By Toby McIntosh
A unique international effort to shed more light on the debt owed by developing nations has faltered.
The strategy was dependent on voluntary disclosures by financial institutions. But only two banks participated, dashing hopes for a new international database.
A resuscitation plan is being considered, EYE has learned, but the path forward is unclear.
The continuing lack of transparency about sovereign debt was highlighted in comprehensive World Bank report. Almost 40 percent of 74 low-income developing countries have never published debt data or they had not updated their data in the last two years, according to the Bank report, issued in November 2021.
Concern about this opacity is increased because of growing debt levels and more complicated debt instruments.
There is broad concurrence on the value of transparency, not only to allow citizens to understand the commitments being made, but also to facilitate the workings of the marketplace. Debt pressures, many analysts say, end up reduced government spending, particularly hitting vulnerable populations and exacerbating inequality. Lack of transparency increases uncertainty, risk and borrowing costs.
Alternative ways to achieve debt transparency appear unpromising.
Some have urged the World Bank, the International Monetary Fund and other international financial institutions (IFIs) to twist national arms for transparency, but this tactic has not been embraced by the organizations’ leaders.
Past and present programs by the IFIs aspire to help borrowing nations build their capacity to manage debt and pass transparency laws. But the color-coded “heat maps” produced by the World Bank indicate that a sizable task remains.
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G-20 Promoted Alternative Approach
Concern about debt transparency prompted the Group of 20 developed nations to approach the problem in a new way. The plan was to populate a new central database data with voluntary disclosures from lenders.
The lenders appeared to be on board.
Their disclosures were to be guided by principles developed by the Institute of International Finance (IIF), a business group. The information would be disseminated through a central database run by the Organization for Economic Cooperation and Development (OECD), the Paris-based intergovernmental organization with 38 developed country members.
But individual financial institutions resisted disclosure. An OECD report in March revealed that only two banks had contributed data.
“This is an embarrassing outcome and proves that the voluntary approach has failed,” Tim Jones, Head of Policy at Debt Justice (formerly Jubilee Debt Campaign), a UK-based civil society organization (CSO), told EYE.
“By now it should be clear that voluntary really doesn’t work,” observed Mae Buenaventura, head of the Asian Peoples Movement on Debt and Development, during a July 14 forum.
OECD May Hold Meeting on Topic
Back at the drawing board, the OECD is considering how to revive the effort.
The current plan is to address an objection made the lenders, who told the OECD that they remain uncertain about whether the borrowing countries want debt disclosure, according to Riccardo Boffo, the OECD economist leading the effort.
The OECD is considering holding a meeting this Fall to which the affected countries, banks and CSOs would be invited, Boffo said.
The hoped-for-outcome would be pro-transparency message from the developing countries to the lenders, he said. No details have been announced.
Possible New Hurdle from Lenders
Potentially complicating the effort is that lenders may want more assurances from governments before they disclose loan information.
Penelope Hawkins, senior economic affairs officer at the United Nations Conference on Trade and Development (UNCTAD), said she understood, based on a recent statement by the IIF, that lenders may want more assurances before they disclose loan information and need waivers from a borrowing countries. She recounted this view during a July 14 panel on debt transparency held on the fringe of a meeting of a G-20 finance ministers and central bank governors held in Bali. (See the webinar video beginning at 3:11 on Youtube.)
Contacted by EYE, the IIF did not confirm the comment.
The IIF has consistently calling for both IFIs and the borrowing countries to release more information, according to IIF publications that also stress the industry’s strong interest in achieving more transparency.
Lack of Incentive?
So what kept lenders from sending data to the OECD?
The OECD report in March didn’t highlight a lack of waivers as a main inhibiting factor, instead citing a variety of issues and pointedly elaborating the steps taken to work with the finance industry, such as devising a template for submitting data and addressing legal concerns.
The limited participation has raised questions about feasibility of the voluntary transparency model.
Hawkins expressed concern that the lenders may have no incentives to provide the data required in the OECD template.
“Unless there are incentives for disclosure, then why would one creditor be the first, when its competitors are not doing so?” she mused. “Unless we talk about incentives of some sort I don’t know how we move beyond this,’’ she said.
But Hawkins refrained from suggesting what those incentives might be.
One civil society side representative closely following the effort said the only thing that might work is heavy pressure on the financial institutions from the United States and other G-20 countries. That has yet to materialize.
Other Options Seem Like Long-Shots
Perhaps the most direct pro-transparency fix would be for the Bank and the IMF to require governments to fully disclose their debts as a condition of receiving loans. This approach is not supported by the Bank or the IMF, but it has prestigious backers.
“Of all the actors active in the sovereign debt arena, multilateral institutions—including the IMF, the World Bank, and regional development banks—are in the best position to exert influence over the shape and content of a transparency regime for sovereign debt,” according to a January 2022 report by the Bretton Woods Committee’s Sovereign Debt Working Group (SDWG). It was co-chaired by William R. Rhodes, President and CEO of William R. Rhodes Global Advisors, and John Lipsky, Distinguished Scholar and Senior Fellow, Johns Hopkins School of Advanced International Studies (SAIS).
