Debt Management by the Government of Maldives:

Debt Profiles, Policies, Strategies, Systems, Techniques and

Assessment of Capacity Development Requirements

Draft Inception Report

Tarun Das1 Ph.D.,

PWC Debt Management Specialist

ADB Program on Institutional Strengthening

For Economic Management
Government of Maldives
Male, Maldives

January 2011

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The Consultant would like to express his gratitude to the PricewaterhouseCoopers (PWC) Pvt. Ltd.,
particularly to Mr. Ranen Banerjee and Mr. Subramanian Sriram and the Asian Development Bank for
providing an opportunity to take up this consultancy work. The Consultant would also like to thank his
colleagues Ms. Neha Gupta, Peter Griffin and John Wetherhold and various officers of the Ministry of
Finance and Treasury, Government of the Maldives, Capital Markets Development Authority, Maldives
Monetary Authority and State Bank of India Office at Male, Maldives for valuable discussions and
providing necessary data and information . The Inception Report expresses the personal views of the
author, which do not necessarily imply the views of the PWC Pvt. Ltd., Asian Development Bank or the
Government of the Maldives.

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 Debt Management by the Government of Maldives
Draft Inception Report

Tarun Das
PWC Debt Management Specialist

CONTENTS

Items Pages

Contents 2-3

Maldives at a Glace (World Bank Fact Sheet dated Sept 2009) 4-5

1. Introduction- Scope and Objectives of the Study 6-9

1.1 Basic objectives of the study 6
1.2 Terms of Reference (TOR) for Debt Management Specialist 6
1.3 Resource mobilization visit to Male during 5-16 Dec 2010 8

2. Debt Profile and Debt Management Strategies and Policies 9-22

2.1 Economic context for debt management 9
2.2 Strength Weakness Opportunities and Treats (SWOT) analysis 11
2.3 Debt profile 12
2.4 Debt management systems and organizations 15
2.5 Front offices, rules and procedures for borrowing 18
2.6 Debt management strategies and policies 19
2.7 Limits on public debt 20
2.8 Contingent liabilities 21
2.9 Transparency and reporting of public debt 22
2.10 Auditing of debt 22

3. Debt Management Performance Assessment (DeMPA) 22-25

3.1 IMF public expenditure and financial accountability (PEFA) 22
3.2 Main conclusions of DeMPA Report by WB and COM-SEC 23

4. Debt Sustainability Analysis (DSA) 26-27

4.1 Joint DSA by the Fund-Bank 27

5. Capacity Building Assessment and Planned Outputs and 28

Deliverables in 2010-2011 28
5.1 Work Plan Matrix 28
5.2 Questionnaires

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 Items Pages

Annex-1: List of officials and experts consulted 29-30

Annex-2A: List of documents consulted 31-33

Annex-2B: List of papers by Tarun Das 34-37

Annex-3: Work Plan Matrix of the Debt Management Specialist 38-40

Annex-4: Questionnaire on Debt Management for ERMD 41-49

A. Debt recording, analysis and debt statistics: Coverage, Scope and 41
Quality
B. Recording and Reporting: Transparency 42
C. Guarantees and other Contingent Liabilities 42
D. Legal and Institutional Arrangements: Accountability 44
E. External Debt Management Policies, Strategies, Practices, 45
Methods and Systems
F. Risk Management: Capacities and Systems 46
G. Debt Sustainability Analysis 46
50
Annex-5: Country Policies and Institutional Assessment (CPIA) 50
Annex-6: Questionnaire for the Maldives Monetary Authority (MMA) 51-52
and the Capital Markets Development Authority (CMDA)
Annex-7: Basic concepts of external debt and sustainability indicators 53-59
7.1 Definition of external debt 53
7.2 Debt Sustainability and Fiscal Deficit 54
7.3 Debt Sustainability and Current Account Deficit 54
7.4 Liquidity versus Solvency 54
7.5 Debt Sustainability Measures 55
7.6 World Bank Classification of External debt 56
7.7 Stress Tests 57
7.8 Strategies and policy framework for debt management 59

Selected References 60-66

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4
Source: Gambia at a Glance, 12 September 2009, by the World Bank

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 Debt Management by the Government of Maldives:
Debt Profiles, Policies, Strategies, Systems, Techniques and
Assessment of Capacity Development Requirements

Tarun Das Ph.D.

PWC Debt Management Specialist

1. Introduction- Scope and Objectives of the Study

1.1 Basic Objectives of the Study

This Inception Report summarizes the basic objectives and scope of the debt management
by the government of Maldives and the major duties, responsibilities and detailed
work plan of the Debt Management Specialist Mr. Tarun Das. The Report has been
produced on the basis of discussions held with the principal stakeholders during the
Resource Mobilization Visit to Male in 5-16 December 2010 and the documents,
information and advice provided by them.

The task of the Debt Management Specialist forms a part of a wider project called the
“Institutional Strengthening for Economic Management Program” being
funded by the Asian Development Bank and being executed by the
PricewaterhouseCoopers Private Ltd. over a period of two and half years starting
with December 2010. The main objective of the Program is to deepen and
institutionalize the process of Medium Term Fiscal Framework (MTFF) and to
build a more strategic and performance oriented budget management system and
process, while strengthening financial accountability and transparency in the
formulation, execution, monitoring, review and reporting of the budget at the center
and line ministries in the government of Maldives. The overall Program
encompasses four major activities viz. integrating MTEF and MTFF, performance
budgeting, improvement of sectoral budgeting, debt management and efficient cash
management to be executed by the respective international specialists in association
with the national consultants.

1.2 Terms of Reference for Debt Management Specialist

The services of a Debt Management Specialist are required for the External Resources
Management Division ERMD) in the Ministry of Finance and Treasury (MOFT),
Government of Maldives at Male for a period of five months on intermittent basis during
18 months from December 2010 to May 2012. The main assignment of the Debt
Management Specialist is to provide policy advice and assist in all areas related to public
debt management. The Specialist will also have the responsibility of building local
counterpart capacity of relevant staff through hands-on training, organizing local
workshops and through working closely with national counterparts.

The following are the indicative scope of work and terms of reference. It is natural that
other related tasks will evolve during the course of the project period. However, the Debt
Management Specialist will try his best to transfer the knowledge and engage the staff for
capacity building.

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 A. In Support of Debt Management

(i) Review and assess the Maldives’ debt management strategy and capacity
requirements to effectively meet debt management goals and recommend changes
in line with best practices.
(ii) Review recommendations of ADB-TA on Strengthening of Debt Management
and update recommendations.
(iii) Assess capacity development requirements for effective debt management
including hardware and software requirements.
(iv)Further to proposed organizational set-up of expanded External Resource
Management Division (ERMD) propose arrangements to effectively coordinate
front, middle and back office functions.
(v) Review state debt profile (domestic and external debt) including contingent
liabilities, and recommend development of a database to include domestic and
external debt and which can link to externally funded project monitoring database.
(vi)Develop framework for debt sustainability analysis (DSA) building on
Commonwealth Secretariat Debt Recording and Management System (CS-
DRMS) and based on critical assumptions.
(vii) Prepare debt sustainability study jointly with ERMS Staff and recommend
feasible options for debt restructuring, including debt servicing requirements for
the next 5 to 10 years.
(viii) In coordination with Team Leader, develop debt scenario building as a part of
regular inputs into the Macroeconomic Coordination Committee (MECC).
(ix) Propose methodology for estimating relevant debt related indicators and develop
effective reporting requirements.
(x) Prepare a debt management manual to include application of debt management
techniques based on such parameters as interest rate, maturity, currency, grace
period, guarantees.
(xi)Create an operational toolkit for debt sustainability analysis.
(xii) Identify terms of reference and work plans for national consultants/ contractual
staff and assist in selection process.

B. In Support of Training

(i) Prepare workshops and support training arrangements with dedicated institutions to
enhance skills set of ERMS.
(ii) Coordinate with the training expert and the capacity development expert to prepare
a training program for the concerned staff and provide necessary training.

C. Expected Expertise and Reporting Arrangements

The expert will have proven experience in debt management functions and in developing
debt management policies and measures in support of a national treasury and will spend
25 percent of allocated time on training. The expert will have a relevant educational
background in economics and/ or finance. The expert will work alongside Head of
External Resource Management Section (ERMS) and Team Leader.

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 1.3 Resource Mobilization Visit to Male during 5-16 December 2010

Debt Management Specialist is working in association with four other international

consultants viz. Fiscal Economist/ Task Manager, Budget Expert, Sector Budget
Expert, and Cash Projection and Treasury Expert in order to ensure effective
coordination among debt management and other activities and sustainability of
public debt over time. Along with other consultants, the Debt Management
Specialist visited Male, Maldives during 5-16 December 2010 and held discussions
with various stakeholders concerned with debt management and collected relevant
data and information. This Report has been prepared on the basis of these
discussions and documents collected during the Resource Mobilization visit.

The Resource Mobilization Mission by the PricewaterhouseCoopers Private Ltd. (PwC)

consultants started with the start-up meeting held at 10=30 hours on Sunday, the 5th
December 2010 at the office of the Ministry of Finance and Treasury (MOFT) at the
Ameenee Magu, Male, chaired by the Minister of State for Finance and Treasury,
Republic of Maldives and attended, amongst others, by the Deputy Minister, Permanent
Secretary, Financial Controller, Directors and senior officers of the divisions concerned
with various aspects of the Public Financial Management (PFM) Reforms including debt
management. The mission ended with the wrap up meeting on Thursday, the 16th
December 2010 with the heads and senior officers of the concerned divisions in the
Ministry of Finance and Treasury.

Discussions and Consultations

During the intervening period, the Debt Management Specialist had the opportunities to
hold detailed discussions on data base, organizational set-up, legal framework, systems,
procedures, policies and strategies for management of public debt and contingent
liabilities with the External Resource Management Division (ERMD) and Asset and
Liabilities Management Section (ALMS) in the Ministry of Finance and Treasury
(MOFT), and other major stakeholders viz. Maldives Monetary Authority (MMA),
Capital Market Development Authority (CMDA), Bank of Maldives Ltd. (BML) and the
State bank of India (SBI) at Male. Meetings and discussions with the MMA, CMDA,
BML and SBI were jointly held by the Debt Management Specialist and the Cash
Projection and Treasury Expert. Annex-1 provides the list of officials consulted by the
Debt Management Specialist.

Background Papers and Data Base

During the period under review, the Debt Management Specialist gathered various
background papers prepared by the MOFT, ADB, World Bank, IMF, Com-Sec and
Crown Agents in London and prepared up-to-date data base on public debt, macro-fiscal
parameters, Treasury bill yield and maturities. Debt Management Specialist also shared
some of his own publications and reports on debt management with others. Annex-2
provides a list of all documents and reports either collected by the Debt Management

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Specialist from MOFT or downloaded from the ADB/ World Bank/ IMF/ Com-Sec
websites or his selected publications shared with the concerned officials in the ERMD.

Questionnaires

For formulation of strategies, policies and systems, and conducting the debt sustainability
analysis for effective debt management, the Debt Management Specialist needs to
have additional data, information and views from the concerned national
authorities. For this purpose, a detailed Questionnaire is presented in the Appendix.
The Questionnaire deals with the Profiles of Public Debt, Debt Management
Policies, Strategies, Legal and Institutional Systems, Techniques and an assessment
of the Capacity Building Requirements in Maldives. It was not possible to gather
all these information during the short first visit (5-16 December 2010). As the work
will be done on intermittent basis, the External Resources Management Division
(ERMD) of the MOFT, which is the nodal body in charge of debt management, has
been requested to collect the relevant information from various concerned
authorities in the intermittent period before the second visit of the Debt
Management Specialist.

2. Debt Profile and Debt Management Systems and Policies in Maldives

Annex-7 provides basic concepts on debt management and debt sustainability indicators
and international best practices for debt management. In this section we discuss the
existing rules, regulations, procedures, and practices, institutional and legal systems for
debt management in Maldives.

2.1 Economic Context of Debt Management

A stable macroeconomic environment supported by sound macroeconomic policies is the

first line of defense against any debt crisis. In recent years, Maldives recorded sustained
high growth rates averaging 5.5 percent per annum during 1998-2010 with moderate
inflation around 5 percent and comfortable balance of payments position until 2004. But
the economy was adversely affected by the 2004 Tsunami and subsequently by the global
economic slowdown and financial crisis during 2008-2009.

After the December 2004 tsunami disaster, the economy rebounded aided by significant
increase in tourism-related investment and government expenditure. The fiscal expansion
was, however, excessive, including large increases in public sector wages, employment
and subsidies. Budget expenditure increased to 63.1% of GDP and overall deficit to
16.9% of GDP in 2008. Given high import dependency, large fiscal expansion led to a
marked deterioration in balance-of-payments. The situation was exacerbated further by a
drop in tourism income as a result of global financial crisis in 2008, leading to serious
domestic and external imbalances and an overall macroeconomic stability.

Real GDP declined by 2.3% in 2009 (Table-2.1), due primarily to contractions in

tourism, fisheries, manufacturing and construction by 5.2%, 12.3%, 4% and 29.2%
respectively. Annual point-to-point consumer inflation peaked at 17.3% in July 2008, but

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the high price hikes were quickly moderated, and the average inflation rate was moderate
at 4.5% in 2009, down from 12% in 2008, mainly due to drop in food prices.

Based on the tourism rebound, real GDP growth is expected to be 4.8 percent in 2010.
The government’s policy efforts to redress macroeconomic imbalances and external
financing have helped to regain macroeconomic stability. Looking beyond stabilization,
the government has costed and prioritized its medium-term development plan viz. the
Strategic Action Plan. Donors showed strong support for the government’s plan with
pledges amounting to more than 80% of the required funding.

