By Toby McIntosh
A “ladder of transparency” was described recently by a World Bank official. The ladder has four rungs for countries to climb to reach full transparency about their national debts.
Few countries have made the climb, however, despite years of encouragement and support from the Bank and others.
“A serious lack of debt transparency” was documented in a November 2021 World Bank report. Nearly 40 percent of the 74 Low-Income Developing Countries (LIDCs) studied “have never published debt data on their websites, or they have not updated their data in the last two years,” according to the report.
“Despite progress in recent years, public disclosure of debt data by LIDCs’ authorities … is still limited, particularly in fragile countries,” concluded the report.
The poor report card came out amid growing concern about the size and complexity of sovereign debt. These fears prompted the Group of Twenty developed nations to take a new tack to achieving debt transparency, hoping to rely disclosures by lenders. But that project has run into difficulties. (See related EYE report.)
To give countries a boost, the Bank, the International Monetary Fund and other international financial institutions (IFIs) have long funded projects geared toward helping them to improve their debt management capabilities and pass pro-transparency laws. The efficacy of these efforts is hard to ascertain. A 2021 internal review of the relevant Bank programs found “mixed results” for $26 billion spent over 10 years.
From an outcomes standpoint, the Bank’s November report painted a grim picture. And a forthcoming IMF report will say that legal frameworks for debt transparency in 65 countries are “lagging.”
While the Bank report doesn’t employ the ladder analogy, the scores suggest that few countries have reached the top rung. Only one of the 74 countries studied got full marks for debt transparency.
Long Way to Climb
Besides the negative findings on disclosure of debt information, the Bank’s 122-page report pointed out related accounting and management problems.
“Existing statistical standards for public debt are proving to be very ambitious for LIDCs,” the report said, showing that inconsistencies in record-keeping lead to large variations in public estimates of debt.
Exacerbating the situation is the complexity of debt agreements, particularly for “resource-backed loans,” the report said. The Bank’s researchers found that 15 low income countries had collateralized debt (debt typically guaranteed by future revenues from natural resource exploitation) about which no details of the terms were published. Contingent liabilities are sizable in LIDCs, but data on them are not easily accessible, according to the report, which said that in 30 percent of LIDCs, statistics on guarantees are not disclosed.
A similar finding was made in a more recent report by other Bank researchers. It revealed that no African country with outstanding collateralized debt had publicly disclosed the details of the collateral.
Among the 74 IDA countries examined by the Bank, only Burkina Faso got a “full disclosure” rating for all of the nine categories on the Bank’s Debt Transparency Reporting Heat Map. (See Bank blog post.)
“Because of the current risks to low-income countries, improvements in debt transparency have to be accelerated,” the Bank’s November report advised. A Foreword in the report by Bank President David Malpass ended: “Debt Transparency in Developing Economies should end any complacency about addressing debt transparency challenges in low-income countries. The time to act is now.”
Negative Consequences of Opacity
There is little disagreement on the value of debt transparency. The Bank report described what can happen when debt levels and specific debt obligations are opaque, summarizing the consensus view among IFIs, lenders, borrowers and civil society organizations.
“Enhanced debt transparency is essential for adequate borrowing and lending decisions and efficient debt resolutions,” according to the report. It said the “lack of visibility around exact public debt stock may affect the quality of debt sustainability analysis and limit the implementation of swift and fairly designed debt restructuring.” In addition, “government capacity to make sound borrowing decisions is limited when comprehensive debt data are not available.”
Rising financing needs have to be met through new borrowing, the Bank report said, continuing, “To ensure that this financing contributes effectively to development outcomes and does not undermine long-term debt sustainability, debt transparency must be improved.”
The latest findings, while more extensive, are consistent with a line of past analysis. In 2018, a World Bank report stated, “Public debt disclosure remains particularly weak in countries at high risk of debt distress and fragile states.” Looking backward, other Bank economists found in 2022 that “underreporting of debt has been a long-standing issue.”
