“BACK OFFICE PROCEDURES IN DEBT...
Transcript of “BACK OFFICE PROCEDURES IN DEBT...
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“BACK OFFICE PROCEDURES IN DEBT MANAGEMENT”
BY THEMBA ANDREAS DLAMINI
RESEARCH DEPARTMENT CENTRAL BANK OF SWAZILAND
MENTOR: MR MACDONALD BANDA
DEBT MANAGEMENT SECTION CROWN AGENTS
A TECHNICAL PAPER SUBMITTED IN PARTIAL FULFILMENT
OF THE AWARD OF MEFMI FELLOWSHIP PROGRAMME
JULY 2009
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Table of Contents List of Acronyms and Abbreviations iv
Acknowledgements v
Executive Summary vi
Section Page
Section 1: Introduction 8
1. Background 8
Section 2: Best practices in Back Office Operations 10 2.1 Legal Framework 11 2.2 Organisational Framework 13 2.3 Procedures 16 2.4 Staffing 18 2.5 Technology 19 2.6 DeMPA Tool Functions on Back Office 21
Section 3: Back Office Operations in sampled MEFMI countries 15
3.1 Legal Framework 25 3.2 Government Policy on Debt 27 3.3 Institutional Arrangements 28 3.4 Procedures 32 3.5 Staffing 36 3.6 Technology 38
Section 4: Back Office functions available in CS-DRMS 40 4.1 Overview 41 4.2 Operational Functions 49 4.3 Exchange Rates and Interest Rates 41 4.4 Reporting Functions 49 4.5 Database Management Functions 50 4.6 Future Plans for CS-DRMS 50
Section 5: Ideal Back Office operations in MEFMI Member States 62 5.1 Overview
5.2 Critical Analysis of DMO Models
5.3 Ideal Back Office Operations in MEFMI members states
Section 6: Recommendations for CS-DRMS
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Appendices Page
Appendix A: UK Government Securities: gilts 73
Appendix B: Objectives of UK Government Debt Management 75
References 77
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List of Acronyms and Abbreviations
AfDF - African Development Fund
BADEA - Arab Bank for Economic Development in Africa
BEAD - Budget and Economic Affairs Department of the Ministry of
Finance
BES - Book Entry System
BIS - Bank for International Settlements
CBDMS - Computer Based Debt Management Systems
CBS - Central Bank of Swaziland
ComSec - Commonwealth Secretariat
CS-DRMS - Commonwealth Secretariat Debt Recording and
Management System
CTP - Customized Training Programme
DMFAS - Debt Management Financial and Analysis System
DMO - Debt Management Office
DSA - Debt Sustainability Analysis
EIB - European Investment Bank
FDP - Fellows Development Programme
FMAD - Fiscal and Monetary Affairs Department of the Ministry of
Finance
GDP - Gross Domestic Product
HIPCs - Highly Indebted Poor Countries
IBRD - International Bank for Reconstruction and Development
ICT - Information and Communication Technology
IDA - International Development Association
IFAD - International Fund for Agricultural Development
IMF - International Monetary Fund
LICs - Low Income Countries
MEFMI - Macroeconomic and Financial Management
Institute of Eastern and Southern Africa
OECD - Organization for Economic Co-operation and
Development
UNCTAD - United Nations Conference on Trade and Development
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ACKNOWLEDGEMENTS
The paper would not have been a success without the guidance of
my mentor, Mr MacDonald Banda of Crown Agents. His continuous
and timely guidance was indeed invaluable. Further accolades go to
MEFMI Secretariat, ComSec Debt Management Section and the UK
Debt Management Office.
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Executive Summary
Whether centralized or decentralized, the way forward with respect to
enhancing the institutional and coordination structures for debt management
would be to regularly update and implement appropriate legal frameworks
and coordinated policies; review institutional roles and responsibilities as and
when necessary; segregation of duties in debt management and strengthen its
supervision so as to reduce inefficiencies and avoid duplication or gaps;
provide adequate resources; train and retain mass of staff with requisite
expertise and experience; develop, document and implement systems and
procedures that enhance debt office operations and institutional memory and
adapt relevant experiences to individual country circumstances.
Coordinated analysis and implementation of fiscal and monetary policies and
effective debt and aid policies including the development of domestic
financial markets will remain an important aspect of best practice in debt
management. To achieve these outcomes, capacity building initiatives will
continue to play a pivotal role.