Downside key risks for growth and stabilization include the challenges for raising
government revenues and implementing fiscal austerity measures for curtailing
expenditure, and the consequences of widening current account deficit and rising
consumer price inflation, if international food and fuel prices continue to rise.

Table-2.1: Macroeconomic Performance during 2000-2010

Growth Rate 2000-2005 2006 2007 2008 2009 2010
GDP 4.7 18.0 7.2 6.2 -2.3 4.8
Primary 6.1 -0.3 -14.9 -4.5 -7.6 -2.9
--Fisheries 7.8 -0.9 -21.8 -7.6 -12.3 -5.8
Secondary 7.4 15.8 10.1 8.4 -11.2 2.4
--Manufacturing 3.8 14.6 3.4 2.8 -4.0 1.3
--Construction 10.9 20.5 20.0 16.3 -29.2 2.6
Tertiary 4.0 21.3 9.1 6.6 -0.0 5.9
Tourism -0.2 42.3 9.4 3.0 -5.2 14.4
Transport 9.4 18.5 8.3 9.4 1.9 3.9
Govt-Administration 10.2 13.8 15.7 13.7 7.1 -1.7
(% of GDP) 2000 2006 2007 2008 2009 2010
Primary 9.4 9.1 7.2 6.5 6.1 5.7
--Fisheries 6.0 6.3 4.6 4.0 3.6 3.2
Secondary 14.4 17.0 17.5 17.9 16.2 15.9
--Manuf 8.0 7.3 7.0 6.8 6.7 6.5
--Const 3.2 5.4 6.0 6.6 4.8 4.7
Tertiary 80.1 77.9 79.3 79.6 81.5 82.4
Tourism 33.0 27.4 27.9 27.1 26.3 28.7
Transport 14.5 18.5 18.6 19.2 20.0 19.8
Govt-Admn 11.8 14.8 15.9 17.0 18.7 17.5
Memorandum items:
GDP (Mln.Rf) 6,935.0 11,717.4 13,496.1 16,130.9 16,879.0 18,941.2
GDP (Mln.US$) 589.2 915.4 1,054.4 1,260.2 1,318.7 1,479.8
GDP Inflation 1.7 3.5 7.4 13.0 7.1 7.1
CPI-Inflation 3.0 2.7 6.8 12.0 4.5 4.0

Source: MMA

2.2 Strengths, Weakness, Opportunities and Threats (SWOT)

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A SWOT analysis of the Maldives economy is presented in Table-2.2. It is evidenced by
the table that Maldives has many weaknesses and threats to achieve higher growth. The
country needs to continue with strict fiscal prudence, to bring the public financial and
governance reforms for private sector development to their logical ends, and to tackle the
risks due to variations of international prices of its major exports and major imports.

Table-2.2 SWOT Analysis of the Maldives Macro-economy

• Democratic system with a multi-party system.

• Dominant role of government through state-owned enterprises
(SOEs) in virtually every sector except tourism.
• Robust growth averaging 5.5% per annum in 1998-2010, despite the
Strengths adverse impact of 2004 tsunami; and global recession in 2008-2009.
• Annual average inflation rate remained moderate around 5% in
2004-2010 except for 12.3% in 2008 due to high food and fuel
Internal Environment

prices.

• Small economy with a narrow economic base.

• Geographic isolation, lack of arable land and small and dispersed
population are major constraints on diversification of the economy.
• Weak institutions and human resource deficiencies are major
constraints, including the fragmented structure of govt.
• Widening income disparities between Malé and the atolls.
Weaknesses
• Following the 2004 tsunami (fiscal deficit jumped to an average of
8.7% of GDP in 2005-08, and 12.7% in 2008 compared to 3.8% in
1999-2004.
• The country is vulnerable to climate change (none of the islands is
more than 1.8 meters above sea level), and beach erosion.

• Highly open economy with fewer barriers for trade.

Opportunities
• High potentials for fisheries exports and tourism income.
• Donors have supported the governance reforms and the strategic
development plans approved by the government and have pledged
more than 80 percent of funding needs.
•
External Environment

• Being a small and open economy the Maldives is vulnerable to

external environment including geopolitics, global economic
developments, and global climate change.
• Heavy dependence on imports (90% of GDP in recent years);
• Highly dependent on tourism and fishing contributing more than
one-third of national income
Threats
• The country is highly dependent on imports of food and fuel
products which make up almost 60% of total imports and comprise
40% of the CPI basket.
• Hardening of international food and fuel prices may have adverse
impact on the current account deficit, terms of trade, foreign
exchange reserves and consumer price inflation.

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 2.3 Debt Profile

It may be mentioned at the very beginning that there is no uniformity

of reporting and estimation of the debt stock by the government of
Maldives and different multilateral organizations such as International
Monetary Fund (IMF), World Bank and Asian Development Bank (ADB).
These differences may be due to different concepts and exchange
rates used by different authorities and needs to be reconciled.

(a) Debt Portfolio as Estimated by IMF/World Bank Joint Study

As per the Joint IMF/World Bank Debt Sustainability Analysis (DSA) for
Maldives2 under the Debt Sustainability Framework for Low Income
Countries, conducted in November 2009, the total debt (total of public
external and domestic debt and private external debt) to GDP ratio
increased at a faster rate following the 2004 tsunami, and reached 110
percent of GDP in 2008. Growth in private external debt, used to
finance a rapidly expanding tourism sector, was particularly fast. An
increasing fiscal deficit in 2007-2008 led to a build up of public debt,
mostly in the form domestic debt. With limited recourse to external
financing in 2009 and a fiscal deficit at around 30 percent of GDP, total
debt-to-GDP ratio was projected to reach 129 percent in 2009.

(b) Debt Portfolio as Estimated by World Bank Global

Development Finance

As per the World Bank estimates (see the Table reproduced below from
the World Bank Little Book on External Debt), the long term debt stock
increased significantly from US$71.2 million (amounting to 57 percent
of the Gross National Income) in 2007 to US$109.4 million (amounting
to 82 percent of the Gross National Income) in 2008. The debt stock as
percentage of exports of goods and services increased from 64 percent
to 94 percent, while debt service ratio as percent of gross exports of
goods and services remained unchanged at 6 percent over the period.

(c) Debt Portfolio as Estimated by Asian Development Bank

As per the ADB estimates, the debt stock as percentage of the Gross
Domestic Product (GDP) increased from 65 percent in 2007 to 98
percent in 2008 and the debt stock as percentage of exports of goods

2
Prepared jointly by the staffs of the IMF and the IDA in November 2009 in
consultation with ADB and approved by Kalpana Kochhar and Aasim Husain (IMF) and
Carlos Braga and Ernesto May (IDA). The basic data were provided by the Maldivian
authorities.

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and services increased from 55 to 78, while debt service ratio as
percent of gross exports of goods and services increased marginally
from 5.6 to 6.2 percent over the period (details given in Table-2.3).

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 Table-2.3-A: Maldives: Trends of Debt (in million US$)
Items 1995 2000 2005 2006 2007 2008 2009
Total Debt stock (EDT) 78.0 206.1 389.6 484.2 576.3 986.8 1093.
Long term debt 64.0 184.7 327.4 379.9 439.8 499.0 589.0
Public & guaranteed 64.0 184.7 327.4 379.9 439.8 499.0 589.0
Private non-guaranteed 0 0 0 0 0 0 0
Short-term debt 14.0 21.4 56.3 98.2 130.0 483.8 500.0
Use of IMF credit 0 0 5.9 6.2 6.5 3.9 3.9
Total debt service TDS)(US$Mln) 8.8 19.8 35.3 38.8 50.1 62.1 99.5
Repayment of long term debt 6 13.9 24.4 23.6 30.7 41.2 79.7
Interest on Long term debt 1.3 4.7 9 10.2 12.4 13.9 12.7
Interest on Short term debt 1.5 1.2 2.0 5.0 7.0 7.0 7.0
Gross Domestic Product (GDP) 399.0 600.3 749.8 915.4 1054.4 1260.2 1473.0
Exp.of goods and services (XGS) 183 471 490 787 893 1009 1100
International reserves (RES) 24.4 122.8 186.3 231.4 308.3 240.6 261.0
Debt Sustainability Indicators (in per cent)
Total Debt stock (EDT)/ XGS (%) 42.5 43.7 79.5 61.5 64.6 97.8 99.4
Long term debt/ XGS (%) 34.9 39.2 66.8 48.3 49.3 49.5 53.5
Public & guaranteed/ XGS (%) 34.9 39.2 66.8 48.3 49.3 49.5 53.5
Private non-guaranteed/ XGS (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Short-term debt/ XGS (%) 7.6 4.5 11.5 12.5 14.6 48.0 45.5
Use of IMF credit/ XGS (%) 0.0 0.0 1.2 0.8 0.7 0.4 0.4
TDS/ XGS (%) 4.8 4.2 7.2 4.9 5.6 6.2 9.0
Amortization/XGS (%) 3.3 2.9 5.0 3.0 3.4 4.1 7.2
Interest on LTD/ XGS (%) 0.7 1.0 1.8 1.3 1.4 1.4 1.2
Interest on STD/ XGS (%) 0.8 0.3 0.4 0.6 0.8 0.7 0.6
Total Debt stock (EDT)/ GDP (%) 19.5 34.3 52.0 52.9 54.7 78.3 74.2
Long term debt/ GDP (%) 16.0 30.8 43.7 41.5 41.7 39.6 40.0
Public & guaranteed/ GDP (%) 16.0 30.8 43.7 41.5 41.7 39.6 40.0
Private non-guaranteed/ GDP (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Short-term debt/ GDP (%) 3.5 3.6 7.5 10.7 12.3 38.4 33.9
Use of IMF credit/ GDP (%) 0.0 0.0 0.8 0.7 0.6 0.3 0.3
TDS/ GDP (%) 2.2 3.3 4.7 4.2 4.8 4.9 6.8
Amortization / GDP (%) 1.5 2.3 3.3 2.6 2.9 3.3 5.4
Interest on LTD (%) 0.3 0.8 1.2 1.1 1.2 1.1 0.9
Interest on STD (%) 0.4 0.2 0.3 0.5 0.7 0.6 0.5
Long term debt to total debt (%) 82.1 89.6 84.0 78.4 76.3 50.6 53.9
Short-term/ Total debt (%) 17.9 10.4 14.5 20.3 22.6 49.0 45.7

Table-2.3-B: Maldives-External Debt: Average Terms of New Commitment

Items 1995 2000 2005 2006 2007 2008
Interest (% per annum) 3.2 3.7 3.7 4.2 5.8 0.9
Maturity (years) 31.3 26.9 19.6 18.1 12.8 12.9
Grace period (years) 9.1 6.9 4.6 4.1 3.1 4.0
Grant element (%) 56.1 47.9 42.2 35.8 21.1 36.4
Source: Data for Maldives from the Key Indicators for Asia and the Pacific 2010, published by
the Asian Development Bank, www.adb.org/statistics

(d) Debt Situation Reported in DeMPA Report

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As per the Debt Management Performance Assessment (DeMPA) Report conducted
jointly by the World Bank and the Commonwealth Secretariat in October 2009, the
public debt stock rose sharply to 54 per cent of GDP by 2008 from 43 per cent in 2004. In
terms of the debt portfolio, domestic debt constituted 42 percent of total debt. Domestic
debt and was overwhelmingly (more than 85 per cent) short-term. At the end of 2008, the
outstanding balance of Ways and Means Advances (WMA) from the Maldives Monetary
Authority (MMA) accounted for 60 per cent of total domestic debt with another 20 per
cent contributed by Treasury bills. With regard to external debt, 54.5 percent was
multilateral loans, 21.7 percent commercial/ supplier credit, 11.4 percent bilateral and
12.4 percent other loans. Special Drawing Rights (SDR) accounted for 37.1 percent of the
currency composition of external debt, while the US dollar and Euro accounted for 31.5
and 22.2 percent, respectively.

(e) Debt Portfolio as Estimated by MOFT and MMA

Yet another set of debt estimates (details given in Table-2.4) are

available from the Ministry of Finance and Treasury, Government of
Maldives and the Maldives Monetary Authority (MMA). As per these
estimates, the total public debt stock as percentage of the Gross
Domestic Product (GDP) increased from 52 percent at the 2007 to 69
percent in 2008 and increased further to 100 percent in 2009 and is
expected to increase to 120 percent at the end of 2010.

Table-2.4: Fiscal Situation and Outstanding Debt

(As percentage of GDP at current market prices)
Item Revenue Exp Balance Forgn-Fin Dom-Fin Total debt Foreign Domestic
1997 30.5 31.9 -1.4 2.9 -1.5 39.7 25.0 14.7
1998 30.4 32.3 -1.9 2.0 -0.1 41.0 25.6 15.4
1999 32.1 36.1 -4.1 0.8 3.2 40.1 24.3 15.9
2000 32.3 36.7 -4.4 0.0 4.3 40.9 22.9 17.9
2001 33.0 37.7 -4.7 1.9 2.8 43.5 23.9 19.5
2002 33.1 38.0 -4.9 4.5 0.4 47.0 26.9 20.2
2003 34.8 38.2 -3.4 4.7 -1.3 46.1 29.6 16.5
2004 34.5 36.0 -1.6 4.1 -2.5 43.1 30.5 12.6
2005 48.1 59.0 -10.9 2.4 8.4 52.6 34.0 18.7
2006 52.5 59.3 -6.8 4.5 2.3 50.9 32.4 18.5
2007 56.1 60.8 -4.7 4.6 0.1 51.7 32.7 19.0
2008 46.2 63.1 -16.9 4.6 12.2 68.7 37.4 31.2
2009 35.6 65.0 -29.4 4.7 24.8 99.5 43.5 56.0
2010 38.0 58.8 -20.9 0.6 20.3 120.0 43.8 76.2

Source: MOFT and MMA

2.4 Debt Management Systems and Organization

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The two main entities responsible for the management of external and domestic debt are
the External Resources Management Division (ERMD) at the MOFT and the Public Debt
Department at the MMA. The responsibilities are distributed as follows:

1. ERMD has the following 3 Sections responsible for inter alia, negotiating,
contracting, recording and repayment for all external debt. Table-2.5 indicates the
detailed functional responsibilities of these sections.
(a) Financial Institution Section
(b) Debt Policy and Mobilization Section
(c) Aid Coordination Section

2. In addition, the Assets and Liabilities Section under the Financial Controller’s
Office has the responsibility of recording all government guarantees given for
both domestic and external debt.