IFI pressure on countries is also supported by activists such as Jones. “No lender should lend to a government which is not releasing information on their debt,” he said. “It’s not so much that it should be a condition,” Jones explained, “just that responsible lending requires only lending to governments that have transparent and accountable borrowing and debt management plans.”
The prestigious Bretton Woods Committee, with strong ties to the financial world, advocated for the IFIs to set minimum disclosure requirements for sovereigns seeking financial support, as well as to continue providing practical and technical support to governments.
No Interest in Mandates by Bank or Fund
However, the Bretton Woods Committee report observed that both the Bank and the IMF have opposed imposing such requirements, adding, “this opposition presumably reflects their members’ views.”
“Without the support of their key members, these multilateral institutions’ advocacy for greater transparency will not by itself bring about meaningful change,” the Bretton Woods Committee report said, continuing, “Other political support will also be required, including from the members of the G20 and the Paris Club.”
One of the authors of the Bretton Woods Committee report told EYE: “So far no evidence of movement to push harder for disclosure on the part of the IMF or the WB.”
“Indeed they seem reluctant to use their leverage to this end,” added Mark A. Walker, Senior Managing Director/Sovereign Advisory, Guggenheim Securities, LLC.
Of the OECD effort, Walker commented: “I would say it’s too early to judge the efforts of the OECD. They started with a narrow mandate and would like to do more.”
IFIs Continue to Pursue Training, Persuasion
Both the Bank and the IMF strongly support more debt transparency and for several decades they and other IFIs have funded programs designed to increase countries’ capacity to record, monitor and report on public debt. They also have encouraged passage of national transparency laws.
The Bank’s November report’s recommendations, and those of an IMF report from April 2022, support continuing the prescription of aid and encouragement. The reports did not analyze the efficacy of the past efforts in light of the findings of low transparency.
Recent blogs by Bank officials have described a “ladder of transparency” for countries to climb and stressed the idea of releasing summaries of debt information.
(More on this in upcoming EYE report.)
Other Ideas Floated
Another approach entirely, being pushed by Debt Justice and others, envisions passage of laws on New York and the United Kingdom that would make transparency a prerequisite element in loans. Without such conditions, lenders would not be able to asserting legal protections for their loans. A large percentage of loans are issued in those jurisdictions. Bills have been introduced, but enactment seems distant in both places.
Yet another idea is to employ the leverage of the credit rating agencies (CRAs), whose assessments of national debt have substantial market influence.
Both the Bank and Bretton Woods Committee reports suggested that CRAs could play a positive role.
One of the authors of the Bretton Woods Committee report, Richard J. Cooper, a New York attorney, and two colleagues wrote in a blog post, “For example, certain ratings levels could be conditional on meeting minimum disclosure requirements.” They continued, “Disclosure ‘scorecards’ for sovereign borrowers could be used to further encourage transparency, and so too could information-sharing among agencies.”
The Bank’s report also mentions CRAs, commenting, “There is room for further improvement in the granularity of information on the rationale for CRA’s downward adjustment as a result of data transparency.”
More specifically, the Bank said, “A revision of CRAs’ methodology ensuring a more detailed and systematic disclosure of the specific events that trigger adjustments would add clarity to the process and allow final users to appreciate possible “red flags” in their own approach to debt data transparency.”
All told, however, the prospects seem slight that any of these paths will lead to more debt transparency in the near future.
Asked if overall progress is being made on debt transparency, Jones said, “Not enough yet.”
The Credit Suisse scandal in which hidden debt was discovered in Mozambique “has shown to lenders the danger of lending in secret,” Jones said, concluding: “It is therefore disappointing that private lenders are still dragging their heels on being transparent. We need more voices joining the campaign to push governments to consider rules that would ensure banks are transparent in their lending.”
Why Did So Few Banks Participate in G-20/OECD Disclosure Effort?
At the moment, G-20/OECD debt transparency effort seems stalled.
It has appeared promising in January 2021 when the OECD began to plan collecting data from the financial institutions based on Voluntary Principles for Debt Transparency. The principles were developed by the Institute of International Finance (IIF), a global association with close to 450 financial industry members from 70 countries. The principles were published on June 10, 2019, and are amended from time to time. (Available here).
The rationale, as stated by the OECD, is:
Greater transparency across financial transactions should improve the flow of information and reduce the risk of adverse shocks arising as a result of undisclosed public liabilities appearing in central government liabilities. Greater transparency will assist borrowers, creditors and the official sector in the ongoing assessment of debt dynamics and debt sustainability.
The OECD’s mission was to establishing a data repository about all the debt held by about 70 low-income countries (LICs) that are eligible for debt reduction.
