KATHMANDU, Sept 16: A report prepared by the Financial Comptroller General´s Office (FCGO) has recommended formation of an independent debt management office to ensure efficient handling of the country´s debt burden and activities related to debt servicing.
The advice comes at a time when the government has started to feel that traditional debt management practices, the absence of a central body to maintain the country´s debt records, lack of market research prior to issuing debt instruments and inability to generate public awareness about debt instruments have increased the risks and cost of fund-raising for the state.
“A separate yet unified structure of debt management would streamline related responsibilities, make monetary management independent of debt management and improve the debt management capacity of the government,” the report says.
Once such an office is created the government may start raising funds from international capital markets to finance the development needs of the country and support deficit financing, which is the difference between the state´s income and expenditure for a given year.
The ability to tap international capital markets for funds is considered crucial as evidence shows that domestic debt is costlier than foreign debt.
For instance, little more than two-fifths of the country´s debt stock is domestic. But interest cost for domestic debt servicing makes up 77 percent of the total amount allocated for debt repayment, the report says. “This makes domestic debt four times costlier than foreign debt,” it adds.
Although the report acknowledges that foreign debt is prone to exchange rate vulnerabilities, it says proper research and analysis can minimize such risks, for which “a different debt management is required.”
The need for an independent office has been felt as the current credit management function is scattered, with Nepal Rastra Bank keeping tabs on domestic debt, while the Ministry of Finance´s Foreign Aid Coordination Division keeps records of foreign aid and debt. The FCGO, meanwhile, keeps records of both foreign and domestic debt.
The draft of the report, which has been forwarded to the Finance Ministry for further consultations, has suggested that the responsibilities of different government bodies, with regard to debt management, be transferred to the proposed debt management office. These would include debt management tasks performed by the Finance Ministry´s Economic Operations and Policy Analysis Division, according to the report.
“In addition, the scattered legislative arrangements and regulations need to be streamlined and recast so that debt management responsibility is efficiently discharged through one window,” the report says.
To ensure that the responsibilities of the debt management office are equally divided, the report has suggested creation of front, middle and back offices at the proposed office.
“The front office should be responsible for debt mobilization and management functions. This office should also see whether laws, rules, regulations and guidelines are being followed while negotiating new loans and issuing new debt instruments,” says the report.
The middle office, on the other hand, should be responsible for analyzing risk, the report says. This office should be entrusted with the task of conducting portfolio analysis and debt sustainability studies, formulating borrowing policy, plan and strategy, and designing policy for issuance of government guarantees, the report adds.
Lastly, the back office should be responsible for maintaining debt database, debt servicing and preparing statistical reports.
According to the report, the proposed office should be headed by a civil servant with an accounting background.