3. MMA as the fiscal agent for the government, and responsible for domestic
management along with the Budget Division in the MOFT, issues government
treasury bills (TBs) and government securities (G-Secs) and offers advice to the
GRM on all aspects of issuance of TBs and G-Secs. Although there exists a
Committee comprising members from the MOFT and MMA to decide on the
financing needs of the government, in practice the MMA makes the decisions on
issuance strategy regarding the frequency, amount, timing and method of
issuance, and type and duration of instruments given the manner of operations of
the Ways and Means Advances (WMA) to the MOFT, and then obtains approval
from the Financial Controller at MOFT.

4. The Public Debt Department at the MMA is responsible for the issuance of
Treasury bills and recording and repayments, and sends the required reports and
information to the Financial Controller at the MOFT.

5. There are also a few important Committees responsible for debt management.
These include the following:

(i) External Resources Coordination Committee that meets every Tuesday with the
Vice President as the Chairman. The focus of this Committee is more on
implementation of externally-funded projects (color codes assigned depending
on implementation status);
(ii) Macro Economic Coordination Committee (MECC) which comprises two sub-
committees – the policy and technical sub-committees. The members
comprise MMA, MOFT, FC, and for the policy sub-committee,
representatives from the ADB and the WB. The MECC deals with, among
other matters, fiscal numbers, balance of payments, national planning,
fisheries, and tourism. It does not meet regularly, although there is a
commitment now to the ADB to meet on quarterly basis.
(iii) There is a Liquidity Management Committee
(iv) which determines the amount of roll over of the existing treasury bills and
issuance of new TBs.

17
(v) In addition there was an Aid Management Coordination Committee which had the
important mandate of deciding on the funding of projects with direction from
the National Planning Council and coordination with ERMD. This is not in
operation now.

Table-2.5: Functions of the External Resource Management Division

18
The above discussion indicates that the traditional functions of front, middle and debt
offices are not clearly structured and focused. The managerial structure for debt
management in GRM lacks an integrated approach towards the management of total
central government debt as there is no single entity responsible for the same.

There is also lack of coordination among MOFT and MMA and among various
Committees regarding their activities. The two main entities ERMD and MMA do not
exchange debt information regularly. None of the Committees cited above is entrusted
with the functional responsibility or terms of reference for coordinating activities in
relation to debt management or exchanging information on total central government debt.

However, the authorities are aware of these problems and presently engaged in
reorganizing the divisions and sections in the MOFT for strengthening the Public
Financial Management (PFM) systems and the debt management. It is understood that the
process has been initiated and is evolving in the right directions. Once the reorganized
structure becomes fully operational and cash management arrangements become more
effective, the decision making for debt management will be with the MOFT.

2.5 Front Office, Rules and Procedures for Borrowing

The ERMD compiles a pipeline of projects that is identified by line ministries, the World
Bank Country Assistance Strategy and a three year program of the Asian Development
Bank and approved by the National Planning Council (NPC) and included in the Budget
for a particular year. An assessment of the cost-effective and most beneficial terms and
conditions that can be obtained from potential creditors and markets is identified and
presented to the Minister. These are then evaluated within the framework for the
underlying assumptions with regard to the forecast on external debt service; the costs are
discussed with the Minister of Finance and the NPC. Ministerial approval is obtained for
the assumptions as that forms the basis of the external borrowing plan. Concessional
financing is proposed for those projects that fall within the priority areas identified for
development by the NPC. Commercial funding is proposed for those projects falling
outside this priority area, such as maintenance of buildings. The borrowing assumptions
are updated at least twice per year (with IMF Article IV consultations) and also before
any new loan is undertaken.

There are internal documented procedures for all external borrowing. A term sheet is
prepared for negotiations and after the signing of a loan agreement. Currently, due to staff
shortages, no time is specified for capturing the terms sheet on the CS-DRMS. In addition
as per the Law on Public Finances, the ERMD has 30 days to report the details of the
loan agreement (amount, purpose and authorizations) to the Majlis.

Legal advisors are involved before the negotiation of a loan is concluded. When loan
negotiation takes place in the Maldives, legal advisors are involved for a more substantial
part of the negotiations, this is however not the case if negotiations are conducted outside
the Maldives.

19
 2.6 Debt Management Strategies and Policies

There is no formal debt management strategy and policy in place and there is no single
unit that oversees the total central government (including domestic and external) debt
portfolio. There are no specific benchmarks regarding the mix between domestic and
external debt for financing fiscal deficit. There are no benchmarks on borrowing rate,
maturity mix of public debt currency mix of external debt.

An ad hoc decision making process determines the extent of public debt every year while
formulating the budget. The external financing choice is driven by the projects on the one
hand, and availability of lenders, on the other hand. Capital expenditures are matched
with the projected disbursements from pipeline external loans. For new projects, requests
from line ministries are examined, taking into account their consistency with the priority
projects determined by the National Development Council. Often, line ministries sign a
memorandum of understanding with the lender, effectively committing the government to
the loan, although it is the Finance Minister who signs the loans and there have been
occasions when the loans were not accepted on the basis of the MOFT recommendations.

As regards financing fiscal deficit, the current practice is to maximize the inflows of aid
and to finance the residual by external debt. Most of the borrowing is financed by
concessional loans from multilateral and bilateral lenders. Under agreement with the
IMF, there is a minimum requirement of concessional debt at 45 percent of total debt.
There is also a cap on the total amount that the government can borrow in commercial
terms. The agreement with the IMF established limits on commercial borrowing of $70
million for 2009 and cumulatively to $120 million till 2010. To the extent that aid and
concessional debt is maximized, the implicit strategy has been on cost minimization.

However, the IMF guidelines on concessional loan are not not exactly followed in
Maldives nor is there an established target of the minimum grant element that must be
achieved. Commercial loans are sought for priority projects that donors will not finance,
for example to construct government buildings. The residual that is not financed
externally is borrowed domestically. In the past, the government relied heavily on the
overdraft facility extended by the MMA through the Ways and Means Advances (WMA)
Account. When the residual deficit financing needs exceeded the limits set for the WMA,
Treasury bills were issued to the MMA.

The government stopped receiving direct credit from the Maldives Monetary Authority
(MMA) from September 2009 and domestic financing is now made up of T-bills and
bond issues. In December 2009, the Ministry of Finance, in conjunction with the MMA
introduced formal treasury auctions for 28-day and 91-day T-bills to market participants
(largely state-owned enterprises (SOEs) and commercial banks).

In August 2009, the MMA fully securitized outstanding balances in the Ways and Means
(WAM) account to medium- and long-term treasury bonds. These instruments are being
used to carry out open-market operations (OMOs) with the commercial banks in an effort
to mop up excessive rufiyaa currency liquidity. The objective now is to maintain zero
domestic financing at the end of the year. This effectively means that the balance in the

20
WMA Account will be zero at the end of the year, and that the overdraft facility will not
be available for budget financing. In addition to Treasury bills, there is a plan to issue a
2-year US dollar denominated bond in the domestic market. There is no stated strategy
for developing the domestic debt market and the secondary market for government
securities.

Under the current project, the government has committed to the Asian Development
Bank to develop a debt management strategy by June 2011. ERMD in the MOFT has
been sensitized and is fully committed to the need to develop the debt management
strategy and policies.

2.7 Limits on Public Debt

Under the Memorandum of Economic and Financial Policies signed with the IMF, there
is a ceiling on the stock of non-concessional debt3 of any maturity contracted or
guaranteed by the public sector with non-residents, regardless of the timing of
disbursements. The public sector is defined as the central government, the MMA, and
other agencies acting on behalf of the central government.

Excluded from the ceiling are (i) the use of Fund resources; (ii) lending from the World
Bank, the Asian Development Bank, and the International Fund for Agricultural
Development; (iii) debts incurred to restructure, refinance, roll over, or prepay existing
debts, to the extent that such debt is incurred on terms at least as favorable as the terms of
the existing debt; (iv) concessional debts; (v) any rufiyaa-denominated treasury bills and
government bonds, and MMA bills held by nonresidents; (vi) debts classified as
international reserve liabilities of the MMA; (vii) the rollover of existing guarantees; and
(viii) normal import financing. A financing arrangement for imports is considered to be
“normal” when the credit is self-liquidating.

For program purposes, the guarantee of a debt arises from any explicit legal obligation of
the central government, the MMA, or other agencies on behalf of the central government
to service a loan in the event of nonpayment by the recipient (involving payments in cash
or in kind), or indirectly through any other obligation of the central government, the
MMA, or other agencies on behalf of the central government to finance a shortfall
incurred by the loan recipient.

For program purposes, a debt is concessional if it includes a grant element of at least 35

percent. The grant element of a debt is the difference between the net present value

3
“Debt” is defined as a current, not contingent, liability, created under a contractual arrangement through
the provision of value in the form of assets (including currency) or services, and which requires the obligor
to make one or more payments in the form of assets (including currency) or services, in future point(s) in
time; these payments will discharge the principal and/or interest liabilities incurred under the contract.
Debts can take a number of forms, such as (i) loans (including deposits, bonds, debentures, commercial
loans, buyers’ credits, collateralized loans, repurchase agreements and official swap arrangements); (ii)
suppliers’ credits, (iii) leases, and (iv) arrears, penalties, and judicially awarded damages arising from the
failure to make payment under a contractual obligation that constitutes debt are debt.

21
(NPV)4 of debt and its nominal value, expressed as a percentage of the nominal value of
the debt. Loans provided by a private entity will not be considered concessional unless
accompanied by a grant or grant element provided by a foreign official entity, such as
both components constitute an integrated financing package with a combined grant
element equal to at least 35 percent.

2.8 Contingent Liabilities

Regarding the preparation and issuance of loan guarantees, ERMD, Asset and Liabilities
Section and the Public Enterprises Monitoring and Evaluation Board (PEMEB) under the
MOFT, are responsible for the preparation, issuance and monitoring of all loan
guarantees. All loan guarantees are issued with approval of the Minister of Finance; the
analysis note for approval is prepared by ERMD/PEMEB. ERMD records and monitors
all external loan guarantees while PEMEB do so for all domestic loan guarantees.

However, it appears that there is no comprehensive contingent liability management and

policy paper indicating the definition, identification and measurement of contingent
liabilities, policies for approval and deciding sectors eligible for guarantees,
determination of guarantee fees, contingent liability fund or guarantee redemption fund.

When a state owned enterprise (SOE) needs a guarantee to borrow, a request is submitted
to the MOFT together with the required documents that provide information on the
soundness of the SOE and information with regard to the guarantee. This is an
established procedure and the list of documents is available to all borrowing entities. The
MOFT (PEMEB or ERMD) then assesses the possible exposure under the guarantee.
This task is however not done consistently (because of staff shortages). A notice to issue
a guarantee is submitted for the recommendation of the Minister of Finance; the President
gives final approval. As per estimates by the DeMPA Report, the government current
guarantees include 15 loans (5 external and 10 domestic) with an outstanding value of
US$98 million. Currently no guarantee fee is charged. There are polices regarding the
activities to be guaranteed these are in accordance with the national development policies
as part of the developmental agenda of the country12. These policies and procedures as
well as the required information by the SOE is documented and therefore meets the
minimum requirement for dimension one.

Domestic guarantees are managed and monitored by the Public Enterprises Monitoring
and Evaluation Board (PEMEB), while external guarantees are managed by the ERMD.

4
The NPV of debt at the time of its contracting is calculated by discounting the future stream of payments
of debt service due on this debt. The discount rates used for this purpose are the currency specific
commercial interest reference rates (CIRRs), published by the Organization for Economic Cooperation
Development (OECD). For debt with a maturity of at least 15 years, the ten-year-average CIRR will be
used to calculate the NPV of debt and, hence, its grant element. For debt with a maturity of less than 15
years, the six-month average CIRR will be used. To both the ten-year and six-month averages, the same
margins for differing repayment periods as those used by the OECD would continue to be added (0.75
percent for repayment periods of less than 15 years, 1 percent for 15 to 19 years, 1.15 percent for 20 to 29
years, and 1.25 percent for 30 years or more).

22
The servicing of the domestic guaranteed loan is however not monitored. Dimension one
could be scored a B if a credit assessment were done consistently for all guarantees.

The government receives loans in foreign currency and on-lends these loans in local
currency. The loans are usually on-lent at the same maturity which therefore eliminates
maturity mismatches. There is, however, exchange rate risk since the government needs
to obtain the foreign currency at the buy price while it is provided at the selling price to
the SOE, this costs the government the difference between the buy and sell price. The
MRF however floats against the euro and SDR, and on-lending in these currencies (in
domestic currency) poses an exchange rate risk to government. The interest rate charged
for on-lending is the prevailing Treasury bill rate (usually 91-day).

2.9 Transparency and Reporting on Public Debt

The Law on Public Finances requires that the government submit an Annual Report to the
People‘s Majlis. Accordingly, an annual report is prepared and submitted. The annual
report describes the new mandate, functions and activities of the ERMD, and presents
total external debt outstanding and disbursed, organized by creditors, on-going projects,
debt service payments, new borrowings, the terms and amounts of the loans, subsidiary
agreements (for on-lending), and guarantees. It also describes the training and TA carried
out, and missions that were received. However, evaluation of the total debt management
situation is not facilitated as domestic and external are presented in different reports.

