it position improved to third in 1990 and further to eighth in 2002-2003.

3.2 Selected countries in Asia and Pacific

Table-4 classifies the selected countries by the levels of per capita income and external
indebtedness. Bhutan, Kyrgyz Republic, Lao PDR, Myanmar and Tajikistan are classified
as severely indebted low income (SILI) countries, while Indonesia, Kazakhstan,
Maldives, Samoa and Turkey fall under the category of severely indebted middle income
(SIMI) countries. External debt in Indonesia is discussed in details in section-5.

Table-4: Classification of selected countries in Asia and Pacific

by levels of external indebtedness and per capita income in 2003

Severely indebted Moderately indebted Less indebted

Low income Middle income Low income Middle income Low income Middle income
SILI SIMI MILI MIMI LILI LIMI
Bhutan Indonesia Cambodia Malaysia Bangladesh Armenia
Kyrgyz Rep Kazakhstan Mongolia Philippines India Azerbaijan
Lao PDR Maldives Pakistan Russian Fed Nepal China
Myanmar Samoa PN Guinea Sri Lanka Vietnam Fiji
Tajikistan Turkey Solomon Island Turkmenistan Iran Ism Rep
Uzbekistan Thailand
Tonga
Vanuatu

3.3 South Asia, and East Asia & Pacific

Table-5 indicates that despite severe foreign exchange and financial crisis at the end of
1990s, East Asia and Pacific countries as a group achieved significant improvement in the
external debt burden in 1990-2004. South Asian countries as a group also improved their
debt situation. South Asia has higher shares of multilateral and concessional debt than

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those in East Asia and Pacific. On the other hand, the ratio of reserves as a percentage of
external debt is much higher in East Asia and Pacific than in South Asia despite
significant improvement in the ratio in South Asia over the period.

Table-5 : Trends of Key Debt Indicators

Key external debt indicators East Asia and Pacific South Asia
1980 1990 2000 2004 1980 1990 2000 2004

EDT/XGS (%) 179 132 78 49 154 303 155 113

EDT/GNI (%) 17 36 32 24 16 31 27 23
TDS/XGS (%) 27 18 11 8 12 28 15 10
INT/XGS (%) 14 7 4 2 5 15 6 4
INT/GNI (%) 1 2 2 1 1 2 1 1
RES/EDT (%) 51 31 57 141 40 7 30 78
RES/MGS (months) 9 5 6 8 6 2 5 10
Short-term/ EDT (%) 23 16 13 27 7 10 4 4
Concessional/ EDT (%) 19 29 21 21 73 55 50 52
Multilateral/ EDT (%) 9 15 13 12 25 31 38 36
Notes: EDT = External debt outstanding, GNI = Gross national income
TDS = Total debt services, INT = Interest payments
XGS = Exports of goods and services, MGS = Imports of goods and services
RES = Foreign exchange reserves, Short term = Short term debt
Concessional = Concessonal debt, Multilateral = Multilateral debt

3.3.1.1.1.1.1.1 International Best Practices

3.4 New Zealand

The New Zealand Debt Management Office (NZDMO) is responsible for the
management of public debt since the separation of debt management policy from
monetary policy in 1988. Although NZDMO is placed in a division in Treasury, it
maintains some degree of autonomy from the rest of the government and has its own
advisory board. The board meets at least four times a year and consists of a senior
member of the Treasury and experts in risk management. The board provides advice and
oversight on wide range of issues relating to operational risk management and promotes
transparency in debt management policies and supervision.

The treasurer or the head of the NZDMO recommends benchmarks for sovereign debt in
terms of currency mix and interest rate sensitivity, and trading limits imposed on the
portfolio manager. The basic objective of the NZDMO is to identify a low risk portfolio
of net liabilities consistent with the government’s aversion to risk and expected costs for
risk reduction. In order to minimize the net risk exposure, the NZDMO has set the
duration and currency profile of the liabilities to match its assets. As most of the
government assets are denominated in New Zealand dollars, the strategy has entailed
gradual elimination of net foreign currency debt (which was achieved in September 1996)

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and lengthening maturity of domestic debt. Assets and liabilities are monitored on daily
basis and the model also incorporates private sector debt management practices. The
actual performance of portfolio managers is evaluated against the benchmark portfolio on
daily basis.

Over these years NZDMO has undertaken considerable amount of works relating to
analysis and management of the government liabilities within an Asset and Liability
Management (ALM) framework (Anderson 1999). It has developed both economy wide
models and specific models for the management of public debt. In the wider model, basic
objective is to construct a debt portfolio, which aims at hedging the economy as a whole
against shocks to national income or net worth. It requires information on the nature and
degree of private hedging mechanisms, which are highly dispersed and very expensive to
collect. Therefore, NZDMO concentrates on the management of the government assets
and liabilities. It has improved accounting principals and has adopted generally accepted
accounting and auditing practices.

In recent times, focus has been on maximizing returns and minimizing costs of assets and
liabilities using the modern portfolio theory. In contrast to earlier works, it does not
include physical assets that do not directly produce returns. The model estimates the
relationship between the values of various asserts classes (e.g. equities, real estate etc,)
and various government liabilities (e.g. debt and the undefended pension liabilities). To
reflect the Crown’s total portfolio, the model also includes the measures of the Crown’s
future tax revenues and future social expenditure liability.

ALM relates essentially to the management of market risk and derivatives are used to
achieve desired outcomes. On the basis of ALM modeling, NZDMO specifies
benchmarks for various sustainability indicators such as ratio of domestic and external
debt, ratio between debts with floating and fixed interest rates, currency mix, maturity
mix, limits on short term debt, interest rates etc.

Like many sovereign debt management agencies the NZDMO is committed to the
principles of transparency, neutrality and even-handedness in its activities. The
experience of NZDMO (Anderson 2000) leads to the following conclusions:

(a) ALM framework is conceptually appealing but requires huge data.

(b) It is relatively easy to include all financial assets and liabilities.
(c) The extension of ALM to physical assets and non-traded sovereign
instruments raises a number of issues and practical difficulties.
(d) ALM framework is only one component of prudent debt management.
Measures to manage other risks, particularly refinancing, liquidity, and
operational risks need to be established. However, gains in risk
management and cost reduction are considerable.