Choosing the best Computer Based Debt Management System is also critical.
The support of ICT department is also vital for debt managers especially the
back office. The system should be well maintained, including the local area
network plus the interface this technology now gives with other Integrated
Financial Management Systems that it may be used along with.
It should be noted that use of the system would require a highly performing
hardware to run the very specialized software used with the debt recording
system in use. There is therefore a strong need for Executives to decide on the
choice of the system since it implies a lot of financial resources. Backups,
preferably done by ICT staff, should be run in order to allow for recovery of
information stored in the system in the event of disaster.
1. Background
The institutional perspective of debt management can be broadly categorized
into three functions, namely; Front Office, Middle Office and Back Office. This
paper’s focus would be on the back office procedures in debt management.
Before pursuing that, it may be necessary to highlight that: “the main
objective of public debt management is to ensure that the government
financing needs and its payment obligations are met at the lowest possible cost
over the medium to long run, consistent with a prudent degree of risk”1. Public
debt management cannot be effectively realized if the back office fails to
deliver the necessary information to middle and front offices. It is the back
office’s responsibility to ensure that debt data is accurate, exhaustive,
comprehensive, up-to-date and usable by the other two (front and middle
offices) functional aspects of debt management.
Approaches to debt management differ from country to country, between
developed, emerging economies and developing countries. The size of the debt
management office and/or size of debt portfolio may also provide guidance on
the approach to be used in debt management. Central to this difference is the
structure and role of the back office function.
The objectives of this paper are therefore threefold; firstly, is to research and
describe international best practices in the area of debt management with
particular emphasis on back office procedures. Secondly, is to analyze debt
management functions and the role of back office in selected MEFMI member
countries. Lastly, is to identify weaknesses and recommend ideal back office
procedures for debt management including the use of CS-DRMS that would suit
1 World Bank and IMF, (2001, 2003 and 2007), Guidelines for Public Debt Management, Washington
MEFMI member states. The paper would, therefore, provide practical guidelines
to staff involved in back office operations and recommends best practices for
MEFMI member states.
2. Best practices in Back Office Operations
2.1 Legal Framework
It is indeed a challenge to establish institutional arrangements that ensure
effective debt management. Best practice would require institutional
arrangements to have: Legal framework; Policy coordination; Transparency and
accountability; Clarity of roles, responsibilities and objectives; Organizational
framework and Management of internal controls.
Sound institutional framework call for clear legislative framework that would
define goals, authorities and accountabilities. There should be well-defined
institutional responsibilities, which clearly specify the mandates and roles of
key stakeholders. A clearer accountability arrangement, which articulates
reporting arrangements, should be in place. To be precise, it is of paramount
importance that the allocation of responsibilities among the ministry of
finance, central bank, or a separate debt management agency, for debt
management policy advice, and for undertaking debt issues, secondary market
arrangements, depository facilities, clearing and settlement arrangements for
trade in government securities, should be publicly disclosed.
An ideal legislative for debt management should address authority to borrow,
borrowing limits, issue and management of guarantees, on-lending and/or
direct lending arrangements. Such would entail separate acts or a single act
governing both foreign and domestic borrowing. Usually, it is the sole
responsibility of the Minister of Finance after Parliament approval to borrow
and issue guarantees. However, for domestic borrowing, like Issuance of
Government Treasury Bills and Bonds, such authority is usually delegated to
central banks. Further, there should be regulations to provide for consultations
with other agencies involved. There should also be establishment of a Debt
Management Office (DMO) in the ministry of finance or as a separate entity. A
high-level debt policy committee should also be established. The committee
should deal with policy issues, which the government will pursue. The primary
objective of the policy is to ensure that borrowing for government financing
needs are met at optimal cost over the medium to-long-term, consistent with a
prudent degree of risk to ensure that the debt remains sustainable. The policy
document should also allow government to pursue a debt strategy consistent
with laid down policy guidelines. In that regard, the debt management strategy
should focus on close monitoring and regular assessment of the debt portfolio.
Sound institutional framework also seeks to ensure that borrowing limits are
specified for both foreign and domestic borrowing. Separate ceilings should
also be set for government guaranteed debt and for unguaranteed debts of
state enterprises. Such legislation should be tightened such that there are no
loopholes to allow certain kinds of borrowings to be unrestricted. It is also
important that the limits be increasingly set within the framework of fiscal
responsibility legislation. Thus, close co-ordination of public debt policy with
monetary and fiscal policies will result in sound public debt management.