2.10 Auditing of Debt

Under the Audit Act, 2007 an independent4 Auditor General‘s (AG) Department was set
up in 2008. Under this Act the Auditor General at any time may conduct a performance
audit of any ministry or department of the GRM. In the past, external audits were
primarily compliance audits with some degree of a performance assessment. Now the
AG‘s Department is undertaking combined audits, both financial and performance. The
audit of the MOFT was completed in the past year, and ERMD was included in that, but
this was not an audit of the activities, policies and operations of ERMD. The financial
audit of MMA was undertaken on April 30, 2009; internal audit of MMA is undertaken
and can be a random check. There has, however, been no internal audit of the ERMD.
Also there has been no external audit of the activities, policies and operations of the
ERMD and the Public Debt Department of the MMA undertaken within the past 5 years.

3. Debt Management Performance Assessment (DeMPA)

By the World Bank and COMSEC

From October 19 to 27, 2009, a World Bank team in collaboration with the
Commonwealth Secretariat (COMSEC) undertook a Debt Management Performance
Assessment (DeMPA) of the Government of Maldives (GRM). At that time the debt
level of Maldives was moderately high around 55 per cent of GDP with vulnerable
sustainability indicators.

23
The DeMPA comprises a set of 15 debt performance indicators (DPIs), which aim to
encompass the complete spectrum of government debt management (DeM) operations
and the overall environment in which these operations are conducted. While the DeMPA
does not specify recommendations on reforms and capacity and institution building, the
performance indicators do stipulate a minimum level that should be met under all
conditions. Consequently, if the assessment shows that the minimum requirements are
not met, this will clearly indicate an area requiring attention or priority reform.

The scope of the DeMPA is central government debt management activities and closely
related functions such as issuance of loan guarantees, on-lending, cash flow forecasting
and cash balance management. Thus, the DeMPA does not assess the ability to manage
the wider public debt, including implicit contingent liabilities (such as liabilities of the
pension system) and the debt of state-owned enterprises (SOEs), if these are not
guaranteed by the central government.

The scoring methodology assesses each dimension and assigns a score of either A, B or C
based on the criteria listed. The evaluation starts by checking whether the minimum
requirement for that dimension has been met, corresponding to a score of C. A minimum
requirement is the necessary condition for effective performance under the particular
dimension being measured. If the minimum requirements set out in C are not met, then a
D score is assigned. In the cases where a dimension cannot be assessed, an N/R (not rated
or assessed) score is assigned. The A score reflects sound practice for that particular
dimension of the indicator. The B score is an in-between score lying between the
minimum requirements and sound practice.

3.1 The IMF Public Expenditure and Financial Accountability (PEFA)

The Public Expenditure and Financial Accountability (PEFA) conducted by the IMF
highlighted need for improvement relating to budget execution and credibility, audit and
legislative oversight, cash management and the treasury single account (TSA), and
monitoring and managing fiscal risks. The government’s gross financing needs to meet
development and growth priorities, including rollover of short term debt, were estimated
to be 12-13 per cent of GDP per year for the next 5 years. This requires prudent debt
management to avoid debt–related vulnerabilities.

Although improvements are underway in many areas, the recent PEFA assessment by the
IMF indicates significant weaknesses in public financial management. Budget credibility
is low, although the budget formulation is comprehensive. Budget execution, control,
procurement, accounting and reporting are weak. External and internal audit and
legislative oversight have also been weak.

24
 3.2 Main Conclusions of the DeMPA Report

The main findings of the DEMPA mission of October 2009 are summarized below:

(a) Governance and Strategy Development

• The primary legislation (the Constitution and the Public Finance Law, 2006)
provide authorization to borrow and issue debt and loan guarantees, and specify
the requirements for reporting and audits. Pre-authorization for specified
borrowings is a pre-condition for borrowing. However, the law does not specify
the objectives for debt management.

• There is no written debt management strategy no entity is given the responsibility

to coordinate the formulation of debt management strategies and policies in the
government. There is a lack of focus on total sovereign debt or public debt
(including both domestic and external debt) which is a priority area for debt
management reforms.

• In fact, there is no description of measures to develop the domestic debt market,

bond market and the capital markets. There are only primary dealers of the
treasury bills and no secondary markets. The maximum maturity of treasury bills
is only 182 days, and the MMA does not issue one year treasury bills or
government bonds with longer maturity.

(b) Coordination with Macroeconomic Policies

• Coordination among the debt management entities, the fiscal advisors and
monetary authorities is weak with infrequent exchange of relevant data and
information. The Macro Economic Coordination Committee (comprising
members from the MOFT, MMA, and Financial Controller‘s office) provides the
desired structure but there is no clear agenda for the Committee and it does not
meet regularly.

• External debt service projections are provided by the External Resource

Management Division (ERMD) of the MOFT to the Budget Division, but a debt
sustainability analysis is not undertaken by them. Although the latest Fund-Bank
DSA was conducted in association with the ERMD and an officer has been
trained recently by the World Bank for running the DSA, significant efforts are
necessary to upgrade the capacity of the ERMD to execute the DSA templates in
the Fund-Bank framework.

• A credible macro—fiscal modeling is a pre-requisite for making the next 20 years

projections of major macroeconomic variables for the national accounts, balance
of payments and government finance, which form the basic inputs for DSA. So
such projections are done in the government and the MMA. Although a medium

25
 term projection for the three-year rolling budget and MTEF is done for the
preparation of the budget, it is not sufficient for conducting the DSA.

(c) External Borrowing

• On the external borrowing side, annual borrowing plans with a detailed

assessment of the most beneficial terms (lowest cost) from creditors are prepared.
Due diligence through a formal organizational structure and procedural
requirements is exercised while issuing loan guarantees and on-lending funds.
However, there does not exist a written contingent liability policy indicating
priority sectors and eligibility criteria for providing guarantees. In addition, due to
staff shortages, credit risk assessments prior to issuing loan guarantees are not
always done in a consistent and regular manner for all loan guarantees.

(d) Domestic Debt

• There is no advance borrowing calendar available for accessing the domestic

markets. The reliance on Ways and Means Advances (WMA) from the central
bank constrains the development of the domestic market. The market participants,
however, informed that they are satisfied by transparency and disclosure practices
on the part of the government and the MMA, and the disclosure of information on
the MMA website on regular basis.

(e) Debt Records and Reporting

• Recording of external debt data in the ERMD is complete. The recording of

domestic debt by the MMA is also complete within reasonable time. The MMA in
association with the Budget Division of MOFT now provides information on total
central government debt (combining domestic and external debt).

(f) Cash Balance Management and Cash Forecasting

• Steps have been taken by the MOFT and MMA to improve cash management for
the entire government, and there exists a liquidity forecasting model and cash
management group. The model needs to be improved significantly to forecast
government revenues and expenditure on monthly basis. The government had a
large number of bank accounts that are not reconciled on a daily/weekly basis.

(g) Operational Risk Management

• There are accessible manuals on rules and procedures for contracting, recording
and servicing debt. However, business continuity and disaster recovery plans are
not in place. Management of systems failures and data security practices (offsite
storage, etc) are weak. There is no established procedure in the case of an
emergency situation. Key personnel risk is also high with high level of turn outs,

26
 lack of succession plan for crucial positions and delay in the recruitment and
extension of skilled staff.

(h) Contingent Liabilities

• The Assets and Liabilities Section in the Financial Controller’s Office is in charge
of consolidating the information on guarantees and other contingent liabilities.
However, domestic guaranteed loans are not reported and a debt statistical
bulletin giving debt sustainability and risk indicators is not published. As regards
quality and comprehensiveness, debt data records are accurate and complete for
all external loans, albeit with a lag for external guarantees and on-lent funds. Data
for domestic debt (specially the recent securitized advances with the MMA) are
being uploaded onto the Book Entry System.

4. Debt Sustainability Analysis (DSA)

The ERMD within the MOFT provides three year forecasts for the servicing of existing
external debt and future disbursements based on a pipeline of projects for budgetary
purposes. The currency composition of external debt is also presented. Although the bulk
of the borrowing is done at fixed rates, variable rate debt comprises 15 percent of the
external debt portfolio. As a prudent measure, a five percent buffer for movements in
interest and exchange rates is included in the debt service projections. There is, however,
no formal sensitivity analysis done to determine if this buffer is sufficient or not. An
investigation into the national budget by the DeMPA Report shows that for 2007, the 5
percent buffer was almost apt, as the actual amount for interest payments on external debt
was MRF 341.7 million against the budgeted MRF 325.4 million (nominally higher than
the 5 percent). The estimates for 2008 show that external debt interest payments will be
16 percent higher at MRF 396.9 million than the budgeted figure of MRF 339.3 million6.
This can mainly be attributed to higher borrowing rates during the global financial crisis
which also resulted in higher refixing rates with regard to the 15 percent of variable rate
loans in the debt portfolio.

The technical sub-committee of the MECC discusses movements in macroeconomic and

other fiscal variables and makes recommendations for the budget to the policy sub-
committee. The policy sub-committee in turn, approves the recommendations that are
then included in the Budget. The ERMD provides information on disbursements, debt
service and the status of projects. This technical sub-committee, however, does not meet
regularly and so is not an efficient vehicle to share fiscal information. The ERMD does
not have access to key fiscal variables for planning purposes. No debt sustainability
analysis (DSA) is undertaken (staff had recently been trained and it is expected that a
DSA group will be formed soon in the MOFT).

27
 4.1 Joint IMF/World Bank Debt Sustainability Analysis
(DSA)

Joint IMF/World Bank Debt Sustainability Analysis (DSA) for Maldives5

under the Debt Sustainability Framework for Low Income Countries,
conducted in November 2009, concluded that “Maldives is rated to be at a
moderate risk of debt distress. Vulnerabilities for total public debt are higher, and
addressing them will require timely implementation of the authorities’ strong fiscal
adjustment program. The borrowing space in the short and medium terms has shrunk
after the recent accumulation of large fiscal and external deficits. The build-up of private
external debt prior to the onset of the global financial crisis and of public domestic debt
(mainly owed to the Maldives Monetary Authority, MMA) in the last two years has
intensified the debt burden. Key risks for debt sustainability are large future shocks to
exports or fiscal policy slippages. Satisfactory implementation of the fiscal adjustment
proposed under the program would lead to a sustained downward path in the public and
external debt stocks.”

It may be mentioned here that vulnerabilities were judged on the basis of the Maldives’
overall policies and institutions, as measured by the World Bank’s Country Policy and
Institutional Assessment (CPIA), averaging 3.53 over the past three years (2006-2008),
making Maldives as a “medium performer.” The relevant indicative thresholds for this
category of countries are summarized in Table-4.1. These thresholds are applicable to
public and publicly guaranteed (PPG) external debt.

Table-4.1: Indicative Thresholds for Maldives

Indicators Thresholds

1. Net Present Value (NPV) of debt to GDP ratio (%) 40

2. Net Present Value (NPV) of debt to Exports ratio (%) 150

3. Net Present Value (NPV) of debt to Revenue ratio (%) 250

4. Debt Service to Exports of Goods and Services ratio (%) 20

5. Debt Service to Revenue ratio (%) 30

5
Prepared jointly by the staffs of the IMF and the IDA in November 2009 in
consultation with ADB and approved by Kalpana Kochhar and Aasim Husain (IMF) and
Carlos Braga and Ernesto May (IDA). The basic data were provided by the Maldivian
authorities.

28
 5. Capacity Building Assessment and Planned Outputs and Deliverables in 2011

On considering the main observations as indicated above, local capacity developments

are required for formulating debt strategies and policies, preparing comprehensive debt
reports by combing both domestic and external debt, strengthening various debt offices
and setting bench marks and conducting debt sustainability analysis. In consultation with
the Team Leader, Project Manager in PwC and the Director, ERMD in the MOFT, the
following outputs and deliverables have been identified, for the assignment period of five
months within a span of 18 months until May 2012, in order to comply fully with the
Terms of Reference (TOR) for the Debt Management Specialist:

1. Debt management strategy and policy review report;

2. Debt management capacity development report;
3. ERMD institutional structure report focusing front, back and middle offices;
4. Status report on external debt, public debt and contingent liabilities;
5. Toolkit for Debt Sustainability Analysis in the Fund-Bank Framework;
6. Debt Sustainability Report and options for debt restructuring;
7. Debt Sustainability Indicators and methods and systems for monitoring, reviewing
and reporting on regular basis;
8. Setting benchmarks for domestic/external debt mix, maturity mix, interest rate,
currency mix, contingent liabilities and concessional debt;
9. Debt Management manual;
10. Report on Contingent liability strategy, policies, monitoring and reporting
11. Terms of reference for local consultants

5.1 Work Plan Matrix

Detailed Work Plan Matrix to deliver these outputs is presented as Annex-3. At the
moment the ERMD has no objections to this work-plan. However, they indicated that the
Work plan may be modified to some extent to take care of urgent needs by the MOFT
during the year and the availability of the counter staff. They also indicated that they may
need the assistance by some local consultants (who in general would be selected from the
retired officials of the MOFT and MMA having experience on debt management and
strategy). The exact need and their terms of reference will be finalized during the next
visit of the Debt Management Specialist starting with the 15th January 2011.

5.2 Questionnaires

In order to prepare these reports including the Inception Report, the following
questionnaires have been prepared to collect relevant data and the information and the
ERMD has been requested to coordinate the activities and gather relevant data and
information by the 15th January 2011 when the Debt management specialist is expected to
commence the second visit to Male for the next 30 days:
1. Questionnaire on public debt management in Maldives (see Annex-5).
2. Questionnaire for MMA and CMDA (see Annex-6).