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 3.5 Australia

The Australian Office of Financial Management (AOFM) established on July 1, 1999 is

an independent agency within Treasury and a specialised office to manage Australian
government’s debt position (McCray 2000). However, it has important practical linkages
with the parent departments. Its major task is to identify, measure, monitor and analyze
all kinds of risk, particularly market risk, funding/ liquidity risk, credit risk, operational
risk etc.

AOFM recognizes that capital account convertibility and liberalisation of trade and
financial flows present both opportunities and challenges for debt management.
Opportunities lie in accessing a truly global and expanded market for debt with
potentially low cost. However, risks arise due to increased financial market volatility and
internationally mobile creditors and investors leading to vulnerability of debt service
costs, market exposures of debt portfolio and balance sheet net worth.

Australian government introduced accrual budgeting and accounting systems to tackle

risks and contingent liabilities. There is an increasing emphasis on outcomes-oriented
approach to performance reporting, public sector transparency and accountability, and
focus on net worth and risks to net worth.

A comprehensive risk management framework encompassing funding, market, credit,

liquidity and operational risks provide the basis for a coherent and objective planning for
debt. A unique feature of the Australian debt management is that the basic organisational
structure, staffing numbers, skill net, financial resourcing, delegation powers and
accountability arrangements within AOFM had practically remained unchanged since its
inception.

3.6 Ireland

The National Treasury Management Agency (NTMA) in Ireland is an independent public

debt office and is in charge of management of all public debt- either internal or external
and also all contingent liabilities (such as savings schemes of the government, pension,
provident and insurance funds). The benchmarks are designed in consistent with the
annual debt-service budget within which the NTMA has to operate. As such the review of
the benchmark is annual and matches the budget cycle.

At the beginning of the year, NTMA signs a Memorandum of Understanding (MOU)

with the Finance Minister and specifies benchmarks for various parameters such as extent
of internal and external loan, currency mix, maturity mix, interest rare mix etc. These
benchmarks are developed after careful examination and measurement of various risks
such as liquidity, debt refinancing, maturity of debt etc. MOF does not interfere with the
day-to-day working of the NTMA, which has distinct front, back, middle and head
offices and dealing rooms.

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The NTMA attempts to beat the benchmark both by funding at different dates than the
benchmark stipulations in order to take advantage of favourable market conditions, and
by issuing at different maturities within the broad guidelines regarding proportions of
foreign currency and floating rate debt. The performance of the NTMA is evaluated at the
end of the year in terms of actual and benchmark portfolios and costs. If NTMA performs
better than the benchmarks agreed in the MOU, it retains the profits of debt management.
Over the years, NTMA has emerged as a highly technical, efficient and profitable
organisation in debt management.

3.7 European Union

The Maastricht Treaty of the European Union set up the framework for the European
Monetary Union, which includes introduction of common currency – the Euro. The
Treaty also sets out four convergence criteria to achieve price stability, fiscal prudence
and debt sustainability. These include the following:
(1) Average consumer price inflation should be sustainable and, in the year prior to
examination, should not be more than 1.5 percentage points over that of, at most,
the three best performing countries.
(2) The country should not have an excessive deficit. Prima facie a government’s
budget deficit should not exceed 3% of GDP, and
(3) Its debt should not be more than 60% of GDP.
(4) Average nominal long-term interest rates should not exceed, by more than two
percentage points the long-term interest rates of, at most, the three best
performing member states in terms of price stability.

Individual countries within European Union have developed independent debt

management systems and procedures within these broad principles. Several countries
have developed benchmarks for currency composition and maturity mix of external debt.
Institutional constraints that limit influence the benchmarks include limiting currency
composition of foreign debt to that of reserves portfolio (e.g. United Kingdom) and
maintaining a fixed percentage of foreign exchange in a specific currency such as the
ECU to develop debt market of that currency (e.g. France and Italy).

In Sweden, the benchmark serves as the limit within which the foreign currency debt may
be exposed to currency and interest rate risks. The Sweden debt Office (SNDO) lays
down the risk limits and takes position in the foreign exchange and bond markets to bring
the long-term cost of the debt below that of benchmark portfolio. The currency
composition of the benchmark primarily matches the weights of the currencies in the
ECU basket while US dollar and Japanese Yen are included in the portfolio for
diversification. The SNDO may deviate from the currency mix benchmark by 3
percentage points, and that for duration benchmark by 0.5 percentage points. The interest
rate structure of the benchmark is based on diversified borrowing along the yield curve to
reduce shocks to specific parts of the yield curve and to reduce bunching of debt
payments over time. In Denmark, benchmarks for various indicators and the maximum
level of deviations from the benchmarks are specified.

16
In Hungary, the debt management office located in the Ministry of Finance is responsible
for servicing the cost of the net sovereign external debt. The authorities align the currency
composition of the external debt through hedging operations with that of the currency
basket to which the national currency is pegged. Emphasis is placed on lengthening the
maturing of the debt, maintaining more than three quarters of the debt in fixed rate
instruments, and evenly spreading debt redemptions to avoid rollover risks.

3.8 India

External debt indicators of India showed steady improvement over time. Despite severe
balance of payments difficulties due to the impact of the gulf crisis in early 1990s and
hardening of international oil prices in recent years, India never defaulted on its
obligations of external payments. On the contrary, India pre-paid $7 billion worth of
external debt to multilateral and bilateral lenders during 2003-2004. In terms of total
external debt stock, India’s position improved from the first rant in 1980 to third rank
after Brazil and Mexico in 1990 and further to the eighth rank after Brazil, China,
Argentina, Russian Federation, Mexico, Turkey and Indonesia in 2003 (Annex-2-A). The
debt-to-GDP ratio declined continuously from 38 % in 1991 to 20 % in 2003 and further
to 18 % in 2004. The debt-service ratio (i.e. the ratio of total debt services to gross
receipts on the current account of the external sector) also declined continuously from 35
% in 1990 to 16 % in 2003-2004 and further to 6 % in 2005. The World Bank now
classifies India as a “low indebted country”. External debt is predominantly long-term.
The share of short-term debt in total debt declined from 10.2 per cent in 1990-91 to 5.7
per cent in 2004-05. Eighty per cent of government debt comes from multilateral and
bilateral sources.