The consequences of a lack of transparency are not just theoretical. “The cases of Mozambique and Zambia illustrate why debt transparency is important for macroeconomic stability and development,” wrote three World Bank economists in a 2022 blog post. The sudden disclosure of undisclosed public debt in those countries caused “adverse shocks,” commented a March 2022 report by the Organization for Economic Cooperation and Development (OECD), the Paris-based intergovernmental organization with 38 developed country members.
Zambia defaulted in November 2020 after a group of bondholders refused to accepting a request from the government for a suspension of coupon payments on the grounds that the debt owed to some bilateral lenders was not fully disclosed. In Mozambique, two large and previously unreported loans were revealed. “As a result, donor support was frozen, the economy plunged, and the government was forced to make deep cuts in public spending,” the Bank report summarized, adding: “The biggest losers were poor Mozambiquans. Nontransparent public debt can quickly alter the lives of millions of ordinary citizens.”
Limited Progress on Debt Transparency
The reasons given for opacity are many, including willful secrecy, weak management, poor accounting systems and the lack of laws mandating disclosures.
The Bank report downplayed the magnitude of purposeful secrecy, but conceded that “recent episodes” of “hidden debt” are linked with “intentional efforts to conceal debt exerted by the creditor, the borrower, or both.”
“It is challenging to empirically disentangle unintentional from intentional lack of transparency,” the report said, not attempting a quantitative analysis. The report said that “lack of transparency is not necessarily the consequence of deliberate actions by borrowers and lenders.”
While intentional secrecy “is undoubtedly part of the problem, our analysis shows that debt transparency is also a story of ‘missing debt portfolios,’ ” according to the Bank report. In some cases, the report said that “weaknesses in capacity are a direct consequence of a deliberate lack of commitment to debt transparency.”
“In several cases, entire sectors or instruments are mis- or under-reported as a result of weak domestic legal and operational frameworks.”
Confidentiality Clauses Exacerbating Factor
Compounding the opacity problem is that borrowing countries find it hard to resist lenders’ demands for nondisclosure agreements. Such confidentiality requests from China are well-documented, but the problem is more widespread, involving private lenders, too.
The OECD report stated, “While multilateral and bilateral financing constitute the majority of the debt issued in LICs (Low Income Countries), some countries have seen a significant increase in reliance on opaque private lending.”
“A recent wave of `hidden debt’ revelations has contributed to today’s record debt levels,” according to an analysis of World Bank data published in March 2022 by three World Bank economists.
Bank, IMF Plans to Continue Efforts
The November Bank report was lauded at a Nov. 11, 2022, launch event hosted by Bank President Malpass, who was introduced by a Bank official as “a tireless and vocal leader on this issue of debt transparency.” (See recording and transcript of the event.)
Malpass and four guests endorsed the Bank report’s recommendations, which largely track the Bank’s existing strategies on debt transparency. The Bank, and the IMF, have for years urged countries to better manage and account for their debt and to pass national laws to improve transparency. They have sought to improve government “capacity” around debt management and transparency, efforts generically termed “technical assistance.”
The Bank report did not attempt to assess the effectiveness of Bank’s strategies. Nor does an April 2022 IMF report, which provides a thorough, if uncritical, overview of existing policies and programs intended to encourage more transparency, which it recommended continuing.
Bank Report Recommendations in More Detail
While the November Bank report said improvements in debt transparency “have to be accelerated,” and its stark findings raise questions about the sufficiency of years of Bank assistance and persuasion, the recommendations largely repeat the previous Bank prescription,
Five “high-priority” recommendations are for countries:
- Develop a sound public debt management legal framework to establish clear debt authorization provisions, and requiring the disclosure of public debt information, regulating its content and frequency and making it easily accessible to all stakeholders
- Publish core public and publicly guaranteed debt statistics at the general government level annually, including information on individual debt instruments contracted
- Limit and define the scope of confidentiality clauses in borrowing, and refrain from those that require secrecy
- Develop and adopt strict analytical and monitoring processes for approval and implementation of resource-backed loans
- Provide a definition of public debt in line with international standards, announce the country’s debt management objectives, and provide a list of permitted debt instruments, transactions or sources of funding
However, the report says that “debt transparency cannot be addressed by individual countries by themselves.” It goes on to say that debt transparency “requires broad international consensus and better global debt surveillance systems. IFIs, creditors, and other stakeholders, like credit rating agencies, have a key role to play in fostering debt transparency.”