29
 Annex-1
List of Officials Consulted by the Debt Management Specialist
During the First Visit to Male, Maldives from the 5th to 16th December 2010

Name Designation Contact Number e-mail id

Ministry of Finance and Treasury, Ameenee Magu, Male 20379, Maldives
website: http://www.finance.gov.mv

Ahmed As-ad Minister of State Tel: 3349208 ahmed.asad@finance.gov.mv

for Finance &
Treasury
Ismail Shafeeq Permanent Tel: 3341997 ishafeeq@finance.gov.mv
Secretary Mob: 7783850

Mohamed Financial Tel: 3314869 313765@dhivehinet.net.mv

Ahmed Controller Mob: 7771372

Fathmath Deputy Minister Tel: 3349284 fathmath.nuzuha@finance.gov.mv

Nuzuha

Hassan Waheed Funds Executive Tel: 3349182 hassan.waheed@finance.gov.mv

Mob: 7781250

Fathimath Public Accounts Tel: 3349178 fathimath.razeena@finance.gov.mv

Razeena Executive Mob: 7791696

Aminath Sudha Assistant Mob: 7676224 sudha@fin.gov.mv

Director

Mariyam Senior Accounts Tel: 3349290

Fazleena Officer (ADB Mob: 7836311
Musthafa Desk)
Ali Rashid Budget Division Mob: 7913023 ali.rasheed@finance.gov.mv

Fathimath Public Acc. Tel: (960)334-9178 fathimath.razeena@finance.gov.mv

Razeena Executive Mob: (960)779-1696
Aminath Manik Director General Tel: (960)334-9223 aminath.ali@finance.gov.mv
External Mob: (960)778-6906
Resources
Management
Division (ERMD)
Ahmed Salah Senior Tel: (960)334-9245 ahmed.salah@finance.gov.mv
Administrative Mob: (960)771-8391
Officer, ERMD

Abdulla Hassan ERMD abdulla.hassan@finance.gov.mv

30
 Capital Markets Development Authority, 4th Floor, MTCC Tower,
Boduthakurufaanu Magu, Male, Maldives

Fathimath Chief Executive Tel: 3336621 shafeega@cmda.gov.mv

Shafeega Officer

Maldives Monetary Authority, Capital Markets Development Authority, 4th Floor, MTCC
Tower, Boduthakurufaanu Magu, Male, Maldives,
website: http://www.bankofmaldives.com.mv

Ahmed Munawar Manager, Tel: 3312343 ahmed.munawar@mma.gov.mv

Monetary Section, Mob: 7944169
Economic
Research and
Statistics Division
Mariyam Rashfa Manager, Tel: 3322268 mariyam.rashfa@mma.gov.mv
Research and Mob: 7591089
Publications
Section, Monetary
Policy and
Research Division

State Bank of India, Boduthakurufaanu, Magu, Male, Maldives

B.N. Jha Senior Vice Tel: 3328619 bn.jha@sbi.co.in

President (Account Mob: 7796922
and Admin)
Bank of Maldives PLC Head Office, 11 Boduthakurufaanu Magu, Male 20094, Maldives

Lasantha Chief Financial Tel: (960)333-0243 lasantha@bml.com.mv

Thennakoon Officer Mob: (960)799-0479

Mohamed Head of Tel: (960)333-0162 mohamed108@bml.com.mv

Ahmed Development Mob: (960)777-4187
Banking Cell

31
 Annex-2-A

List of Documents
Either Received from ERMD, MOFT
Or Downloaded from websites of ADB, IMF, WB, COMSEC, Crown Agents
And Ministry of Finance, India

Asian Development Bank (2007) Maldives: Borrowing Capacity Assessment, pp.1-9,

ADB, Manila, September 2007.

Asian Development Bank (2009) Proposed Program Loan, Technical Assistance Loan,
and Technical Assistance Grant, Republic of the Maldives: Economic Recovery
Program- Project Number: 39658 - Report and Recommendation of the President to the
Board of Directors, pp.1-73, November 2009.

Asian Development Bank (2010a) Asian Development Outlook 2010, Country Report
on Maldives, pp.177-179, ADB, Manila.

Asian Development Bank (2010b) Asian Development Outlook 2010 Update, pp.172-
177, ADB, Manila.

Asian Development Bank (2010c) Maldives, Key Indicators for Asia and the Pacific,
pp.1-7, ADB, Manila.

Canada- Department of Finance (2010) Debt Management Strategy 2010-2011, pp.1-

12, March 2010.

Crown Agents (2005) Final Report- Republic of Maldives, Strengthening of Debt

Management, submitted to Asian Development Bank, Contract reference No:TA 4196,
Crown Agents reference No.T22821, June 2005.

Government of Maldives (2009) “Aneh Dhivehi Raajje”- The Strategic Action Plan,
National Framework for Development 2009 – 2013, pp.1-528., November 2009.0 ̊ 00’ E
71 ̊ 00’ E 72 ̊ 00’ E 73 ̊ 00’ E 74 ̊ 00’ E 75 ̊ 00’ E 76 ̊ 00’ E
Ian Storkey (2003) Government cash and treasury management reform, pp.1-4, The
Governance Brief, Asian Development Bank, Manila.

India, Government of (2010a) India’s External Debt at End-December 2009, pp.1-27, Ministry
of Finance, New Delhi, March 2010, www.finmin.nic.in.
.
India, Government of (2010b) Fiscal Policy Strategy Statement for the India’s Budget for 2010-
2011,1-8, Ministry of Finance, New Delhi, March 2010, www.finmin.nic.in.
.
India, Government of (2010c) India’s External Debt- A Status Report 2009-2010, pp.1-102,
Ministry of Finance, New Delhi, August 2010, www.finmin.nic.in.

32
India, Government of (2010d) Public Debt Management– Quarterly Report July-September
2010, pp.1-32, Ministry of Finance, New Delhi, November 2010, www.finmin.nic.in.

India, Government of (2010e) Government Debt – Status and Road Ahead, pp.1-52, Ministry of
Finance, New Delhi, November 2010, www.finmin.nic.in.

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

International Monetary Fund (2008a) Republic of Uzbekistan: Poverty Reduction

Strategy Paper, pp.1-143, IMF Country Report No. 08/34, IMF, Washington D.C.,
January 2008.

International Monetary Fund (2009a) IMF Executive Board Discusses Managing

Public Debt: Formulating Strategies and Strengthening Institutional Capacity, pp.1-3,
Public Information Notice (PIN) No. 09/45, April 6, 2009.

International Monetary Fund (2009b) Debt limits in Fund-Supported Programs:

Proposed New Guidelines, pp.1-36, Prepared by the Strategy, Policy, and Review
Department (in consultation with other departments), Approved by Reza Moghadam,
August 5, 2009.

International Monetary Fund (2009c) Maldives—Assessment Letter for the Asian

Development Bank and World Bank, pp.1-2, November 24, 2009.

International Monetary Fund (2010a) Maldives: Letter of Intent, Memorandum of

Economic and Financial Policies, and Technical Memorandum of Understanding, pp.1-
15, March 16, 2010.

International Monetary Fund (2010b) Maldives: Action Plan for PFM Reforms Based
on PEFA Assessment, pp.1-23, IMF Country Report No. 10/138, May 2010.

International Monetary Fund (2010c) Maldives: Public Financial Management—

Performance Report, pp.1-67, IMF Country Report No. 10/137, May 2010.

International Monetary Fund (2010d) Maldives: First Review Under the Stand-By
Arrangement and the 24-Month Arrangement Under the Exogenous Shocks Facility and
Requests for Waivers of Nonobservance of Performance Criteria and Modification of
Performance Criterion— Staff Report; Press Release on the Executive Board Discussion;
and Statement by the Executive Director for Maldives, pp.1-40, IMF Country Report No.
10/167, June 2010.

International Monetary Fund (2010e) Statement at the Conclusion of the IMF Staff
Mission to Maldives, pp.1-2, Press Release No. 10/421, November 8, 2010.

International Monetary Fund (IMF) and International Development Association

(IDA) (2009) Maldives, Joint IMF/World Bank Debt Sustainability Analysis under the

33
Debt Sustainability Framework for Low Income Countries, approved by Kalpana
Kochhar and Aasim Husain (IMF) and Carlos Braga and Ernesto May (IDA), pp.1-15,
November 25, 2009.

International Monetary Fund and the World Bank (2003) Guidelines for Public Debt
Management: Accompanying Document and Selected Case Studies, 2003, Washington.
International Monetary Fund and the World Bank (2008) Medium Term Debt
Management Strategy (MTDS) Analytical Tool User Guide, pp.1-13, October 9, 2008.
Macroeconomic and Financial Management Institute of Eastern and Southern
Africa (MEFMI) (2005) Public Debt Management Procedures Manual, pp.1-73.
Magnusson, Tomas; Abha Prasad and Ian Storkey (2010) Guidance for Operational
Risk Management in Government Debt Management, pp.1-18, Economic Policy and
Debt Department, World Bank, March 2010.
Melecky, Martin (2007) A Cross-Country Analysis of Public Debt Management
Strategies, pp.1-42, Policy Research Working Paper 4287, Banking and Debt
Management Department, The World Bank, July 2007.
PricewaterhouseCoopers (2010) Steering the Economy- TA7424-MLD, Institutional
Strengthening for Economic Management, Government of Maldives- Technical Proposal,
for the Asian Development Bank, pp.1-59, Government Reforms and Infrastructure
Development (GRID), Public Finance Division.
World Bank (2000) Sovereign Debt Management Forum: Compilation of Presentations,
November 2000, World Bank, Washington D.C.
World Bank (2003a) Republic of Uzbekistan Country Economic Report, Report
No.25625-UZ, Europe and Central Asia Region, April 30, 2003, Washington D.C.
World Bank (2003b) Off budget risks and their management, Chapter-3, Philippines
Improving Government Performance: Discipline, Efficiency and Equity in Managing
Public Resources- A Public Expenditure, Procurement and Financial Management
Review (PEPFMR), Report No. 24256-PH, A Joint Document of The Government of the
Philippines, the World Bank and the Asian Development Bank, Poverty Reduction and
Economic Management Unit, World Bank Philippines Country Office, April 30, 2003.
World Bank (2007) Promoting Growth and Higher Living Standards- Some Diagnostic
Tools and Project Options, pp.1-27, Power Point Presentation, World Bank, Europe and
Central Asia Region, March 12, 2007.
World Bank (2009a) Maldives at a Glance, pp.1-2, September 2009.
World Bank (2009b) Maldives- Debt Management Performance Assessment (DeMPA),
pp.1-28, Economic Policy and Debt Department, October 2009.
World Bank (2010a) Maldives Economic Update, pp.1-11, April 2010.
World Bank (2010b) The Little Data Book- World Development Indicators, pp.1-246,
World Bank, Washington D.C., 2010.
World Bank (2010c) The Little Data Book on External Debt- from Global Development
Finance, pp.1-156, World Bank, Washington D.C., 2010.

34
 Annex-2-A

List of Selected Papers of Tarun Das

On Debt Management and Related Subjects

A. Tarun Das Selected Papers on Debt Management

1. Tarun Das (2006a) Management of External Debt- International Experiences and

Best Practices, pp.1-46, Best Practices series No.9, United Nations Institute for Training
and Research (UNITAR), Geneva, 2006.

2. Tarun Das (2006b) Governance of Public Debt- International Experiences and Best
Practices, pp.1-44, Best Practices series No.10, United Nations Institute for Training and
Research (UNITAR), UNITAR, Geneva, 2006.

3. Tarun Das (2002a) Management of Public Debt in India, pp.85-110, in

Accompanying Document to the Guidelines for Public Debt Management, IMF,
Washington, June 2002.

4. Tarun Das (2002b) Management of Contingent Liabilities in Philippines- Policies,

Processes, Legal Framework, and Institutional Arrangements, pp.1-61, World Bank,
Washington D.C, March 2002.

5. Tarun Das (2006c) Financing International Cooperation behind National Borders- a

Case Study for India, pp.1-50, Office of Development Studies, UNDP, New York. March
2006.

6. 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.

7. Das, Tarun (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.

8. Das, Tarun (2003) Off budget risks and their management, Chapter-3, Philippines
Improving Government Performance: Discipline, Efficiency and Equity in Managing
Public Resources- A Public Expenditure, Procurement and Financial Management
Review (PEPFMR), Report No. 24256-PH, A Joint Document of The Government of
the Philippines, the World Bank and the Asian Development Bank, World Bank
Philippines Country Office, April 30, 2003.

9. Das, Tarun with Raj Kumar, Anil Bisen and M.R. Nair (2003) Contingent
Liability Management- A Study on India, pp.1-84, Commonwealth Secretariat,
London.

10. Das, Tarun (2005b) Management of Public Debt, External Debt and Medium
Term Expenditure Framework for the Government of Samoa, pp.1-35, presented
at the National Workshop on External Debt Management, organized jointly by

35
 UN-ESCAP and the Ministry of Finance, Government of Samoa, at Apia, 20-22
August 2005.

11. Das, Tarun (2005c) Management of External Debt in India and Lessons for
Other Developing Countries, pp.1-35, UN Economic and Social Commission for
Asia and Pacific, Bangkok.

12. Das, Tarun (2005d) Management of External Debt and Medium Term Fiscal
Framework for the Government of Indonesia, presented at the Multi-stakeholders
Consultation on the External Debt and Fiscal Responsibility Law, organized
jointly by the United Nations Institute for Training and Research (UNITAR), the
Australian Agency for International Development (AusAID) and the Ministry of
Finance, Government of Indonesia, at Jakarta, 28 November- 2 December 2005.