Table-6-A: Trends of external debt of India

Year Total Ext Debt As % of GDP Short term Official Official Conce-
End Creditors Debtors ssional
(US$ Bln) Per cent Per cent Per cent Per cent Per cent
1990-91 83.8 28.7 10.2 64 60 46
1995-96 93.7 27.0 5.4 64 57 45
2000-01 101.3 22.6 3.6 51 43 35
2001-02 98.4 21.2 2.8 52 44 36
2002-03 105.0 20.3 4.4 48 42 37
2003-04 111.7 17.8 4.0 45 40 36
2004-05 123.3 16.7 5.7 43 39 34

Table-6-B Debt sustainability indicators for India during 1990-2005 (per cent)
Year Debt service ratio Debt/ Current Short Term debt Short term debt Int. to current
Receipts ratio to Forex reserves to GDP ratio receipts ratio
1990-91 35.3 329 382 3.0 16
1991-92 30.2 312 126 3.2 13
1995-96 26.2 189 30 1.4 9
2000-01 16.2 110 9 0.8 6
2003-04 16.2 99 4 0.7 4
2004-05 6.1 95 5 0.6 2

17
18
Contingent Liabilities

Government of India raises external loans on its own account under external assistance
program and also provides guarantees to external borrowings by the public sector
enterprises, developmental financial institutions and a few private sector companies
under the BOT schemes for infrastructure development. All loans taken by the non-
government sectors from multilateral and bilateral creditors involve guarantees by the
government. Such guarantees given by the government form part of sovereign liability as
the guarantees could be invoked in the case of default by the borrower. Thus, guarantees
tantamount to contingent liability of the government. However, share of guaranteed loans
in total external debt has declined continuously over the years and now accounts for only
5.5% of total external debt.

External Debt Management- Policies and Organisational Set-up

India has been able to manage its external debt situation despite serious balance of
payments problems at the beginning of 1990s on account of gulf war leading to
disruptions of Indian exports and remittances by non-resident Indians living in the gulf.
Policy emphasis has been on resorting to concessional and less expensive fund sources,
preference for longer maturity profiles, monitoring short-term debt, pre-payment of high
cost debt and encouraging exports and non-debt creating financial flows.

Careful management of external debt allowed India to retain policy-making sovereignty

and not to be wholly influenced by the conditionalities imposed by the multilateral
funding agencies. In fact, in recent years India prepaid a part of more expensive debt
from the World Bank, the Asian Development Bank and some bilateral countries. They
insisted for substantial reduction of food and fertilizer subsidies and overall fiscal deficit,
which were not politically feasible for a coalition government. Effective public debt
management also helped government to adopt a step-by-step approach to liberalization
and to adopt effective safety nets for the weaker and vulnerable sections of the society by
expanding and strengthening various anti-poverty and poverty alleviation programs.

India adopted a cautious, gradual and step-by-step approach towards capital account
convertibility. Initially non-debt creating financial flows (such as FDI and portfolio
equity) were liberalized followed by liberalization of long-term debt flows and partial
liberalization of medium term external commercial borrowing. There was tight control on
short-term external debt and close watch on the size of the current account deficit. Capital
account restrictions for residents and short-term debt helped India to insulate from the
East Asian economic crisis during 1997-2000. There was high share (80% at the end of
March 2000) of concessional debt in government accounting and there was no
government borrowing from external commercial sources and no short-term external debt
on government account. Maturity of government debt concentrated towards long-end for
the debt portfolio (GOI-MOF 2005).

The organisational structure for sovereign external debt management consists of the
following offices:

19
 (a) Front offices, which are responsible for negotiating new loans. Various
divisions in the Ministry of Finance (MOF) such as Fund-Bank, ADB, EEC,
Japan, America, ECB divisions, and the Reserve Bank of India (for IMF loans)
act as front offices.
(b) Office of Controller of Aid, Accounts and Audit in the MOF acts as the Back
Office, which is responsible for auditing, accounting, data consolidation and the
dealing office functions for debt servicing.
(c) External Debt Management Unit (EDMU) in the MOF acts as the Middle
Office, which is responsible for identification, measurement and monitoring of
debt and risk, dissemination of data and policy formulation for both short and
medium term.
(d) The Finance Minister acts as the Head Office and accords final approval for
both internal and external debt.

Under the Indian constitutional provisions, States cannot borrow directly from external
sources and the Central government has to intermediate external borrowings and bear
exchange rate risk for the states. Currently, external assistance is passed on to the states
on the same terms and conditions as for normal central assistance for state plans i.e. in
90:10 mix of grant and loan to the hilly and backward states (the so-called special
category states) and 30:70 mix of grant and loan to other states. Loans carry an interest
rate of 11.5% with maturity of 20 years including moratorium of 5 years. The system
involves certain amount of concession provided to the states.

Recently, on considering the high transactions cost of large number of low value projects,
tied assistance, and strict conditionalities, government has taken a policy decision to
prune the number of bilateral creditors from over 18 to only six namely Japan, United
Kingdom, Germany, USA, European Commission and Russian Federation. Government
has also decided to pre-pay outstanding bilateral debt except to Japan, Germany, USA
and France. The decision was also partly influenced by the substantial build up of foreign
exchange reserves and low interest rates in the domestic countries.

Those bilateral countries, from which it has been decided not to receive development
assistance on government account, have been advised to provide their development
assistance to non-governmental organisations and the Universities etc. Accordingly,
countries like Australia, Belgium, Canada, Denmark, France, Italy, Netherlands, Norway,
Sweden, Switzerland and others are now providing assistance directly to the NGOs for
primary education, urban water supply and sanitation, HIV/AIDS prevention and care,
strengthening environment institutions and poverty alleviation program.

India provides technical assistance under the Technical and Economic Cooperation
(ITEC) Program and the Special Commonwealth African Assistance plan (SCAAP) to
141 developing countries in Asia, Africa, Latin America, Eastern Europe and the Pacific.
India is also participating actively in the international initiative for economic
development of HIPC (Heavily Indebted Poor Countries) and other developing countries.
Under the HIPC, India is providing credit lines to seven eligible HIPC countries viz.