In summary, it is fundamental that the Legal Framework for Public Debt
Management consists of three (3) bases. Firstly, it is important that all
borrowings are done through the same entity; e.g. Ministry of Finance.
Secondly, it should be authorized by the highest state authority (Parliament)
with delegation of powers to the entity that actually manages the debt. Lastly,
the debt manager should report on a regular basis to the highest state
authority. These facts should be stated explicitly in law. Reporting to
Parliament increases transparency and strengthens accountability. Debt
statistics reports should be timely, coherent and accessible even to general
public. Further, the Public Debt Law should define; the actors involved in
public debt management, the rules and regulations, their interactions and
responsibilities.
The above requirements for a model debt management operations is essential
since a weak legislative framework would often leads to: unauthorized persons
contracting loans; stipulated borrowing limits contravened; loan funds
misappropriated; no sanctions applied when laws are broken and moreover
leads to fragmented approach to debt management. The impact of the weak
legislative framework would be; unchecked growth in debt, high costs since
debt would often be contracted on poor terms, potential macroeconomic
instability and slow market development.
2.2 Organisational Framework
Institutional arrangements for debt management differ from country to
country. The location of debt office (whether it is at the ministry of finance,
central bank or shared amongst these institutions or even as a separate entity)
depends on the Institutional arrangements that suit a particular country.
Legislation should therefore establish an efficient institutional structure to
manage the debt through any of structures mentioned above, which are further
discussed below.
2.2.1 Setting up Debt Management Office in Ministry of Finance
Setting up a DMO in the Ministry of Finance facilitates the smooth interaction
between the ministry economic and financial forecasting functions and
preparation of borrowing programme. This will also enable all debt transactions
(drawdowns and repayments) to be timely fed in the budget process. Further,
as custodian of public funds, DMO in the Ministry of Finance is good since the
Ministry is in most cases the only entity legally entrusted to contract and
manage public debt on behalf of the government.
2.2.2 Locating the Debt Management Office in Central Bank
Setting of a DMO in the Central Bank may lead to potential conflict of interest
with fiscal authorities. The Central Bank, to control inflation may wish to raise
interest rates and such may not go down well with government in that it will
certainly increase the cost of borrowing in the domestic economy and also lead
to low economic growth since credit would be expensive. To avoid conflict of
interest and allow for segregation of duties, DMO should be removed from the
Central Bank since the Bank cannot fairly continue issuing government
securities and at the same time be responsible for setting interest rates. This
was the main reason for the establishment of the United Kingdom Debt
Management Office.
On the other hand, location of a DMO in the Central Bank may fit if the
institution has human capacities to handle such a task. This will hold true
where Ministries of Finance has no such capacity mostly associated with staff
turnover as a result of poor remuneration associated with civil servants salary
scales. Proper coordination with the Ministry of Finance (being the designated
legal borrowing authority) must under such arrangement be at its best.
2.2.3 Shared debt management responsibilities between Ministry and
Central Bank
Under this set-up, it is crucial that the Ministry of Finance, as custodian of all
public borrowing, is at the forefront in public debt management. However, it
would still be important to specifically define the roles to be played by the
different entities involved in public debt management in order to eliminate
conflict that might arise. For example, the Central Bank may want to increase
interest rates to curb inflation, whilst Ministry of Finance would see that as an
increase to the cost of borrowing in the domestic market. Through proper
coordination, such potential conflicts would be eliminated.
For developing countries, due to the size of the debt offices and the strong need
for consistent co-ordination within the institutions and departments involved in
public debt management such arrangement may hold.
2.2.4 Separate and independent Debt Management Office
Internationally, it is ideal to have a debt office as a separate and independent
entity. That also eliminate staff turnover as a result of poor remuneration
aligned to government salary scales. It allows greater focus on debt management
policy and separates fiscal policy advice from debt management. It also provides
greater operational independence and increases success in obtaining budget
resources.
Managing the government’s public debt requires controls. There are daily
internal controls set in into the DMO activities that are based on segregation of
duties and responsibilities. There are also regular controls within the DMO and
by Internal Auditors. The controls implanted in the DMO activities vary according
to the functions of the different offices namely; front, middle and back offices.
Then, there would be the senior management who would control and monitor
that each one of the offices perform their duties efficiently and in due time.