13. Das, Tarun (2006c) Management of External Debt and Medium Term Fiscal
Policy Framework for the Government of Cambodia, presented at the National
Workshop on External Debt Management, organized jointly by UN-ESCAP and
the Ministry of Finance, Government of Cambodia, at Phnom Penh, 21-22
February 2006.

14. Das, Tarun (2006d) Management of External Debt and Medium Term Fiscal Policy
Framework for the Government of Lao PDR, presented at the National Workshop on
External Debt Management, organized jointly by UN-ESCAP and the Ministry of
Finance, Government of Lao PDR, at Vientiane, 23-25 February 2006.

15. Das, Tarun (2006e) Management of External Debt and Medium Term Fiscal
Policy Framework for the Government of Nepal, presented at the National
Workshop on External Debt Management, organized jointly by UN-ESCAP and
the Ministry of Finance, Government of Nepal, at Katmandu, 24-28 May 2006.

16. Das, Tarun (2006f) Management of External Debt and Medium Term Fiscal
Policy Framework for the Government of Malaysia, presented at the International
Conference on Global Economic Prospects,, organized by organized by the
Malaysian Institute of Economic Research (MIER), at Kuala Lumpur, 5-7 Dec
2006.

17. Das, Tarun (2008e) Medium Term Macroeconomic Framework and the Debt
Sustainability Analysis for the Government of Gambia, presented at the National
Workshop on Debt Sustainability Analysis, organized jointly by the
Commonwealth Secretariat, and the Ministry of Finance, Government of Gambia,
at Banjul, 18-21 August 2008.

36
 B. Tarun Das Selected Papers on Medium Term Budgeting/ Program Budgeting

18. Tarun Das (2008a) Guidelines on Medium Term Budgeting, pp.1-33, ADB-
CBPGR, MOF, Mongolia, January 2008.

19. Tarun Das (2008b) An Introduction to Program Budgeting and Program

Evaluation Review Technique (PERT), pp.1-36, ADB-CBPGR, MOF,
Mongolia, June 2008.

20. Tarun Das (2008c) Budget Performance Evaluation- Methodology, Systems and
Management, pp.1-55, ADB-CBPGR, MOF, Mongolia, May 2008.

21. Tarun Das (2007a) Preparation of Strategic Business Plans- Structural

Framework and Guidelines to Line Ministries, pp.1-74, ADB CBPGR, MOF,
Mongolia, July 2007.

22. Tarun Das (2007b) Performance based program budget for Ministry of
Education, ADB-CBPGR, MOF, Mongolia, December 2007.

23. Tarun Das (2007c) Performance based program budget for Ministry of Social
Welfare, ADB-CBPGR, MOF, Mongolia, December 2007.

24. Tarun Das (2007d) Performance based program budget for Ministry of
Agriculture, ADB-CBPGR, MOF, Mongolia, December 2007.

25. Das, Tarun (2008b) Financial Planning - Part-1: Methodology, pp.1-34, and
Financial Planning Methodology and Policies- Part-2: Policies, pp.1-32, ADB
Capacity Building Project on Governance Reforms, Ministry of Finance,
Government of Mongolia, Ulaanbaatar, Jan 2008.

C. Tarun Das Selected Papers on Macro-Fiscal Modeling and Projections

26. Das, Tarun (2010a) Upgraded Nepal Macroeconomic Model- Main Conclusions,
Vol.1. pp.1-50, Asian Development Bank Capacity Building Project on
Governance Reforms, Nepal Rastra Bank, 30 May 2010.

27. Das, Tarun (2010b) Upgraded Nepal Macroeconomic Model- Analytical

framework, model structure, data base, test and calibration techniques, computer
algorithms, projections and simulations, Volume-2, pp.1-80, Asian Development
Bank Capacity Building Project on Governance Reforms, Nepal Rastra Bank, 30
May 2010.

28. Das, Tarun (2010c) Best Fitted Econometric Relations, Volume-3, pp.1-70,
Asian Development Bank Capacity Building Project on Governance Reforms,
Nepal Rastra Bank, 30 May 2010.

37
29. Das, Tarun (2010d) An Operational Consistent Macroeconomic Accounting
Forecasting Model for Gambia- Analytical framework, Model Structure and
Specifications, Data Base, Test and Calibration Techniques, Computer
Algorithms, and Base Line Projections, pp.1-71, African Development Bank
Institutional Support Project on Economic and Financial Governance (ISPEFG),
the Gambia, Banjul, 31 July 2010.

D. Tarun Das Lectures on National Accounts, BOP, GFS and MFS

30. Official Economic statistics- Part-1 on Government Finance Statistics (GFS) and
Balance of Payments (BOP) Statistics, pp.1-70, UN Statistical Institute for Asia
and Pacific, Chiba, Japan, Aug 2007.

31. Official Economic statistics- Part-2 on Monetary and Financial statistics (MFS)
and Multi–Factor Productivity Measures (MFP), UN Statistical Institute for
Asia and Pacific, Chiba, Japan, Aug 2007.

32. Official Economic statistics- Part-3 on National Accounts and Input Output
analysis, UN Statistical Institute for Asia and Pacific, Chiba, Japan, August
2007.

38
 Annex-3-B
Work Plan Matrix Of Tarun Das, Debt Management Specialist
During Dec 2010- Dec 2011
Terms of reference 5 Dec- 15 Jan- April Aug Dec Outputs and
16 Dec 15 Feb 2011- 2011- 2011- Comments
2010- 2011-
1st Visit 2nd Visit 3rd Visit 4th Visit 5th Visit
2 Weeks 4 weeks 4 weeks 4 weeks 3 weeks
Visit for resource Finalization of work
mobilization and background plan and draft outline
study of the Inception
Report in
consultation with the
Team leader and DG
(ERMS) during first
visit
Preparation of the Inception Inception Report
Report during 2nd visit
A. In Support of Debt Management
(xiii) Review and assess Report on Debt
the Maldives’ debt Management
management strategy Strategy during the
and capacity 3rd visit (Draft
requirements to outline during the
effectively meet debt 2nd Visit)
management goals and
recommend changes in
line with best practices.
(xiv) Review Review Report on
recommendations of ADB ADB-TA Debt
TA on Strengthening of Management Report
Debt Management and during 2nd Visit
update
recommendations.
(xv) Assess capacity Report on capacity
development development
requirements for effective requirements
debt management including technical
including hardware and manpower and ICT
software requirements. Upgradation during
the third visit
(xvi) Further to proposed Report on structural
organizational set-up of reorganization of
expanded External ERMD &
Resource Management coordination of front,
Division (ERMD) propose middle, back and
arrangements to head offices, and
effectively coordinate other organizations
front, middle and back dealing with debt
office functions. management during
the 4th visit
(xvii) Review state debt Report on database
profile (domestic and on domestic and
external debt) including external debt and
contingent liabilities, and contingent liabilities,
recommend development and linkages with
of a database to include project monitoring
domestic and external database during the
debt and which can link fifth visit (draft
to externally funded outline during the
project monitoring third visit)
database

39
 Annex-3-B
Work Plan Matrix Of Tarun Das, Debt Management Specialist
During Dec 2010- Dec 2011

Terms of reference 5 Dec- 15 Jan- April Aug Dec Output and

16 Dec 15 Feb 2011- 2011- 2011- Comments
2010- 2011-
1st Visit 2nd Visit 3rd Visit 4th Visit 5th Visit
2 Weeks 4 weeks 4 weeks 4 weeks 3 weeks

(xviii) Develop framework for Report on the

debt sustainability analysis Development of DSA
(DSA) building on the framework and
Commonwealth Secretariat Hands-on training in
Debt Recording and the fourth visit(draft
Management System (CS- report and beginning
DRMS) and based on critical of hands on training in
assumptions. the third visit)

(xix) Prepare debt Report on debt

sustainability study jointly restructuring during
with ERMS Staff and the fifth visit.
recommend feasible options
for debt restructuring,
including debt servicing
requirements for the next 5
to 10 years
(xx) In coordination with Team Report on Debt
Leader, develop debt scenario building as
scenario building as a part of inputs for the MECC
regular inputs into the during the fifth visit
Macroeconomic (draft outline during
Coordination Committee the fourth visit).
(MECC).
(xxi) Propose methodology Report on Debt
for estimating relevant debt sustainability
related indicators and indicators & reporting
develop effective reporting arrangements in the
requirements. fifth visit.
(xxii)Prepare a debt Debt Management
management manual to Manual in the fifth
include application of debt visit (dealing with
management techniques debt management
based on such parameters techniques and
as interest rate, maturity, benchmarks for
currency, grace period, various parameters to
guarantees. minimize cost / risk)
(xxiii) Create an operational DSA Toolkit in the
toolkit for debt sustainability fourth visit
analysis.
(xxiv) Identify terms of TOR, desired
reference and work plans for experience and Work
national consultants/ plan for national
contractual staff and assist in consultants will be
selection process. included in the
Inception Report to
be submitted in the
second visit.

40
 Annex-3-C
Work Plan Matrix of Tarun Das, Debt Management Specialist
During Dec 2010- Dec 2011

Terms of reference 5 Dec- 15 Jan- April Aug Dec Output and

16 Dec 15 Feb 2011- 2011- 2011- Comments
2010- 2011-
1st Visit 2nd Visit 3rd Visit 4th Visit 5th Visit
2 Weeks 4 weeks 4 weeks 4 weeks 3 weeks

b. In Support of Training
(i) Prepare workshops and Work- Work- Work- Work- Identification of
support training shop shop shop shop support institutions,
arrangements with on on on on conducting workshops
dedicated institutions to Dom. and Evaluation
DSA DSA debt
enhance skills set of ERMS. Debt in Reports of training
associa restru
cturin during the
tion
g respective visits
with
CS,
London

(ii) Coordinate with the training Final report on

Prepar Report
expert and the capacity training needs and
ation of on
development expert to training training training programs in
prepare a training program progra progra the fifth visit.
for the concerned staff and m m
provide necessary training.

41
 Annex-4
MALDIVES - QUESTINNAIRE ON PUBLIC DEBT MANAGEMENT

Tarun Das, Public Debt Management Specialist

A. Debt recording, analysis and debt statistics: Coverage, Scope and Quality

A.1 It is understood that the Commonwealth Secretariat Debt Recording and Management
System (CS-DRMS) is used for debt recoding. Does the system record both external and
domestic debt? Provide details.
A.2 What are the major components of external debt considered by the government and
recorded in the CS-DRMS?
A.3 Does the government indicate total debt stock in the budget or produce any report for
public?
A.4 Fill in the table below the outstanding external debt under different heads at the most
recent date:

Table-1: Outstanding External Debt as on ___________________________

External Debt of Maldives Amount in Maldives Amount in US$
Rufiya (million) (million)
1. Public and publicly guaranteed
(a) Official creditors
(i) Multilateral
--- Concessional
(ii) Bilateral
--- Concessional
(b) Private creditors
(i) Bonds
(ii) Commercial banks
2. Private non-guaranteed
(i) Bonds
(ii) Commercial banks
3. Short term debt
4. Non-residents’ deposits
5. Others, if any, please specify

A.5 Provide external debt by main creditors for the last five years.
A.6 Indicate the sectoral use of external debt for the latest five years.
A.7 Provide the interest rate mix of outstanding external debt for the latest five years.
A.8 Provide the maturity mix of outstanding external debt for the latest five years.
A.9 Provide the currency mix of outstanding external debt for the latest five years.

42
 B. Recording and Reporting: Transparency
B.1 For each of the components of external debt indicated in the table, which institutions
are responsible for recording and reporting the information?
B.2 Which institutions can instantaneously retrieve from their databases up-to-date
information for the items listed below? Which documents report such figures? What is
the time lag in reporting?
(a) Outstanding external debt by creditor and debtor classifications
(b) External debt by sectors
(c) Guaranteed external debt by sectors
(d) Total debt services- classified by amortization and interest payments

B.3 Which types of external debt, in your view, not reported to the following authorities
and why? Give reasons for not reporting. Reasons could be “not available, in public
interest, official secrecy, national security” etc.
(a) Ministry of finance
(b) Cabinet
(c) Central bank
(d) Parliament
(e) Foreign investors
(f) Public

C. Guarantees and other Contingent Liabilities

C.1 Contingent liabilities include government guarantees, and financial losses of
institutions that are covered by some type of government guarantee, state insurance and
social security programs, and all government commitments to spend or intervene or bail
out financial or other strategic institutions financially in the future. Contingent liabilities
can be broadly groups under two heads: explicit (defined by a law or contract) or implicit
(broadly predetermined by public expectations and pressures by interest groups).
(a) Which Ministry/ Department is responsible for deciding on government
guarantees and other contingent liabilities?
(b) Are there written documents on the scope and various aspects (such as eligibility,
limits, guarantee fees etc.) relating to government guarantees and other contingent
liabilities? If yes, give details and provide copies of such documents.

C.2 Is the government legally required to explain the amounts of government contingent
liabilities? If yes, specify the Act and Legislation. Also specify to whom these are
reported- to the Parliament, to the public, and others (please specify).