20
Mozambique, Tanzania, Zambia, Ghana, Guyana, Nicaragua and Uganda. The
government has waived the outstanding dues from these countries. In addition, India
provides credit lines to a number of developing countries.

An effective system is in place to measure and monitor the level and indicators of debt.
Some of the important sustainability and liquidity indicators include external debt to GDP
ratio, debt service ratio, maturity and present value of debt, short-term debt by original
and residual maturity, ratios of debt to other indicators such as exports of goods and
services, and foreign exchange reserves. Statistical improvement and technological
upgradation have been done to monitor these parameters on real time basis.

Fiscal Responsibility and Budget Management (FRBM) Act 2003

Indian government enacted a Fiscal Responsibility and Budget Management Act in 2003.
The Act came into force in April 2004. The Act mandates the Central government to
eliminate revenue deficit by March 2009 and to reduce fiscal deficit to 3% of GDP by
March 2008. Under section 7 of the Act, the central government is required to lay before
both houses of Parliament Medium Term Fiscal Policy Statement, Fiscal Policy Strategy
Statement and Macro Economic Framework Statement along with the Annual Financial
Statement. Four fiscal indicators to be projected for the medium term. These include
revenue deficit, fiscal deficit, tax revenue and total debt as % of GDP.

The Act stipulates the following targets for the Central government:
• Reduction of revenue deficit by 0.5% of GDP or more every year.
• Reduction of gross fiscal deficit by 0.3% of GDP or more every year.
• No assumption of additional debt exceeding 9% of GDP for 2004-05 and
reduction of this limit by at least one percentage point of GDP in each year.
• No government guarantee in excess of 0.5% of GDP in any financial year.
• Greater transparency in the budgetary process, rules, accounting standards and
policies having bearing on fiscal indicators.
• Quarterly review of the fiscal situation.

Monitoring, Dissemination and Capacity Building

100% government debt data and 78% of total external debt data are computerized on the
basis of Commonwealth Secretariat DRMS. The Ministry of Finance has undertaken
projects to computerise fully NRI deposits and short-term debt, which account for the
residual 22% of total external debt.

Historical trends and future projections of debt stock and debt services are available for
analysis, scenario building and as MIS inputs. Debt Data are updated quarterly for March,
June, September, December. June 2005 debt data are now under compilation. Data by
both Creditors and Debtors classification and by currency, maturity and interest mix are
available. Data cross-classified by institutions and instruments are also available.

21
Time lag for data update is 8 weeks, which is well below the IMF benchmark set under
the Special Data Dissemination Standard (SDDS). A Status Report on External Debt is
presented by the Finance Minister to the Parliament every year. The report is also posted
on the MOF homepage.

World Bank provided a Grant under the Institutional Development Fund (IDF) for
strengthening capacity building and policymaking process for management of Indian
external debt. The Grant yielded rich dividends and involved all stakeholders in the
policy of policymaking and helped in bridging research and policy. The IDF Grant helped
to computerise the database and disbursements and payments system for external public
debt on real time basis and reduced transactions cost significantly. Under the IDF grant
the Ministry of Finance organized three international seminars and one workshop with
active participation by the World Bank, RBI, academicians and all stakeholders
concerned with external debt and non-debt creating financial flows. The executive
agencies published three Books on papers and proceedings (CRISIL 1999 and 2001 and
RBI 1999). These seminars recommended various reforms for external sectors. Most of
the policy recommendations were accepted by the government.

Ministry of Finance also set up various working groups comprising members from the
government, RBI, financial institutions, private and public corporate bodies and
professionals having expertise and the experience on the selected subjects. Members
visited foreign countries to understand international best practices for management of
external debt. These countries included Australia, Ireland, New Zealand, UK and USA.

5. External debt situation in Indonesia

Along with other countries, World Bank publishes external debt statistics for Indonesia in
the Global Development Finance (GDF). In the latest issue of GDF (2005), the World
Bank has classified Indonesia as a severely indebted middle-income country. As per the
World Bank statistics summarised in Table-7, in recent years, external indebtedness of
Indonesia has improved to some extent. The external debt to GNI ratio decreased from
117 per cent in the crisis year 1999 to 189 per cent in 2003, external debt service ratio
also declined from 30 per cent in 1999 to 26 per cent in 2003 and the share of
concessional loan in total external debt improved from 21 to 27 per cent over the same
period. The share of multilateral debt in total debt remained around 14 per cent and that
of short-term best remained around 6 per cent during 1999-2003.

However, external debt to export ratio decreased from 257 per cent to 333 per cent over
the same period and the country has foreign exchange reserves, equivalent to only 6
months imports cover.

22
 Annex-7: External Debt in Indonesia (in US$ billion)

1970 1980 1990 1999 2000 2001 2002 2003

Total Debt stock (EDT) 4.5 20.9 69.9 151.2 144.4 134.0 131.8 134.4
Long term debt 4.0 18.2 58.2 120.9 110.9 103.1 100.1 101.3
Public & guaranteed 3.6 15.0 48.0 73.7 69.8 68.7 70.1 73.4
Private non-guaranteed 0.5 3.1 10.3 47.3 41.2 34.4 30.0 27.8
Use of IMF credit 0.1 0 0.5 10.2 10.8 9.1 8.9 10.3
Short-term debt 0.3 2.8 11.1 20.0 22.6 21.8 22.8 23.0
Total debt service 0.2 3.1 9.9 17.7 16.7 15.5 17.0 18.4
Interest payments (INT) 0.05 1.5 4.0 6.0 7.4 5.9 4.0 4.3
Interest on long term debt 0.05 1.2 3.4 4.6 5.7 4.6 3.2 3.4
Interest on short term debt 0 0.3 0.5 0.9 1.2 0.9 0.6 0.6
Interest on IMF loan 0 0 0.1 0.4 0.5 0.5 0.3 0.2
Gross national income (GNI) 9.7 74,8 109.2 129.3 139.2 137.1 167.1 198.0
Exp.of goods and services (XGS) … … 29.9 58.8 74.3 65.9 68.4 71.0
Workers remittances 0 0 0.2 1.1 1.2 1.0 1.3 1.4
Imp.of goods & services (MGS) … … 33.1 53.9 66.9 59.5 60.8 63.9
International reserves (RES) 0.2 6.8 8.7 27.3 29.4 28.1 32.0 36.3
Current account balance
Sustainability Debt indicators (in per cent)