The controls involved in back office operations, the focus of this paper, include:
the need to have a legally binding and enforceable contract with all
creditors/borrowers and the central government in its capacity as a
borrower/creditor including the issuance of guarantees; quality of debt data
(should be complete and up-to-date) for all central government debt records
including records of holders of government securities; well documented
procedures for settlement of transactions, maintenance of financial records and
for accessing the Computer Based Debt Management Systems (CBDMS) including
the payment systems (ICT specialist therefore should tighten controls access
rights); meet statutory reporting requirements; systems for contracting loans
and issuance of guarantees. The key requirement in these controls is that
someone must ensure that all such are adhered to which can be easily achieved
and/or monitored where the DMO is set as a separate and independent entity.
Finally, the activities in the back office should be subject to scrutiny by national
audit bodies. Standards of external audit practice should be consistent with
international standards.
2.3 Procedures
The tasks of a back office include debt recording and validation, debt
accounting, quality control and debt reporting2. On the other hand, the
objective of the back office is to create and maintain a high quality up-to-date
database; high quality of the debt portfolio that allows timely registration,
disbursements, and servicing as well as to produce accurate statistical
information. The back office functions therefore comprise the administration
of the full cycle of a contract, from loan contracting to its full repayment.
Back office procedures can broadly be categorized into two, namely; the
Recording and the Operating functions. These basic functions of the back office
are critical for the other operational function of the middle and front offices to
be carried out.
2.3.1 Recording function
The recording function is the ‘base’ of all the other functions of debt
management. It involves; collecting, storing, processing and validating:
2 MEFMI, (2005) , Public Debt Management, Procedures Manual, Harare
2.3.1.1 Collecting
Best practice entails that all information of different categories of debt; to
include loan contracts, disbursements, repayments,
cancellations/enhancements, restructuring etc should be collected timely.
2.3.1.2 Storing
The back office, since it is in charge of the implementation and maintenance of
the CS-DRMS would further use the system to electronically store scanned
documents in the system or the information can be physically stored in
classified files.
2.3.1.3 Processing and Validating
Once all the debt data is stored, the system would be used to perform tasks
such as capturing basic loans details, forecasting rules, actual transactions etc.
The data would further need to be validated implying the need for using
internal checks within the system or through reconciliation of debt data
periodically with creditors.
2.3.2 Operating function
The operating function would perform functions such as; triggering of
disbursements in due time, pay without falling into arrears, verify if creditors
claim correct amounts, and notify budget department and treasury through
IFMIS, order debt service etc. The operating function would also produce debt
service and disbursements for the budget department for inclusion in the
incoming financial year’s budget.
Basically, operating functions entails processes that allow the back office to
function. This section looks at the operational aspects of back office;
2.3.2.1 Debt Servicing
Sound practice entails that the institution should have systems and/or
procedures that result in accurate and timely debt servicing. System in place
should also facilitate tracking of payments to establish and analyze
unwarranted discrepancies. There should be a way of monitoring arrears and
penalties. System should also generate debt service payments due such that
debt service obligations are not solely relied upon instruction or bills from
creditors.
2.3.2.2 Debt data dissemination
The dissemination of data by way of reports generation is the final output of all
the recording and validations made. Users of debt statistics would include
international financial institutions, national and foreign users, private users
etc. Over and above statistical bulletins published, posting of the debt
statistics on a website is necessary to reach a wide range of users.
2.4 Staffing
It is a universal problem for governments to attract and retain skilled personnel
for debt management offices. Staff in DMO should have varying educational
background combining; ICT, financial, macroeconomic and public policy skills.
Such a profile is highly demanded in private sector resulting in alarming rate of
staff turnover in DMOs. The poor remuneration of public servants when
compared to private sector also add in ‘facilitating’ these skilled personnel
early exit for greener pastures and retaining them might be an impossible task
to achieve. There is often no career path and skills development in
government structure and capacity building is often ignored until one is faced
with a crisis. Such hinders the proper functioning of a DMO and needs to be
addressed at executive’s level.
The DMO is not the only government department affected by this but other
sectors as well. However, the argument is that DMO deserves special attention
considering that public debt is often a major share of expenditure within the
national budget. The DMO should have regular training programs tailored to the
ever changing global debt management challenges thus covering all the
different aspects of public debt monitoring and management.