The report does not suggest that the IFIs should condition making loans on government transparency, a strategy that Bank and Fund officials have rejected. (For more on this topic, see a related EYE article.)
Recommendations for IFIs
As for what IFIs could do, the Bank report has three “high” priority recommendations, some of which are intended to foster improvements at the country level, and others to better of handling Bank data on debt.
A new idea, floated in the Bank’s November report, seems not to have been adopted.
“More ambitious,” the report stated, “is the creation of an agency within an existing IFI tasked with producing “soft law” (i.e., non-binding guidelines and opinions) on fiscal and debt statistics, as well as liaising with national authorities to periodically monitor and report on countries’ adherence to international standards.”
The three high priority suggestions are:
- In indirect reporting databases, specify the country-specific instrument and sectoral coverage (as opposed to their expected one) and explain deviations from direct statistics. (“Indirect reporting” refers to information provided to the IFIs, as opposed to what governments tell the public, known as “direct reporting.”)
- Foster coordinated data collection processes and explore potential for streamlining and consolidating existing IFI debt databases.
- Support the development and implementation of modern and integrated debt recording and management systems (DRMS), with definitions and calculation methods aligned with international standards, and capable of easily recording all debt instruments.
The report gives three “medium” priority suggestions:
- Explore the feasibility of developing an international loan repository system (“While targeting official debt in a first step, the ILR can be broadened to include private external debt.”)
- Provide “a regular assessment of borrowing countries’ adherence to international statistical and accounting standards”
- In comprehensive debt restructurings, such as the G-20 Common Framework, disclose key methodological information (e.g., on comparability of treatment) ex ante and publish detailed reporting about their enforcement ex post.
The lone “low priority” suggestion is to “promote alignment of debt statistical and financial reporting standards.
IMF Report Backs Continuing Pro-Transparency Efforts
An April 2022 IMF staff report addressed sovereign debt issues broadly, especially “over-indebtedness,” and also extolled the virtues of transparency and the need for more of it. It called for a continuation of support to countries.
“Debt transparency is the cornerstone of good debt management, reliable debt sustainability analysis, and appropriate and timely debt restructuring,” according to the first of seven bullets about the value of transparency.
Conveying a sense of urgency, the IMF report stated, “Large and relatively rapid changes in the creditor profiles in low-income countries has increased the urgency of arrangements to ensure reliable and transparent accounting of debt.”
Seeing growing challenges on transparency, the IMF report stressed that “the creditor base has become more heterogenous underscoring the need for greater debt transparency.” The report noted the very large share of bilateral aid is provided by China. The “proliferation of debt-like instruments and commodity-based lending, together with the opaque financials of some state-owned enterprises, can obscure total government debt levels,” the IMF said, citing the Bank report.
Looking ahead, the IMF report said, “The IMF and WBG will continue to support member countries in strengthening debt and fiscal transparency to address upfront some of the main drivers of past build-ups of debt vulnerabilities and ensure better monitoring of risks and analysis of debt sustainability.”
In December of 2021, the IMF published a document, Legal Foundations of Public Debt Transparency: Aligning the Law with Good Practices, that was used in a seminar with African government officials.
The IFIs “can promote reforms in national legal and operational frameworks,” according to the IMF staff report, explaining that IMF and World Bank support for debt transparency “has been integrated into policies and operations and supported by scaled up TA” (technical assistance).
“This comprehensive approach has proven effective,” the IMF report claims, saying that in 40 percent of the countries examined in the Bank report, “there has been a broad improvement in the quality of data dissemination practices compared to one year ago.”
The Bank report included no such calculation. The IMF did not reply to requests for its methodology.
Creating Legal Frameworks for Disclosure
The idea that governments should create debt disclosure laws, generally called “Public Debt Management Legal Frameworks” (PDMLF), has been a staple proposal from the Bank and the Fund in past years. But few developing countries have adopted them.
The Bank report recommended as a high priority that governments adopt such frameworks while noting that they are “not currently common practice among LIDCs.”