EDT/ XGS … … 234 257 194 203 193 189

EDT/ GNI 47 28 64 117 104 98 79 67
TDS/ XGS … … 33 30 23 24 25 27
INT/ XGS … … 13 10 10 9 6 6
INT/ GNI 0.5 1.9 4 5 5 4 2 3
RES/ EDT 3.5 33 12 18 20 21 24 28
RES/ MGS (months) … … 3 6 5 6 6 7
Short-term/ Total debt 7.7 13 16 13 16 16 17 18
Concessional/ EDT 62 34 26 21 21 21 24 28
Multilateral/ Total debt 0.1 9 20 13 14 15 15 15
Source: (1) World Bank, Global Development Finance 2005

6. Lessons from international best practices

International best practices for management of external debt lead to the following broad
conclusions:
(a) Management of external debt is closely related to the management of domestic
debt, which in turn depends on the management of overall fiscal deficit.
(b) Debt management strategy is an integral part of the wider macro economic
policies that act as the first line of defense against any external financial shocks.
(c) For an emerging economy, it is better to adopt a policy of cautious and gradual
movement towards capital account convertibility.

23
(d) At the initial stage, it may encourage non-debt creating financial flows followed
by liberalization of long-term and medium-term external debt.

(e) Big bullets are bad for small economies, as these can create refinancing risk that
many countries would be well advised to avoid.
(f) It is not enough to manage the government balance sheet well, it is also necessary
to monitor and make an integrated assessment of national balance sheet and to put
more attention on surveillance of overall debt- internal and external, private and
public. In each of the major Asian crisis economies- Indonesia, Korea and
Thailand- weakness in the government balance sheet was not the source of
vulnerability, rather vulnerability stemmed from the un-hedged sort-term foreign
currency debt of banks, finance companies and corporate sector.
(g) It is not sufficient to manage the balance sheet exposures, it is equally important
manage off balance sheet and contingent liabilities. Emerging as well as advanced
economies have experienced how bad banks and poorly designed bank safety nets
can lead to large costs to he public sector and an unexpected weakening of the
government’s balance sheet. Government guarantees of private debt can also have
similar adverse impact.
(h) It is necessary to adopt suitable policies for enhancing exports and other current
account receipts that provide the means for financing imports and debt services.

(i) Detailed data recording and dissemination are pre-requisites for an effective
management and monitoring of external debt and formulation of appropriate debt
management policies.

(j) There is a need for setting up an integrated Public Debt Office for the following
functions:

• To deal with both domestic & external debt

• To set bench marks on interest rate, maturity mix, currency mix, sources
of debt
• Identification and measurement of contingent liabilities
 Policy formulation for debt management
 Monitoring risk exposures
• Building Models in ALM framework

(k) It is vital that external forward liabilities and short-term debt are kept within
prudential limits.

24
(l) It is important to strengthen public and corporate governance and enhance
transparency and accountability.

(m)It is also necessary to strengthen the legal, regulatory and institutional set up for
management of both internal and external debt.

(n)
(o) A sound financial system with well developed debt and capital market is an
integral part of a country’s debt management strategy.

25
 External Debt Management Strategy

In all the East Asian crisis economies, weaknesses in financial systems as a result of weak
regulation and supervision and a long tradition of a heavy government role in credit
allocation led to misallocation of credits and inflated asset prices. Another vital weakness
of all countries was associated with large unhedged private short-term foreign currency
debt in a setting where the private corporate sector was highly leveraged.

Short-term foreign currency denominated debt created two kinds of vulnerabilities in

these economies. First, if some creditors pulled out their money, each individual creditor
had an incentive to join the queue. As a result, even a debtor that had been fully solvent
before the crisis could be plunged into insolvency. Second, such debts also created
vulnerabilities associated with the exchange rate depreciation. Exchange risk was either
borne directly by the financial institutions or passed on to the corporations as the funds
was on lent (thereby converting exchange risk into credit risk). These factors were further
complicated by the interaction of exchange rate and credit risks. Currency depreciation
led to wide spread insolvency and created additional counter-party risk, which in turn
added momentum to the exit of foreign capital.

The management of debt crisis faced by the East Asian countries was not without
precedence. Following the inception of the Latin American debt crisis in 1982, and on the
presumption that the debt problem was one of liquidity and not solvency, the initial debt
management strategy aimed at normalising the relationship between the debtors and
creditors through a combination of economic adjustment by debtor countries and
negotiations on financial relief. The financing modalities provided debtor countries with
some financial relief through interest rate spreads, reduced fees, and extension of
maturities and provision of some new finances. The negotiations conducted on a case-by-
case approach for debtor countries were co-ordinated by the private bank steering
committees in consultation with the IMF, World Bank and governments of the creditor
banks’ home countries (Islam 1998).

In the case of Asian crisis, countries succeeded in striking a reasonably comprehensive

debt-rescheduling strategy with creditor banks. The implementation of the deal was
voluntary and all creditors did not join the scheme. So long as free movement of
international capital is allowed, there is no guarantee that the debt crisis will not recur in
future. Whenever such a financial crisis occurs in future, it is necessary to formulate an
international debt management strategy on the basis of negotiations among international
private lenders, investors and borrowers for sharing the responsibility for debt relief, for
rescheduling or for delaying claims on repayment.

More effective structures for orderly debt workouts, including better bankruptcy laws at
the national level and better ways at the international level of associating private sector
creditors and investors with official efforts are needed to help resolve sovereign and
private debt problems.

26
In the case of East Asian crisis, considerable thought was given to mechanisms that
involve private sector to forestall and resolve crisis in a more timely and systematic way.
A range of options are available in this respect, viz. (a) to contract credit and swap
facilities with groups of foreign banks, to be activised in the event of liquidity pressures,
such as those contracted by Argentina and Mexico; (b) embedding call options in certain
short-term credit instruments to provide for an automatic extension of maturities in times
of crises; (c) feasible modifications of terms of sovereign bond contracts to include
sharing clauses; and (d) a possible role for creditor councils for discussion between
debtors and creditors. However, these are complex issues and need to be designed
carefully so that there are no perverse incentives, which may encourage private creditors
to bail themselves out at the first sight of difficulty, rather than providing net new
financing in the event of a crisis.