2.5 Technology
It is undoubted that computer based debt management systems bring flexibility
and rapidity to the debt data processing and thereby allow debt managers to
review the information that are not otherwise practicable. Within
minutes/seconds, a CBDMS can compute the current balances of hundreds of
loans, sum and print reports by borrower/creditor category, remaining
maturities, economic sector etc. The CBDMS does not operate in isolation
though; it has to be operated by a trained user capturing accurate and complete
debt data to produce reliable information.
Today, it is totally impossible to effectively manage debt without a performing
computerized system. The Executives of an Institution should diligently choose
the right CBDMS considering the costs involved, then the hardware needed
because of the operating and application software, which are complex and
heavy, implying the need for a highly performing hardware to run a very
specialized software. Executives may decide to choose a standard system
developed by one of the international suppliers (e.g. UNCTAD’s DMFAS or
ComSec’s CS-DRMS), a domestic in-house developed system or outsourcing the
development of the system to an external software developer.
Developing an in-house system might be a best strategy since it would be
tailored towards the needs of that institution managing the debt but it comes
with massive costs. These include hiring of highly qualified ICT staff and
retaining them, debt managers capable of drafting and reviewing the
specifications for the ICT team and the time length. Outsourcing the
development of the system is the worse decision. Reasons being: DMO ICT team
is not directly involved which might lead to problems regardless of the
documentation supplied with the system, documentation itself might be
incomplete, contract with supplier is bound to end leaving system obsolete if
DMO ICT fails to fix any emerging deficiencies.
Choosing a Standard Software package, CS-DRMS in my case, is the best option.
This system has been tried and tested – it PERFORMS if used properly! Also,
frequent forums organized by the developers to interact with users have made
the system less vulnerable such that it has fewer operating problems than in-
house developed or outsourced systems. Further, choosing CS-DRMS decreases
the need to maintain a full group of developers within DMO’s ICT departments
since they would only be needed for maintenance of the system and local area
network , database management and security procedures like regular backups.
Use of CS-DRMS also avoids physical hardcopy filing systems since all legal loan
contracts and their annexes could be scanned and filed electronically,
simplifying retrieving. For simplicity, the system come with a full documentation
on how it is structured and operates. There a number of manual detailing
various modules, operating procedures and help functionalities.
To eliminate disaster though, regular and efficient backups and recovery
strategy should be in place. The back office should also test the disaster
recovery strategy in place and all staff should be trained on this. Full backups of
the system should be done at least once a month. A use of a remote service for
the monthly backup or placement of the backup in another place (outside the
building where normal business is conducted), which has to satisfy the same
security and accessibility standards as the original site is vital. Incremental
backups should be done on a daily overnight basis. The media; i.e. another
server, tapes, CD’s to be used should be defined, taking into account cost of
purchasing.
CS-DRMS has evolved significantly over time, progressing from DOS to UNIX to
Windows. It has been continuously tested and improved over the years to meet
creditor practices, user requirements, and evolving technology changes and
harmonized with the External Debt Guide. Likewise, the system functionalities in
terms of data capture, reports, debt analysis, securities issuance and
management have also been improved to conform to best practice guidelines.
2.6 DeMPA Tool Functions on Back Office
The Debt Management Performance Assessment Tool (DeMPA) developed by the
World Bank is a methodology for assessing performance through a
comprehensive set of performance indicators spanning the full range of
government debt management functions. This facilitates the design of plans to
build and augment capacity and institutions tailored to the specific needs of a
country.
2.6.1 Recording and Reports
The DeMPA tool stipulates that sound practice with regard to debt recording
demand that there should be comprehensive debt management systems to
record, monitor, settle and account effectively for all central government debt
and related transactions. The system used should be capable of performing
accurate and consistent handling of a complete debt database consisting of
domestic, external and guaranteed debt. System used to register government
securities holdings should be secure and efficient. It should also provide
accurate and timely information on all holders of government securities,
including classification by residency. CS-DRMS does cater for almost all of the
above debt recording laid down by the DeMPA tool although there is need to
enhance some of the available features e.g. security and authorisation.
On debt reporting, the DeMPA tool stipulates that Governments should report
all public sector debt outstanding and debt related transactions. This includes
obligations to report to international financial institutions. A Debt Statistical
Bulletin covering domestic and external central government debt including
guarantees should be prepared. The statistical bulletin should at least provide
information on central government debt stock, debt flows and debt rations.