The Bank report identified “eight key properties of a national PDMLF that make it conducive to transparency.” A sound PDMLF:
- clarifies the borrowing authority, the delegation of power, and the debt authorization cycle;
- outlines debt management roles and responsibilities;
- defines public debt according to international standards, sets debt management objectives, and provides a list of permitted instruments, transactions, or sources of funding;
- regulates debt data disclosure statistics to ensure comprehensiveness, timeliness and full accessibility;
- includes public debt audit requirements;
- stipulates the consequence of non-compliance;
- is publicly available: and
- extends its scope to the entire public sector.
“Our analysis shows that LIDCs tend to have fairly clear and traceable provisions that identify who is authorized to borrow and manage the public debt portfolio,” the report said. But, it said, “The legal frameworks, however, vary significantly in areas such as the debt disclosure and audit requirements, approval of non-standard instruments (e.g., involving collateral or collateral-like structures) or the consequences of noncompliance.”
The Bank researchers’ conclusion is based on a 2020 survey of 39 low income countries about their legal frameworks. The results are discussed in some detail in the report along with examples of some countries considered to have good disclosure laws. The value of having a legal framework is explained and the different elements of strong frameworks are reviewed. The report concluded that “there is not a one-size-fits-all approach for developing and implementing a PDMLF conducive to debt transparency.
Likely to buttress the Bank’s findings is a yet-unreleased IMF evaluation of legal frameworks for debt transparency in 65 countries. Researchers found that “full implementation of international standards is lagging across the globe,” according to preliminary video peek at the findings. No further information is yet available, an IMF spokesperson said.
Pressure Via Monitoring
Monitoring government debt transparency efforts has been a tactic to encourage reform.
The Bank’s Debt Transparency Reporting Heat Map with its red and green charts is a new effort to apply such subtle pressure.
Some monitoring also occurs in other contexts, with results appearing in country-specific reports.
The two IFIs, according to the IMF report, “will continue to prepare joint Low-Income Countries Debt Sustainability Analyzes (LIC DSAs) to help the poorest countries achieve their development objectives while maintaining debt sustainability.” Regarding debt transparency, the IMF report said the DSAs, which are conducted annually for 66 countries, “will continue to emphasize near-complete coverage of public debt and debt disclosure.”
Transparency is indeed discussed in the Debt Sustainability Analyses for low-income countries, most of which are posted on the IMF website. The comments on transparency tend to be brief, however.
For example, the DSA of March 19, 2021, on Kenya, said, “In comparison to peers, Kenya maintains a high standard of debt transparency,” while adding, “The external public debt register includes granular data disclosure, which could be more regularly updated.” It later noted, “The authorities also committed to increase debt transparency through expanded coverage and reporting of public debt.”
Country assessments in World Bank’s Debt Management Performance Assessment (DeMPA) are based on an extensive methodology including a component on disclosure (See toolkit page). For example, see 2021 report on Honduras, with the disclosure section beginning at p. 28.)
To encourage initial participation in DeMPA, the country reports were treated as confidential and required country permission to publish, although the World Bank encourages disclosure, and most are. Nevertheless, country authorization is still required for DeMPA publication. (Find available reports here.) (See 2021 blog post on changes in DeMPA.)
The Bank’s Heat Map methodology offers a modified scoring system, with four categories. Clicking on the individual boxes provides information on what is or isn’t available.
Bank Assistance Programs Critically Reviewed
Efforts to build better national financial and debt management capabilities have been underway for several decades, through a variety of channels, and usually with a transparency component.
This is sometimes referred to by the Bank as “a multipronged strategy” that includes “agreement to improve monitoring of debt vulnerabilities, enhance early warning systems, improve debt transparency, and increase debt management capacity building.”
Is the strategy working?
The Bank’s Independent Evaluation Group in March 2021 issued an evaluation of these broad efforts during fiscal years 2008–2017, an investment of more than $26 billion. “This included 126 investment project loans amounting to $6.8 billion, 260 development policy operations (DPOs) amounting to $19.4 billion (through 714 policy actions), and 598 advisory services and analytics activities,” the IEG summarized.
The IEG was diplomatically critical, reporting “mixed results.”