Developing countries need to strengthen their debt management strategy by developing

comprehensive debt sustainability models, which will integrate external sector,
particularly the flows of external debt, with broad macro-economic variables and provide
early warning regarding any possible debt trap. In this respect, separate debt models may
be developed with respect to sovereign external debt and private debt.

All countries need to monitor very carefully short-term debt, long-term debt by residual
maturity, all guarantees and all contractual contingent liabilities arising out of both debt
and non-debt creating financial flows.

A more comprehensive approach is needed when trying to deal with excessive private
borrowing and risk taking in the presence of large capital inflows and weak financial
systems. This often means applying more flexible exchange rates, tighter fiscal policy
and improved financial system. Domestic financial sector liberalisation should also
proceed carefully and in step with tighter financial regulation and supervision, and
internationally recognised prudential norms for capital adequacy and provisioning for
non-performing assets by commercial banks and financial institutions.

27
 Selected References

Das, Tarun (1999a) East Asian Economic Crisis and Lessons for External Debt
Management, pp.77-95, in External Debt Management, ed. by A. Vasudevan, April 1999,
RBI, Mumbai, India.

_______ (1999b) Fiscal Policies for Management of External Capital Flows, pp. 194-
207, in Corporate External Debt Management, edited by Jawahar Mulraj, December
1999, CRISIL, Bombay.

_______ (2000) Sovereign Debt Management in India, pp.561-579, in Sovereign Debt

Management Forum: Compilation of Presentations, November 2000, World Bank,
Washington D.C.

_______ (2002a) Implications of Globalisation on Industrial Diversification in Asia,

pp.ix+1-86, UN Publications Sales No.E.02.II.F.52, March 2002, ESCAP, Bangkok.

_______ (2002b) Management of Contingent Liabilities in Philippines- Policies,

Processes, Legal Framework and Institutions, pp.1-60, March 2002, World Bank,
Washington D.C.

______ with Raj Kumar, Anil. Bisen and M.R. Nair (2002) Contingent Liability
Management- A Study on India, pp.1-84, Commonwealth Secretariat, London

_______ (2003) Management of Public Debt in India, pp.85-110, in Guidelines for

Public Debt Management: Accompanying Document and Selected Case Studies, 2003,
IMF and the World Bank, Washington D.C.

_______ (2004) Financing International Cooperation- A Case Study for India, pp.1-46,
Office of Development Studies., March 2004, UNDP, UN Plaza, New York.

________ (2005a) Sustainable external debt management- International Best Practices,

pp.1-46, paper prepared for UN-ESCAP, Bangkok, September 2005.

ESCAP (2005) Implementing the Monterrey Consensus in the Asian and Pacific Region-
Achieving Coherence and Consistency, United Nations, New York, 2005.

Government of India, Ministry of Finance (2005) India’s External Debt- A Status

Report, June 2005, New Delhi.

International Monetary Fund (2003) External Debt Statistics- Guide for Compilers
and Users, 2003, IMF, Washington D.C.

_______ and the World Bank (2003) Guidelines for Public Debt Management:
Accompanying Document and Selected Case Studies, 2003, Washington D.C.

28
Jensen, Fred (2000) Trends in sovereign debt management in IBRD countries over the
past two years, pp.14-25, in Sovereign Debt Management Forum: Compilation of
Presentations, November 2000, World Bank, Washington D.C.

McCray, Peter (2000) Organisational models for sovereign debt management, pp.297-
310, in Sovereign Debt Management Forum: Compilation of Presentations, November
2000, World Bank, Washington D.C.

Raj Kumar (1999) Debt Sustainability Issues- New Challenges for Liberalising
Economies, pp.53-76, in External Debt Management, ed. by A. Vasudevan, April 1999,
RBI, Mumbai, India.

Reserve Bank of India (RBI) (1999) External Debt Management- Issues, Lessons and
Preventive Measures, pp.1-372, edited by A. Vasudevan, RBI, Mumbai, April 1999.

Sullivan, Paul (2000) The design and use of strategic benchmarks in managing risk,
pp.175-191, in Sovereign Debt Management Forum: Compilation of Presentations,
November 2000, World Bank, Washington D.C.

World Bank (2000) Sovereign Debt Management Forum: Compilation of Presentations,

November 2000, World Bank, Washington D.C.

_______ (2005a) World Development Indicators 2005, World Bank, Washington. DC.

_______ (2005b) Global Development Finance 2005, World Bank, Washington. DC.

29
 Annex-1 Economic Size of Selected Economies in 2003
Population Life
Area Density GNP PC PC Expec- Literacy
Population '000 per US$ GNP GNP GNP tancy Rate
Country Million sq. km. sq. km. billion Rank US$ Rank Years Percent
Top 10 Debtor Countries
1. Brazil 172 8547 20 480 13 2720 95 68 87
2. China 1272 9598 138 1417 6 1100 134 70 87
3. Russian Federation 145 17075 9 375 16 2610 97 66 99
4. Argentina 37 2780 14 140 30 3810 84 74 97
5. Turkey 66 775 86 198 24 2800 93 70 86
6. Mexico 99 1958 52 637 10 6230 68 73 91
7. Indonesia 209 1905 115 174 27 810 146 66 88
8. India 1032 3287 347 571 12 540 159 63 58
9. Poland 39 323 127 202 22 5280 72 74 100
10.Philippines 78 300 263 88 41 1080 135 70 95
SAARC Countries other than India
11.Pakistan 141 796 183 78 44 520 161 63 43
12.Bangladesh 133 144 1024 55 51 400 173 62 40
13.Sri Lanka 19 66 290 18 14 930 140 73 92
14.Nepal 24 147 165 6 113 240 192 59 43
15.Bhutan 0.8 47 18 0.6 … 630 … 63 …
16.Maldives 0.3 0.3 934 0.7 … 2350 … 69 97
Pacific Islands
17.Fiji 0.8 18 45 2 … 2240 … 69 93
18.Papua New Guinea 5 463 12 3 144 508 163 57 65
19.Samoa 0.2 2.8 61 0.3 … 1440 … 69 99
20.Solomon Islands 0.4 29 15 0.3 … 560 … 69 …
21.Tonga 0.1 0.8 140 0.15 … 1490 … 71 …
22.Vanuatu 0.2 12 17 0.22 … 1180 … 68 …
Other Developing Countries in Asia
23.Armenia 3 30 108 3 143 950 139 74 99
24.Azerbaijan 8 87 100 7 104 820 145 65 …
25.Cambodia 13 181 76 4 126 300 183 54 70
26.Iran Islamic Rep 65 1648 39 133 32 2010 110 69 67
27.Kazakhstan 15 2725 6 27 62 1780 119 63 99
28.Kyrgyz Rep 5 200 26 2 156 340 179 66 …
29.Lao PDR 5 237 23 2 152 340 179 54 65
30.Malaysia 24 330 72 96 37 3880 82 73 88
31.Mongolia 2 1567 2 1 164 480 165 65 99
32.Myanmar 48 677 73 … … … … 57 85
33.Tajikistan 6 143 44 1 162 210 195 67 99
34.Thailand 61 513 120 136 31 2190 105 69 95
35.Turkmenistan 5 488 10 5 116 1120 131 65 …
36.Uzbekistan 25 447 61 11 88 420 172 67 99
37.Vietnam 80 332 244 39 58 480 165 69 93
Source: World Bank, World Development Indicators 2005

