What is Public Debt Management?

Public debt management is the process of establishing and implementing a strategy for prudently managing the government's debt in order to achieve the government's risk and cost objectives and any other sovereign debt management goals the government may have set. The main objective of the sovereign debt manager is typically set to mange the risks incorporated in the debt portfolio taking due account of the trade-offs between cost and risk. For many IBRD and IDA member governments, the objectives are broader, including fostering the development of the domestic debt markets. Sovereign debt management addresses the structure and composition of the sovereign debt portfolio, including the desired mix in terms of currency, interest rate and amortization profile. The desirable or sustainable level of debt is usually addressed by fiscal policy.

Why is Public Debt Management Important?

Recent events in the financial markets have shown that poor debt management can exacerbate financial crises, even if macroeconomic conditions was sound. While emerging market governments' debt to GDP ratio are often below that of many OECD governments, their economies may be less diversified and susceptible of prudent debt management is important to prevent government financial crisis evolving into a solvency issue for the country.

What is Public Debt Management in an Asset and Liability Management Framework?

Public debt management requires a framework for identifying and quantifying risks. The sovereign balance sheet approach takes into account both the sovereign's assets and liabilities, allowing the government to maximize the potential for natural hedges and provides the basis for evaluating risk/cost trade-offs in an integrated fashion. The most orthodox ALM solution for a sovereign is to match local currency, long-duration cash flows, with local currency, long-duration debt. Many developing country governments, however, are constrained from immunizing the debt portfolio, the primary reason being the underdevelopment of the domestic debt market. Governments are often forced to make such choices as issuing long term foreign currency debt and short term domestic currency debt. Risk analysis of different types of debt portfolios given the government's risk tolerance must be carried out. The decisions for a particular debt portfolio are then translated into an explicit strategy, usually with a medium-term horizon. The sovereign debt management strategy resulting from the ALM framework should be backed by strong operational bases with respect to organizational structure, legal framework, trained staff, and management information systems.