43
C.3 Tick (√) the types of contingent liabilities borne by the government.
1. Government guarantees given to loans taken by:
(a) Sub-national governments (i.e. provinces and local governments)
(b) Government operated or controlled corporations,
(c) Public sector banks and financial institutions
(d) Entities under public-private partnership
(e) Private sector entities
2. Umbrella government guarantees for various types of loans in priority sectors
(mortgage loans, student loans, and loans to agriculture, housing, micro
enterprises, and other priority sectors)
3. Exchange rate guarantees issued by the government for external loans or foreign
currency denominated non-residents’ or residents’ deposits with banks
4. Government guarantees on various types of risks (including market, currency,
regulatory, political etc) in BOT contracts in infrastructure
5. State insurance and social security schemes such as deposits insurance, health
insurance, private pension funds, crop insurance, natural calamity insurance,
war-risk insurance etc., Funds for old age, children, women, unemployment
allowances etc.
6. Guarantees on benefits (unfunded liabilities) of the social security system
(public pension and provident funds)
7. Others, if any, please specify
C.4 Describe the following in details:
(a) Government guarantees: the requirements for their design (the type of risks that
can be covered, the extent of required risk sharing), issuance authority (is only
the ministry of finance authorized?), government control mechanism (required
reports from the creditor and beneficiary, and audit, accounting and valuation
requirements), guarantee fees, and realization mechanism if they fall due.
(b) Sub-national governments, public sector agencies and enterprises, and state-
guaranteed institutions: the financial management and reporting requirements
and government control mechanism
(c) Demands and pressures on the government to extend ad hoc, previously
unforeseen financial support: the legal requirements and practice for deliberation
in government decision making.

C.5 Classify guarantees by sectors such as industry, transport, telecommunications,

power, banking and insurance, social sectors, urban development, real estate, housing and
construction etc.
C.6 Specify top 5 major guarantees given by the state with their face value, the issuer
(MOF or other government agency), beneficiaries, creditors, currency of denomination,
types of risk covered, risk sharing etc.
C.7 List major 5 state-guaranteed institutions and provide statement of their contingent
liabilities at the latest date. What type of other government support (financial or non-
financial) do these institutions receive (for example, privatization revenues, supply of
land and public utilities at concessional rates, deferment or exemption of government

44
taxes and duties, tax holidays, cheap financing via the banks and financial institutes, state
guarantee for borrowings)?
C.8 List 5 large state-owned enterprises and large state-owned banks that receive
government guarantees and provide statements of their contingent liabilities at the latest
date. What type of other government support do these institutions receive (for example,
additional capital support, cheap financing from the Central Bank, sovereign guarantee
for borrowings)?
D. Legal and Institutional Arrangements: Accountability
D.1 Does the government of Maldives have an Act or Cabinet approved Guidelines or
any other written document on the scope, objectives, purpose, policies, strategies,
processes, legal framework, and institutional arrangements etc. relating to external debt
or public debt and related contingent liabilities? If yes, provide details and give a copy of
the same.

D.2 Please indicate the exact institutional arrangements for the management of external
debt and domestic debt. International experience suggests that centralized debt offices in
most of the countries are located under the Ministry of Finance. What is the arrangement
in the government of Maldives? Give details and indicate constrains (in terms of staff,
skill, information gaps and communications technology etc.) if any.
D.3 International best practices suggest that debt management functions should be
organized as separate and independent units given their different objectives,
responsibilities and staffing needs. Usual practice is to establish a separate front
office, middle office, back office and head office6 as in the case of investment banks
and other financial institutions. Does the government of Maldives have such distinct
offices? If yes, indicate their locations, staffing pattern and functions. If not, who
performs all these functions of external and public debt management? Provide details.
D.4 For each component of external debt, specify the departments/ institutions which act
as the Head Office, Front Office, Middle Office and Back Office for the management of
external debt.
D.5 Are there any legal requirements that the government estimate, account, and report
the external debt, guarantees and other contingent liabilities to the Cabinet, to the
Parliament and to the Public? If yes, specify the Act and Legislation.
D.6 Is there any government Website on various aspects of public debt, external debt and
related contingent liabilities, which can be easily accessed by anybody without paying
any fee? If yes, indicate the website. If no, is their any plan in the government to do so?
D.7 Which of the components of external debt and contingent liabilities are not regulated
by any law and depend fully on ad hoc government decisions?

6
The front office is responsible for the efficient execution of all portfolio transactions and negotiations
with lenders consistent with the portfolio management policy of the agency. The middle office (or risk
management office) is responsible for identification, measurement and monitoring of debt and risk,
establishment of benchmarks, dissemination of data and policy formulation for both short and medium
term and public and private debt. Back Office is responsible for accounting, auditing, data consolidation
and the dealing office functions for debt servicing. Head Office is the final authority to approve all public
debt- both domestic and external.

45
 E. External Debt Management Policies, Strategies, Practices, Methods and Systems
E.1 Is there any law on the Fiscal Responsibility and Budget Management7 which
indicates upper limits on annual borrowing, guarantees and fiscal deficit, and outstanding
public debt and guarantees? If yes, give details. If not, would the MOF prefer to have
such limits in the annual budget? Would it be possible to enact such an Act in the
Parliament?
E.2 In which areas and under what circumstances does the Ministry of Finance resort to
external borrowing beyond the budgeted amount? What kind of approvals is required
from the Cabinet and Parliament for this kind of external borrowing?
E.3 What is the audit and accounting system for public debt and external debt? Are their
both internal and external auditors? Is there Audit by independent auditors? Would the
government departments and public enterprises and the private sector prefer adoption of
the Generally Accepted Accounting Principles (GAAP) being followed in the USA?
E.4 Does the Annual Budget provide details of annual and outstanding external debt (in
both book value and current exchange rates)? Does it also provide a Statement on Fiscal
Risk (Off-Budget liabilities)? If not, would the MOF prefer to place such statements?
E.5 While considering alternative sources of government finance, do the Ministry of
Finance, Cabinet, Central Bank or Parliament
• Quantify the future fiscal cost of alternative options in any medium-term
fiscal framework?
• Describe the risks of alternative options?
E.6 List examples when the government withstood political pressure and did not provide
financial support beyond the budgeted figures (for example, when the government
refused bail out a loss-making enterprise or bank).
E.7 Are public enterprises and banks, state-guaranteed institutions, and creditors and
beneficiaries under state guarantees “rewarded” and “punished” for the quality of their
risk management? Provide examples.
E.8 Are the pension, insurance and provident funds fully funded or the government uses
“pay as you go” approach as in the case of the most developing countries? Would the
MOF like to change the system in the medium term?

E.9 For effective governance and risk management of external debt, most of the
developing countries like India, do not allow Sub-national or provincial governments to
borrow directly from the external sources. Only the Central government borrows from
multilateral and bilateral sources and then on lends money to the provinces and local
governments. What is the system in Maldives?

7
Most of the international best practices dealing with sovereign debt (such as the IMF Guidelines for
Public Debt Management- the “IMF Guidelines”, prepared by the Staffs of the International Monetary
Fund and the World Bank, 21 March 2001) is concerned with the management of public or government
debt in total, not just external debt. Likewise, most of the legal systems and laws deal with the total public
debt. This is quite evident from the titles of such laws such as Public Finance Law, Fiscal Responsibility
Law, Fiscal Responsibility and Budget Management Act, Financial Management and Accountability Act,
Budget Law, Fiscal Prudence and Transparency Law etc. The World Bank maintains a list of such laws on
their website http://www1.worldbank.org/publicsector/pe/countrybudgetlaws.cfm
.

46
 E.10 In many developing countries like India, government does not borrow from
external private commercial sources (syndicated banks, foreign institutional investors
etc) and also does not resort to short-term external borrowing. The government borrows
from only multilateral and bilateral sources on long terms. Many Governments do not
issue bonds and shares directly in the international stock markets although they may
allow purchase of limited domestic government securities (G-Secs) or Treasury Bills
(TBs) by non-residents and Foreign Institutional Investors (FIIs). However, they may
allow public sector and private enterprises and financial entities to raise capital from
foreign stock markets or from foreign commercial banks and investment companies.
What is the system in the Maldives and what are the procedures as regards external
commercial borrowing and short-term borrowing in the government of Maldives?
F. Domestic Debt
F.1 Indicate different components of domestic debt such as treasury
bills (TBs) and long-term Bonds issued to the public, borrowing from
the central bank, borrowing from provident funds, pension funds,
insurance funds, national savings certificates, and other liabilities
(specify them) of the govt etc.
F.2 Provide the interest rate mix of outstanding domestic debt classified by TBs, longer
term Bonds and other borrowings.
F.3 Provide the maturity mix of outstanding domestic debt classified by TBs, longer term
Bonds and other borrowings.
F.4 Indicate the trends of average yields of TBs, government securities
(G-Secs) and Bonds by maturities during last 5 years.
G. Risk Management: Capacities and Systems
G.1 Do you have any benchmarks for the composition of public debt (i.e. optimal ratios
for domestic and external debt), minimum concessional part of external debt, interest
rate, maturity mix, currency mix, limits on guarantee etc.
G.2. Describe the capacities of the ministry of finance, other government agencies, public
sector institutions and enterprises, and state-guaranteed institutions to evaluate domestic
and external debt and control the associated contingent liabilities.
G.3 Is there any Contingency Liability Fund or Government Reserve Fund for assuming
the contingent liabilities in the case of defaults?
G.4 Is there any system for provisioning for contingent liabilities under prudential norms
either by the guarantee agencies or by the government?
G.5 What steps do the Ministry of Finance and other agencies undertake to prevent fiscal
risks arising from the public and private sectors (for example, are any actions taken if
enterprise debt or central bank obligations appear to be too high)?
G.6 It is understood that the budget is formulated on the basis of cash accounting. Does
the MOF desire to move towards accrual accounting in the medium or long term as per
requirements under the IMF Revised Government Finance Statistics 2000?
G.7 Do you consider any of the previous loans to be very expensive as compared to
current rates of interest either in domestic capital markets or in international markets?
G8. Has the government considered any debt to be restructured? If yes, give details.
G9. Do you consider the existing systems and procedures at the MOF and the Central
Bank to be adequate for efficient management of external debt? If not, what
improvements do you like to have? Give details.

47
G.11 Tick (√) the options (most appropriate for Maldives) in the following Table8:Items Per
Items Tick (√) the most appropriate
options- You may tick multiple
options
1. Public Debt management objectives and priorities
(a) To minimize financial costs and risks to the economy
(b) To minimize financial costs and risks to the government
(c) To raise funds for financing government budget
(d) Development of financial and capital markets
(e) Others if any, please specify
2. External Debt management objectives and priorities
(a) To minimize financial costs and risks to the economy
(b) To minimize financial costs and risks to the government
(c) To raise funds for financing government budget
(d) Management of overall public debt
(e) Allow public and private sector companies to raise capital
from external markets
(f) Management of balance of payments
(g) Management of foreign exchange reserves
(h) Others if any, please specify
3. Establishment of benchmarks for risk management
(a) Has established guidelines for risk management
(b) Has established benchmarks for foreign currency debt
(c) Has established benchmarks for portfolio performance
(d) Has established benchmarks for domestic debt
(e) Has established benchmarks for interests mix
(f) Has established benchmarks for maturity mix
4. Objectives of Risk Management Guidelines
(a) To establish limits on currency risk
(b) To smooth maturity profile
(c) To avoid excessive short-term debt
(d) To incur debt in least volatile currency
(e) To fix limits on debt with floating interest rate
(f) To maintain debt matching foreign exchange reserves
(g) Others if any, please specify
5. Analytical techniques for undertaking risk analysis
(a) Has establish Middle Office to conduct risk analysis
(b) Not using any analytical techniques
(c) Uses Value-at-Risk (VAR)/ Cost-at-Risk (CAR)
(d) Uses Debt Sustainability Indicators
(e) Conducts debt stress tests
(f) Others if any, please specify

8
The Table is based on the World Bank Survey on Second Sovereign Debt Management Forum (1999).

48
6. Constraints for establishing benchmarks Tick (√) the most appropriate
options- You may tick multiple
options
(a) Lack of debt management policy and strategy
(b) Lack of debt management expertise
(c) No access to financial and bond markets
(d) Lack of debt monitoring
(e) Lack of appropriate Information Technology (IT)
(f) Difficult economic environment
(g) Difficult political environment
(h) Others if any, please specify
7. Use of derivatives to hedge currency/ interest rate risks
(a) Uses currency swaps
(b) Uses interest rate swaps
(c) Use of exchange commodity futures and options
(d) Others if any, please specify
8. Constraints for using derivatives
(a) Lack of technical knowledge
(b) Undeveloped financial and capital markets
(c) Legal constraints
(d) Political constraints
(e) Others if any, please specify
9. Institutions managing the foreign currency debt
(a) Ministry of Finance
(b) Central Bank
(c) Jointly by the Ministry of Finance and the Central Bank
(d) Independent Debt Office
10. Coordination of both public and private debt
(a) By the Ministry of Finance (MOF)
(b) By the Central Bank (CB)
(c) Jointly by the MOF and the Central Bank (CB)
(d) Debt Management Committee
11. Highest authority for approval of public debt Component of Component
Domestic Debt of External
(Specify) Debt
(Specify)
(a) President
(b) Parliament
(c) Cabinet
(d) Inter-ministerial board
(e) Prime Minister
(f) Finance minister
(g) Governor of the Central Bank
(h) DG of independent authority

49
12. Average time taken for approval of external debt Tick (√) the most appropriate
options- You may tick multiple
options
(a) Less than a week
(b) Less than a month
(c) More than a month, but less than three months
(d) More than three months
13. Management of Contingent liabilities
(a) Sub-national entities are allowed to raise their own funding
from abroad
(b) Sub-national entities are not allowed to raise their own
funding from abroad
(c) Central govt provides explicit guarantees for IBRD loans
taken by public sector enterprises
(d) Central govt provides explicit guarantees for other
multilateral and bilateral loans by PSEs
(e) Central govt bears fully the exchange rate risk for IBRD
external loans taken by public sector enterprises
(f) Central govt bears fully the exchange rate risk for other
external loans taken by public sector enterprises
(g) Central govt shares partially the exchange rate risk for
external loans taken by public sector enterprises
(h) Central govt shares partially the exchange rate risk for
external loans taken by any enterprises
(i) Central govt does not bear any foreign exchange risk
14. Efficiency of Middle Office
(a) There is no Middle Office Unit
(b) There exists a Distinct Middle Office Unit
(c) Middle Office is placed under the direction of the Front
Office or Back Office
(d) Middle Office exits but lacks appropriate technical skill and
appropriate software and hardware
(e) Uses Market Information system (MIS)
(f) Has Access to internet
(g) Maintains Government Website for Public to provide
information on external debt and public debt
15. Main constraints for external debt management
(a) Lack of proper organizational structure
(b) Macroeconomic risk
(c) Political risk
(d) Lack of technical staff in the front office
(e) Lack of technical staff in the middle office
(f) Lack of technical staff in the back office
(g) Front, back and middle offices are not independent
(h) Lack of legal framework
(i) Limited local debt and bond markets
(j) Limited domestic capital markets
(k) Limited domestic money and financial markets

50
 ANNEX-5

Country Policy and Institutional Assessments (CPIA) for External Debt

51
 Annex-6
Questionnaire for the Maldives Monetary Authority (MMA) and
Capital Market Development Authority (CMDA)
By Tarun Das, Debt Management Specialist

A. Maldives Monetary Authority (MMA)-Data base for domestic

debt and BOP

1. Statement on domestic debt

• Frequency for publication- monthly, quarterly, yearly;
• Contents and scope
• Composition domestic debt such as treasury bills (TBs) and long-
term Bonds;
• Distribution TBs/ Bonds/ G-Secs by Holders- MMA, deposit banks,
parastatals, provident/pension/ insurance funds, national savings
certificates, resident individuals, non-residents, investment
bankers, Foreign Institutional Investors, and others;
• Roll over ratio for TBs;
• Interest rate mix/ yields of outstanding domestic debt classified by TBs, longer
term Bonds and other borrowings;
• Maturity mix of outstanding domestic debt classified by TBs, longer term Bonds
and other borrowings;
• Trends of average yields of TBs, G-Secs and Bonds by maturities
during last 5 years.