30
 Annex-2A: Top ten debtor countries in 2003

Country ranked in Total external Share of Debt /GNP Ratio of short Ratio of
terms of stock of debt concessional ratio term debt short term debt
external debt (US$ billion) debt (per cent) (per cent) to Total debt to Foreign exch.
(per cent) (per cent)

1. Brazil 235 1 30 8.3 39.8

2. China 194 17 15 32.7 17.5
3. Russian Fed. 176 1 50 17.6 39.3
4. Argentina 166 1 104 13.8 162.4
5. Turkey 146 4 77 15.8 64.7
6. Mexico 140 1 23 6.6 15.5
7. Indonesia 134 27 80 17.0 63.2
8. India 114 38 22 4.2 4.6
9. Poland 95 7 40 20.5 57.4
10.Philippines 63 23 77 9.9 39.0

Annex-2B: Top ten debtor countries in 2003

Country ranked in Debt service Present Value PV/ GNP PV to Indebtedness

terms of stock of ratio of external debt ratio exports and income
external debt (per cent) (US$ billion) (per cent) ratio (%) Classification

1. Brazil 63.8 254.1 54 323 Severe/ Middle

2. China 7.3 188.5 15 48 Less/ Middle
3. Russian Fed. 11.8 186.5 117 531 Severe/ Middle
4. Argentina 37.9 184.2 52 135 Moderate/ Middle
5. Turkey 38.5 157.1 25 83 Less / Middle
6. Mexico 20.9 153.0 81 243 Severe/ Middle
7. Indonesia 26.0 136.9 82 200 Severe/ Middle
8. India 18.1 100.3 19 106 Less/ Low
9. Poland 25.1 93.5 48 147 Moderate/ Middle
10.Philippines 22.1 65.4 80 147 Moderate/ Middle

Source: World Bank, Global Development Finance 2005

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 Annex-3: Key Indebtedness Indicators in 2001-2003
Total Present Ratio of Ratio of Ratio of Ratio of
External Value of EDT to PV to EDT to PV to
Debt Stock Ext.Debt Exports Exports GNI GNI
(EDT) (PV) EDT/XGS PV/XGS EDT/GNI PV/GNI
Country ($ Billion) ($ Billion) (per cent) (per cent) (per cent) (per cent)
1. Brazil 235 254 299 323 50 54
2. China 194 189 49 48 15 15
3. Russian Fed 175 184 128 135 50 52
4. Argentina 166 187 473 531 104 117
5. Turkey 146 153 232 243 77 81
6. Mexico 140 157 74 83 23 25
7. Indonesia 134 137 196 200 80 82
8. India 114 100 120 106 22 19
9. Poland 95 94 150 147 49 48
10.Philippines 63 65 141 147 77 80
11.Pakistan 36 30 232 189 50 41
12.Bangladesh 19 13 188 128 37 25
13.Sri Lanka 10 8 134 110 62 51
14.Nepal 3.3 2.1 200 131 57 38
15.Bhutan 0.4 0.4 270 252 79 74
16.Maldives 0.3 0.2 54 41 45 35
17.Fiji 0.3 0.3 25 24 15 15
18.Papua N Guinea 2.5 2.3 113 104 87 80
19.Samoa 0.4 0.3 253 209 148 122
20.Solomon Islands 0.2 0.1 224 176 76 60
21.Tonga 0.084 0.059 106 74 57 40
22.Vanuatu 0.095 0.068 64 46 39 28
23.Armenia 1.1 0.7 131 85 45 29
24.Azerbaijan 1.7 1.4 58 47 28 23
25.Cambodia 3.1 2.7 125 107 82 70
26.Iran Ism Rep 12 10 33 30 9 8
27.Kazakhstan 23 23 181 183 94 95
28.Kyrgyz Rep 2 1.6 282 221 125 98
29.Lao PDR 3 2 611 356 155 91
30.Malaysia 49 50 44 45 55 56
31.Mongolia 2 1 188 149 127 95
32.Myanmar 7 6 247 187 … …
33.Tajikistan 1 1 139 112 96 77
34.Thailand 52 51 59 59 41 41
35.Turkmenistan* 2.3 … 231 … 86 …
36.Uzbekistan 5 5 149 142 49 47
37.Vietnam 16 14 77 67 45 39
* in 1998.