Positive results included “improving debt management capacity and strategies, and establishing and strengthening systems of accountability for budget management, PIM, and financial accounting and reporting,” the report said, Also, “Support has also strengthened countries’ institutional capacity by improving the regulatory framework for sovereign borrowing.”
However, the IEG found, “Many IDA-eligible countries still do not meet minimum standards for debt management institutions and practices, suggesting that stronger links between diagnostics and capacity building may be needed.” (The Bank’s International Development Association (IDA) exists to help about 70 of the poorest countries.)
The IEG evaluation said, “There is scope to increase the effectiveness of the significant World Bank support to improve PFDM,” referring to “public financial and debt management.”
One primary initiative is the Debt Management Facility (DMF), a multi-donor trust fund launched in 2008 that offers “advisory services, training and peer-to-peer learning to more than 80 developing countries around the world to strengthen their debt management capacity, processes, and institutions.” In replying to the IEG critique, the Bank management said that 2019 changes introduced “capacity building in areas that support debt transparency such as in areas of debt reporting and monitoring, and debt-related contingent liabilities and other relevant fiscal risks; and enhances technical assistance related to debt management institutions.”
Perhaps understandably considering the multitude of topics under the PFDM umbrella, the IEG report said nothing about the Bank’s record in promoting transparency specifically. The IEG report made several recommendations for stronger assessments of the Bank’s program.
A new IEG evaluation will be forthcoming on the debt sustainability framework, a Bank official told EYE.
The Bank’s November report suggested that there is work to be done “a key enabler of transparency,” the presence of a sound institutional and operational framework. “Many debt offices in LIDCs are now structured according to the international sound practices of back, middle, and front office,” the report said. “However, results from the World Bank’s Debt Management Performance Assessment (DeMPA) suggest that less than 50 percent of LIDCs meet the minimum requirements in terms of staff capacity (IMF-WB, 2020d). Improvements in IT systems for debt recording and management could also help enhance transparency.”
World Bank Officials Describe “Ladder”
Since the publication of the Bank report in November, some Bank officials have written that progress on transparency will be incremental, that there are costs and benefits to transparency, and that summary disclosures might be the way to go.
A “ladder of transparency” was described in a March 2022 article by Marcello Estevão, World Bank Global Director, Macroeconomics, Trade & Investment, and two Bank colleagues.
International financial institutions “will play an important role in assisting creditors and borrowers in enhancing debt transparency,” they wrote in International Banker. But it will be up to country governments to weigh the “marginal benefits” of more or less disclosure, they stressed.
“Enhancing PPG debt reporting will be an incremental process for LIDC borrowers,” the Bank officials said, referring to “public and publicly guaranteed” debt.
The ladder they described has four rungs:
- First, “no public-debt reports are published,”
- Second, “limited sectoral and instrument coverage,”
- Third, “[P]artial debt reporting,” and
- Fourth, “full PPG debt reporting, constitutes best practice.”
“Climbing the debt-transparency ladder requires sound legal and debt-management practices,” according to the authors, who go into more detail about subjects such as standardization of disclosure and the difficulties government might face.
Some borrowers may resist being transparent, the authors said, because while transparency “comes with important benefits,” transparency “can also have potential costs, including increased public scrutiny (political costs) and higher financing costs for countries that reveal additional debt.”
“The choice of enhancing debt transparency will ultimately depend on whether the marginal benefits of revealing additional information outweigh the marginal costs,” according to Estevão and his colleagues. “This tradeoff is difficult to quantify and is compounded by the remaining uncertainty around the true level of indebtedness in the absence of a credible commitment mechanism, such as a transparency certificate,” they wrote, concluding, “Uncertainty around the net effects of enhancing transparency may keep borrowers from doing so.” A similar point about competing incentives is made in the Bank’s November report.
Estevão and colleague put the primary responsibility to action on national governments, but say creditors can also help. “Borrowers and creditors can refrain from engaging in non-disclosure agreements or confidentiality provisions that prevent the timely publication of key information,” they wrote, commenting that “no internationally agreed standard exists on what constitutes an excessively restrictive confidentiality clause.” They said “the disclosure definition included in the debt-transparency principles of the Institute of International Finance (IIF) could serve as a reference point.”