2. Statement on BOP

• Frequency and timing for publication- monthly, quarterly, yearly

• Contents and scope
• Separate Goods balance, services balance, income balance, transfer balance,
financial balance, capital account balance;
• Overall BOP balance and foreign exchange reserves;
• End period and average exchange rate of Maldives rufiyaa per
US$ and other hard currencies and of major trading partners and
creditors;

3. Liquidity management/ cash management

• Frequency and timing for publication- monthly, quarterly, yearly

• Contents and scope
• Liquid assets of deposit banks;
• Required liquidity assets of deposit banks as per statutory norms on CRR and
SLR;
• Excess liquidity as percentage of required liquid assets;
• Cash and Reserve positions of the MMA;

4. Banks assets and liabilities

• ]Frequency and timing for publication- monthly, quarterly, yearly

• Contents and scope
• Liquid assets of deposit banks;
• Required liquidity assets of deposit banks as per statutory norms on CRR and
SLR;

52
 • Excess liquidity as percentage of required liquid assets;
• Cash and Reserve positions of the MMA;

5. Monetary Survey

• Frequency and timing for publication- monthly, quarterly, yearly

• Contents and scope
• Combined Monetary Survey- Net foreign assets, net domestic assets and total
money supply of the banking sector;
• Summary Account of the MMA- Net foreign assets, net domestic assets and
reserve money of the MMA;
• Summary Account of the Deposit Banks- Net foreign assets, net domestic assets,
current, savings and time deposits of the deposit banks;

6. Balance sheet and Profit and loss Accounts

• Audited Annual Balance Sheet and Profit and Loss Accounts of the MMA- latest
and time lag;
• Audited Balance Sheet, Profit and Loss Accounts, profitability ratios, non-
performing assets, risk weighted capital adequacy ratios of the deposit banks-
latest and time lag;
• Contents and scope
• Total assets, liabilities, contingent liabilities, foreign assets and liabilities,
profitability ratios of the MMA;
• Total assets, liabilities, contingent liabilities, foreign assets and liabilities,
profitability ratios, non-performing assets, risk weighted capital adequacy ratios
of the deposit banks;

7. Statutory Ratios

• Trends of statutory norms for CRR, SLR, non-performing assets, risk

weighted capital adequacy ratios, deposit rates, prime lending
rates, ratios of credits to the real sector and capital markets.

B. Institutional arrangements and policies

B.1. Act of MMA
B.2. Does there exist a Monetary Policy Committee?
B.3. Cash Management/ liquidity Management Committee?
B.4. Research Department in the MMA?
B.5. Composition and functions of the dealing rooms dealing with foreign exchange
transactions and external currency denominated bonds, if any;
B.6. composition and functions of the banking operations department dealing with
domestic issue of treasury bills and bonds;
B.7. Are there medium term projections on money supply and BOP?
B.8. Advance Calendar for issue of TBs/ G-secs/ Bonds?
B.9. Policies, guidelines and procedures for issue of TBs/ Bonds/ G-Secs.

C. Capital Market Development Authority

C.1 Relevant Act
C.2 Mandate, structure and activities;
C.3 Guidelines and procedures for issues of equities, shares, debentures;

53
 C.4 Guidelines for establishment of primary market and secondary market
dealers;

Annex-7:
Basic Concepts of Debt Management and Debt Sustainability Indicators

Conceptual Issues Relating to External Debt

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.

7.1 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), Organization 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.

54
 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.

7.2 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.

7.3 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.

7.4 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

55
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.

7.5 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
indicators over time. 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-7.1

Table-7.1: 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 or XGS or Revenue ratio
(c) Present value of debt services to GDP or XGS ratio
2. Liquidity (d) Basic debt service ratio- Ratio of total debt services
monitoring ratios (interest payments plus repayments of principal) to XGS
(e) Cash-flow ratio for total debt or the total debt service
ratio (i.e. the ratio of total debt services to XGS)
(f) Interest payments to reserves ratio.
(g) Ratio of short-term debt to total debt or XGS or foreign
exchange reserves
(h) Import cover ratio- Ratio of total imports to total foreign
exchange reserves.
3. Debt burden ratio (i) Total external debt to GDP or GNP or XGS ratio
(j) Debt services to GDP (or GNP) ratio
(k) Total public debt to budget revenue ratio
(l) Ratio of concessional debt to total debt
4. Debt structure (m) Rollover ratio- ratio of amortization (i.e. repayments of
indicators principal) to total disbursements
(n) Ratio of interest payments to total debt services
(o) Ratio of short-term debt to total debt
5. Public sector (p) Ratio of public sector debt to total external debt or GDP
indicators (q) Public sector debt services to XGS ratio
(r) Public sector debt to government revenue ratio
(s) Average maturity of non-concessional debt
(t) Foreign currency debt over total debt

56
6. Financial sector (u)
Open foreign exchange position- Foreign currency assets
indicators minus liabilities plus long term position in foreign
currency stemming from off-balance sheet transactions
(v) Foreign currency maturity mismatch
(w) Ratio of foreign currency loans for real estate to total
credits given by the commercial banks
(x) External sector related contingent liabilities
(y) Trends of share market prices
(z) GDRs and Foreign Currency Convertible Bonds issued
(aa) Inflows of FDI and portfolio investment
7. Corporate sector (bb) Leverage (debt/ equity ratio)- Ratio of debt to equity
indicators (cc) Interest to cash flow ratio
(dd) Short-term debt to total debt
(ee) Return on assets
(ff) Exports to total output ratio
(gg) Net foreign currency cash flow
(hh) Net foreign currency debt over equity
8. Dynamic ratios (ii) Average interest rate/ growth rate of exports
(jj) Average interest rate/ growth rate of GDP
(kk) Average interest rate/ growth rate of revenue
(ll) Change of PV of debt service/ change of exports
(mm) Change of PV of debt service/ change of GDP
(nn) Change of PV of debt service/ change of revenue
Source: Tarun Das (2006a) and IMF (2003)

7.6 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-2.2. 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-7.2 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
capita between US$766 Middle income (SIMI) Middle income (MIMI) Middle income (LIMI)
and US$9,385

57
 7.7 Stress Tests

Stress tests are closely related to the debt sustainability indicators and are useful in
identifying major liquidity risks, as well as strategies to mitigate them. Stress tests can be
used to test a variety of scenarios such as the following:
(a) Types of capital inflows (FDI, trade credit, other credits)
(b) Periods of access to capital markets
(c) Exchange rate changes/ derivative positions
(d) Risks due to price and interest rate changes
(e) Macroeconomic uncertainties (such as outlook for exports and imports)
(f) Policy uncertainties (fiscal and monetary policies)

(a) Standard Stress Tests

(a) Revenue growth = Baseline GR – 1 SD

(b) Export value growth = Baseline GR – 1 SD
(c) Assets value growth = Baseline GR – 1 SD
(d) Inflation rate = Baseline Rate + 1 SD
(e) Net non-debt creating flows = Baseline Inflows – 1 SD
(f) One-time major nominal or real exchange rate depreciation = Baseline + ½ SD

where GR stands for growth rate and SD for standard deviation.

(b) Indications of debt distress episodes

Debt distress is indicated by recourse to any of the following forms of exceptional

finance:
(a) Arrears: Number of years in which principal and interest arrears to all creditors
is in excess of 5% of total debt outstanding
(b) Debt rescheduling: Year of initial debt restructuring plus two subsequent years
(c) Bailout by financial institutes / lenders
(d) Normal times are non-overlapping periods of five years in which no signs of
above mentioned debt distress are observed.

(c) Determinants of debt distress

• Traditional Debt Sustainability Indicators include the following:
– Present value of debt/exports ratio
– Present value of debt/revenues ratio
– Present value of debt/assets ratio
– Debt service/exports ratio
– Debt service/revenues ratio
– Debt service/assets ratio
• Shocks can arise as significant fall or volatility of the following:
– Real revenue growth
– Real depreciations
– Assets value growth

58
 (d) Quality of institutions and policies

1. There could be substantial value-added in looking at the role of organizational

quality, good governance, policies and shocks in addition to traditional debt
burden indicators when assessing probability of debt distress.

2. Using a common debt-burden threshold to assess sustainability for all companies

is unlikely to be appropriate.

3. There is strong tradeoffs between quality of institutions, policies, systems of

auditing and sustainable level of debt.

(e) Indicative Debt and Debt-Service Thresholds (%)

For the heavily indebted countries and least developed countries, World Band has indicated the
threshold levels for the debt sustainability indicators under various policy regimes as assessed and
ranked by the World Bank every year.

Indicative Thresholds for Debt Sustainability Indicators

Indicators Quality of Debt Management Policies and Systems

Poor Medium Strong

NPV debt/assets ratio (%) 30 45 60

NPV debt/XGS ratio (%) 100 200 300
NPV debt/Revenue ratio (%) 200 275 350
Debt svc/XGS ratio (%) 15 25 35
Debt svc/Revenue ratio (%) 20 30 40

For example, if the policy regime of a country is assessed as “Poor” by the World Bank, then the
debt service to exports ratio for this country could be 15 percent at the maximum. If debt service
ratio exceeds 15 percent, the country would face problems for servicing debt. If the policy regime
of a country is considered to be “Medium”, the country can have debt service ratio up to 25
percent. If the policy regime for a country is assessed as “Strong”, the country’s debt/service ratio
can go up to 35 per cent. Other indicators have similar interpretations.

(f) Debt Distress Classifications

• Low risk— all indicators well below thresholds

• Moderate risk—baseline OK, but scenarios/shocks exceed thresholds
• High risk—baseline in breach of thresholds
• In debt distress—current breach, that is sustained over projection period

59
 2.8 Strategy and Policy Framework for Debt Management

As regards policy framework, international best practices for the management of external
debt leads 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) Nearly all of the autonomous debt management offices have adopted an
organizational structure similar to that in leading corporate treasury and
investment banks. They divide functional responsibilities for managing
transactions into different offices within the debt management organization and
established procedures to ensure internal control, accountability, checks and
balances. Usual practice is to establish separate front offices, middle office, back
office and head office, as explained earlier.

(d) There is need to have a cautious approach on external short-term credit. In many
developing countries, like India, government does not resort to any short term
borrowing from external sources, although the private sector is allowed to borrow
short-term credit externally subject to certain conditions.

(e) For an emerging economy like Uzbekistan, it is better to put a limit on private
commercial borrowing with short and medium maturity.
(f)
(f) Big bullet loans are bad for small economies like Uzbekistan as these can create
refinancing risk and roll over problems in future.
(g) 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. During the last financial and foreign exchange crisis towards the end of
the last decade, in each of the major Asian crisis economies, viz. 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 the private sector comprising commercial banks, finance
companies and corporate sector.
(h) It is not sufficient to manage the balance sheet exposures, it is equally important
to manage off-balance sheet exposures and contingent liabilities.
(i)
(j) It is necessary to adopt suitable policies for enhancing exports and other current
account receipts (tourism earnings and remittances) that provide natural hedge
and the means for financing imports and debt services.

60
(j)
(k) Detailed data recording and dissemination are pre-requisites for an effective
management and monitoring of external debt and formulation of appropriate debt
management policies.

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

(l) It is important to strengthen public and corporate governance and enhance

transparency and accountability by strengthening internal and external audit.

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

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

61
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Das, Tarun (1999a) East Asian Economic Crisis and Lessons for External Debt Management,
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Das, Tarun (2000) Sovereign Debt Management in India, pp.561-579, in Sovereign Debt
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62
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63
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Tarun Das (2006g) Financing International Cooperation behind National Borders- a

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Tarun Das (2007a) Preparation of Strategic Business Plans- Structural Framework and
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Das, Tarun (2007d) Official Economic statistics- Part-3 on National Accounts and Input
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Tarun Das (2008a) Guidelines on Medium Term Budgeting, pp.1-33, Asian

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64
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projections and simulations, pp.1-210, in three volumes, Asian Development Bank
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65
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67