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 Annex-4: Key External Debt Sustainability Indicators in 2003 (per cent)
EDT/XGS EDT/GNI TDS/XGS INT/XGS INT/GNI Indebted
Country (per cent) (per cent) (per cent) (per cent) (per cent) classification*
Top 10 Debtor Countries
1. Brazil 265 50 64 17 3 SIMI
2. China 38 14 7 1 1 LIMI
3. Russian Fed 107 42 12 5 2 MIMI
4. Argentina 449 136 38 6 2 SIMI
5. Turkey 199 611 39 9 3 SIMI
6. Mexico 73 22 26 6 1 LIMI
7. Indonesia 190 68 26 6 3 SIMI
8. India 101 19 18 5 2 LILI
9. Poland 125 46 25 3 1 MIMI
10.Philippine 135 72 22 6 3 MIMI
SAARC Countries other than India
11.Pakistan 192 45 16 5 1.1 MILI
12.Bangladesh 169 34 6 2 0.3 LILI
13.Sri Lanka 126 57 8 2 1.0 MIMI
14.Nepal 174 56 6 2 0.5 LILI
15.Bhutan 273 72 5 1 0.4 SILI
16.Maldives 47 42 4 1 0.8 SIMI
Pacific Islands
17.Fiji 21 14 3 1 0.5 LIMI
18.PN Guinea 100 90 12 3 2.6 MILI
19.Samoa 152 138 5 3 3.3 SIMI
20.Solomon Islnd 73 75 5 2 1.6 MILI
21.Tonga 67 52 3 1 0.5 LIMI
22.Vanuatu 65 34 2 1 0.4 LIMI
Other Developing Countries in Asia
23.Armenia 105 39 9 1.2 0.4 LIMI
24.Azerbaijan 52 27 8 0.8 0.4 LIMI
25.Cambodia 115 77 1 0.3 0.2 MILI
26.Iran Is Rep 27 8 4 1 0.3 LIMI
27.Kazakhstan 149 82 35 5 3 SIMI
28.Kyrgyz Rep 238 109 17 3 0.9 SILI
29.Lao PDR 592 137 10 2 0.6 SILI
30.Malaysia 48 50 7 2 2.2 MIMI
31.Mongolia 165 118 32 2 1.3 MILI
32.Myanmar 253 … 4 1 … MILI
33.Tajikistan 120 80 9 2 1.1 SILI
34.Thailand 54 37 16 2 1.5 LIMI
35.Turkmenistan* 231 86 32 9 4 MIMI
36.Uzbekistan 131 51 21 4 1.5 MILI
37.Vietnam 67 40 3 1 0.8 LILI
All developing 105 39 17 4 2
East Asia & Pacif 60 26 11 2 1
South Asia 119 24 16 5 1

Annex-5: Key External Debt Sustainability Indicators in 2003 (per cent)

RES/EDT RES/MGS Short Term/ Concess/ Multilateral Indebted
Country (per cent) (months) EDT (%) EDT (%) / EDT (%) classification*

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 Top 10 Debtor Countries
1. Brazil 21 7 8 1 8 SIMI
2. China 215 11 38 17 14 LIMI
3. Russian Fed 45 7 18 1 4 MIMI
4. Argentina 9 6 14 1 10 SIMI
5. Turkey 24 5 16 4 5 SIMI
6. Mexico 41 3 7 1 13 LIMI
7. Indonesia 28 6 18 27 14 SIMI
8. India 91 11 4 37 26 LILI
9. Poland 36 5 21 7 3 MIMI
10.Philippines 27 5 10 23 12 MIMI
SAARC Countries other than India
11.Pakistan 33 8 3 67 45 MILI
12.Bangladesh 14 3 3 93 73 LILI
13.Sri Lanka 22 3 5 80 41 MIMI
14.Nepal 40 8 2 97 84 LILI
15.Bhutan 87 16 2 50 35 SILI
16.Maldives 57 3 9 64 56 SIMI
Pacific Islands
17.Fiji 160 5 33 12 71 LIMI
18.Papua N Guinea 21 3 5 36 36 MILI
19.Samoa 23 6 54 46 43 SIMI
20.Solomon Island 20 3 6 79 58 MILI
21.Tonga 51 3 1 91 82 LIMI
22.Vanuatu 46 3 16 77 74 LIMI
Other Developing Countries in Asia
23.Armenia 45 4 1.2 70 66 LIMI
24.Azerbaijan 49 2 13 53 33 LIMI
25.Cambodia 31 4 7 89 26 MILI
26.Iran Ism Rep … … 28 0 3 LIMI
27.Kazakhstan 22 4 12 4 8 SIMI
28.Kyrgyz Rep 19 5 2 68 50 SILI
29.Lao PDR 9 6 0 96 49 SILI
30.Malaysia 91 5 18 3 2 MIMI
31.Mongolia 16 3 20 76 46 MILI
32.Myanmar 8 2 20 67 18 MILI
33.Tajikistan 10 1 7 74 31 SILI
34.Thailand 81 6 21 19 6 LIMI
35.Turkmenistan* 61 9 23 0 2 MIMI
36.Uzbekistan 25 5 4 27 13 MILI
37.Vietnam 39 3 8 74 25 LILI
All developing 50 7 16 18 15

Annex-6: Classification of selected countries in ESCAP by levels of external indebtedness

And per capita income in 2003

Severely indebted Moderately indebted Less indebted

Low income Middle income Low income Middle income Low income Middle income

SILI SIMI MILI MIMI LILI LIMI

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 (1) (2) (3) (4) (5) (6)

Bhutan Indonesia Cambodia Malaysia Bangladesh Armenia

Kyrgyz Rep Kazakhstan Mongolia Philippines India Azerbaijan
Lao PDR Maldives Pakistan Russian Fed Nepal China
Myanmar Samoa PN Guinea Sri Lanka Vietnam Fiji
Tajikistan Turkey Solomon Island Turkmenistan Iran Ism Rep
Uzbekistan Thailand
Tonga
Vanuatu

Acronyms

LILI Less Indebted Low Income

MILI Moderately Indebted Low Income
SILI Severely Indebted Low Income
LIMI Less Indebted Middle Income
MIMI Moderately Indebted Middle Income
SIMI Severely Indebted Middle Income
Classification as per income
Low Income Per capita GNP less than US$765
Middle Income Per capita GNP between US$766 and US$9385
Classification as per indebtedness:

Less Indebted PV/XGS less than 132% and PV/GNI less than 48%.
Moderately Indebted PV/XGS less than 220% but higher than 132%, and
PV/GNI less than 80% but greater than 48%.
Severely Indebted PV/XGS higher than 220% or PV/GNI higher than 80%.

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