Estevão also urged governments to resist confidentiality clauses in a May 2022 blog post. “More often than not, confidentiality clauses are the result of more unsavory motivations: political considerations like upcoming elections; a reluctance to reveal the true state of public finances; or, simply, corruption,” he said.
Summaries Seen as Alternative Disclosure Mechanism
Another recent report by Bank officials, while supporting passage of transparency laws by national governments, emphasized the value of disclosing summaries as an alternative that could be more useful than full disclosure.
Finance transactions “tend to be complex and, although lenders and IFIs have the capacity to wade through lengthy debt contracts or suites of transaction documents, the capacity and resources of the public and civil society stakeholders to do so is not obvious,” according to a 2022 paper by Susan Maslen, Senior Counsel, Legal Vice Presidency, and Cigdem Aslan, Lead Debt Specialist, Macroeconomics, Trade and Investment. They urged the disclosure of “templates” about loans and their terms.
“The routine public disclosure of summaries would be a tremendous improvement over current widespread practice, and is more readily attainable and easier to implement than the disclosure of entire texts,” Maslen and Aslan said in a reply to a request from EYE for elaboration. They continued, “Such recommendation does not preclude the publication of entire debt contracts.”
Maslen and Aslan wrote that there are “[r]easonable drivers for keeping certain information confidential,” such as “where the information is proprietary or technical (e.g., financial calculations or formulae), price-sensitive or commercially sensitive (e.g., interest rates, fee information).” They further, “Arguably, the reasonableness of these drivers varies depending on the context, parties, circumstances, and jurisdiction.
They noted that other reasons for confidentiality, such as upcoming elections and “the prospect of civil unrest” may skew a government’s disclosure of information. Such “drivers of confidentiality are inherently more subjective and not necessarily reasonable from a purely disclosure-oriented perspective.”
Limited Public Pressure for Debt Transparency
Debt transparency is a regular demand by nongovernmental groups of many varieties, but the cause seems to have trouble gaining traction within countries.
“The current state of opaque and unsustainable debt represents a major impediment to global development and rule of law,” wrote Kristen Sample, director, democratic governance, National Democratic Institute (NDI), in a July 2022 commentary in The Hill. “Opacity fuels corruption and expands authoritarian influence,” said Sample.
To get parliamentarians more engaged on the topic, NDI and the Westminster Foundation for Democracy (WFD) published a series of papers on the topic by Geoff Dubrow, a WFD Associate-Expert and Principal Consultant at Nexus PFM Consulting Inc.
“We have to find a way to enhance democratic engagement about debt and that it involves transparency and oversight,” Sample told EYE.
The Open Government Partnership (OGP), an organization of 77 country governments and many civil society organizations, documents what commitments governments make on open government. However, “Debt transparency has so far been relatively unexplored in OGP commitments, including those by OGP members in Africa,” according to a February 2021 article by Jessica Hickle published OGP.
“We need more voices joining the campaign to push governments to consider rules that would ensure banks are transparent in their lending,” commented Tim Jones, Head of Policy at the UK group Debt Justice.
There is “little engagement” by the public on debt and debt transparency issued, observed Jason Braganza, Executive Director of Afrodad, at 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.)
“Transparency is a win-win to everyone,” said Braganza. Describing the consequences of opacity, he stated, “The impact of the lack of transparency traditionally and disproportionately falls onto citizens, and further still, young people who bear the brunt of the lack of transparency in debt contraction, when thing tend to go sort of pear-shaped.”
Afrodad was been a convener of a 2021 meeting of NGOs and others from around Africa from which emerged the Harare Declaration, a statement about debt. On transparency, the declaration “urges Governments to work with their National Legislatures to strengthen national legal frameworks to ensure transparency and accountability for sovereign debts negotiations, borrowing and management as espoused in the African Borrowing Charter.”
The referenced Charter is a 2018 document signed by African government leaders, which states:
African governments have an obligation to disclose and publish relevant terms and conditions of all financing agreements to citizens and should respond openly to requests for related information from them. Legal restrictions to disclosing information should be based on evident public interest and should be applied reasonably.
Probably a solid base for a ladder.