Multilateral and bilateral financing constitutes the majority of debt issued in LICs, but “some countries have seen a significant increase in reliance on opaque private lending,” according to the March OECD report.
OECD Tried to Persuade Banks to Participate
“The success of this Initiative,” the OECD report underscored, “is dependent on private creditors’ willingness to provide information on their lending activities.”
The OECD created both a Debt Data Users Group and an Advisory Board on Debt Transparency (ABDT), made up primarily of industry representatives.
Indeed, non-governmental organizations (NGOs) in June 2021 balked at participating, 62 of them criticizing the effort as flawed. They called for wider participation by NGOs and affected countries, and inclusion of all debt instruments and more countries. But eventually, three NGO representatives joined the advisory board.
The OECD and its advisors created a “blueprint” for reporting and developed legal language to meet concerns of the financial institutions. (See the documentation on an OECD webpage here. The 23-question reporting matrix and other information is described in an implementation note.)
Only Two Banks Submitted Data
But by the time of the March OECD report, only two banks had supplied data: Credit Suisse and Mitsubishi UFG.
The OECD launched a “fully interactive” debt data portal, but without the hoped-for granularity.
Why such low participation? The report cited:
- “initial problems related to the IT side as some of the banks had strict security protocols that did not allow easy interactions for data submissions.”
- “confidentiality agreement challenges related to legal procedures.”
- “discussion on the fields of the reporting template for data collection.”
The report details efforts meet these objections, particularly through the advisory groups.
OECD Sees `Challenges’ Ahead
“Challenges lie on the path forward,” deadpans to the OECD report.
It states, “Collecting transaction specific data on a voluntary basis from banks and other market participants takes time to build momentum and scale up efforts.”
“Engagement” will be the “primary solution,” states the OECD report. More outreach is planned with public sector authorities in low-income countries, “a vital step in securing their acceptance of the need for better transparency.”
“Their support is needed, at the very least to have them agree to allow banks to waive confidentiality agreements, and amend such agreements in the future, so that such debt data can be submitted to the OECD (among other bodies) for collection, assessment and dissemination,” according to the OECD report.
The OECD “will now seek to move forward with a plan for 2022/23 to strengthen the momentum of debt transparency, scale up data collection, improve analysis and overcome obstacles to widespread support for expanded debt data dissemination for public use,” according to the report.
In addition, the report says the OECD “is negotiating to also incorporate a portion of granular data from commercial data providers.” Such data is sold, but often at high prices. The OECD Secretariat is discussing with commercial data providers “how to better utilize available debt data which is substantial, but not widely available to central banks and IOs.” It notes that this includes bond and syndicated loan issuances, “which appear to represent much of the unguaranteed external private sector debt in LICs (although this varies by country).”
Further, the OECD identified some new transparency frontiers: the syndication of loans by commercial banks, loans from regional development banks, and bilateral loans supported by export credit agencies.
Rising Debt Drives Calls for More Transparency
Calls for more transparency come as that sovereign debt levels are higher than ever, with private financing and more complex instruments playing larger roles.
The “external debt” levels of the 70 low income countries included in the OECD’s Debt Transparency Initiative have “reached their highest levels in the past decade, the OECD reported, the rise pushed by the Covid-19 crisis.
Even without the hoped-for detailed data, the OECD report nevertheless presented some sobering trend analysis about the size and character to sovereign debt, relying on aggregate data from a variety of official and unofficial sources, and a private data-collection company, Rifinitiv.
“Key findings show a decrease in maturity of sovereign borrowings and the high financing costs, which could raise refinancing risks particularly for amounts denominated in foreign currency,” according to the OECD.
Greater transparency would allow better assessments of debt dynamics and debt sustainability, the OECD said, “acting also as a powerful tool to reduce financing costs.”
There are many similar assessments about debt and the need for transparency.
An April 2022 IMF blog post said that about 60 percent of countries eligible for help through the international Debt Service Suspension Initiative (DSSI) are at high risk of debt distress or already in debt distress. The IMF keeps a running list of their status. (See July 31 version.)
The Jubilee Debt Campaign highlighted: “In 2010 African governments were on average spending less than 5% of revenues servicing foreign loans. By 2021 this had jumped to 16.5%.”
The IIF in an August 2021 publication wrote, “Despite some improvements in recent years, debt statistics remain largely incomplete for most LLMICs (low- and middle-income countries); in many cases, the pace of improvement does not match the needs of rapidly growing global debt market.”
The same publication critiques as “far from complete” the official databases maintained by the Bank and the Fund. A June 2021 IIF publication said, “Although IFIs have mandates to collect and disseminate timely and accurate public debt data, most of this information is not publicly accessible.”
The November 2021 World Bank report concluded, “Despite progress in recent years, public disclosure of debt data by LIDCs’ authorities (“direct reporting”) is still limited, particularly in fragile countries.”