This may be in a form of quarterly reviews published by Central Banks or tables
published in government financial accounts. Again, CS-DRMS has a wide range
of in-built standard reports, which cater for almost all of the reports specified
in the DeMPA tool, including data export facility for reporting to World Bank.
2.6.2 Auditing
Accountability by debt management offices can be enhanced and strengthened
by introducing regular internal audits and periodic external auditing. The
audits would help uncover all government debt management activities with
regard to: reliability and integrity of financial information; effectiveness and
efficiency of debt management operations; safeguarding of public funds; and
compliance with laws and regulations.
Ideally, auditors need to have the required skills to audit all debt management
activities, including systems used. There should also be mechanism to adopt
and implement corrective measures as recommended by audit reports.
2.6.3 Security
DeMPA tool advocate that there should be clearly documented authorisation
and controls to access the debt management and payment systems in place.
This would be achieved by active management of individual access permission
and passwords. System should also be able to produce audit trails that indicate
who has accessed the system and at what level.
Back-ups should be frequently done and stored off-site, i.e. outside the
building where the debt database is located. An original copy of loan
agreement should be stored in a secure and fireproof location. All other
correspondences with the lender should also be maintained in a secure filing
system.
3. Back office operations in sampled MEFMI Countries
3.1 Legal Framework
3.1.1 Swaziland
The main legislation that regulates government borrowings in Swaziland is the
Constitution of the Kingdom of Swaziland Act, 2005. The Act stipulates that
Parliament is the final decision-maker on central government borrowings.
Although it is stated that the Minister of Finance on behalf of Government may
borrow or raise moneys from any reputable source, this is followed by the
important proviso that such borrowing or provision of a guarantee shall be as
authorized by or under an Act of Parliament.
In the case of domestic borrowing, authorization that has been given by
Parliament is in the form of Treasury Bills and Government Stocks Act, 1994,
(Amended) 2003. The Act authorizes the Minister of Finance to borrow against
the issue of treasury bills and stocks. The Minister may appoint a Government
Department or any financial institution licensed by law as agent for the issue,
management, and repayment of any treasury bills or stocks issued under this
Act or for any other matter related thereto. The maximum amount, which may
be borrowed under this Act, may at any point in time not exceed One Billion
Emalangeni (E1 billion). In addition, the Central Bank of Swaziland, through the
provisions of the Central Bank of Swaziland Order, 1974, as agent for
Government, is mandated to undertake issue, placement, and service of any
Government securities, including treasury bills.
All other borrowings, including all foreign borrowings, must be decided by
Parliament, on a loan-by-loan basis. For that, a legal instrument in place
and/or used is the Finance Management and Audit Act, 1967 and Amendments
thereof. The Act empowers Parliament to grant authority to the Minister of
Finance to borrow money to an amount not exceeding the sum specified in that
resolution, to meet current requirements. Further, the Act provides that such
resolution shall not have any effect for any period exceeding twelve months.
The principal and interest of all such advances shall be charged on the
Government Consolidated Fund held at the Central Bank of Swaziland.
3.1.2 Botswana
Governing domestic borrowing in Botswana is the Stocks, Bonds and Treasury
Bills Act, 2005. The Act stipulates that the Minister of Finance is authorized to
appoint an agent to float any government securities. In addition, there is the
Finance and Audit Act, which authorize the Minister for Finance to borrow by
means of a bank overdraft or advances from any bank or any public institution
in Botswana, such moneys, as he may need to meet current requirements. The
total outstanding amount of money that can be borrowed under this Act shall
not at any time exceed 5 percent of the total revenue credited to the
Consolidated Fund in the previous financial year or such higher amount as the
National Assembly may approve by resolution.
There is no law governing foreign borrowing. The practice is that the Minister
of Finance seeks parliament approval on a loan-by-loan basis the sum specified
in the purported loan agreement. Alternatively, the Minister for Finance
request parliament to ratify foreign borrowing that has already been
contracted by the Minister.
Other than central government, there are other key regulators involved in debt
market issues. These include the Capital Market Authority, which provides
supervision to ensure investor confidence. There is also the Botswana Stock
Exchange, which approves new issues and provides a market place for
secondary trading.
3.2 Government Policy on Debt
3.2.1 Swaziland
The Government of Swaziland in 2005, with technical assistance from MEFMI,
formulated a National Public Debt Policy to guide contracting, coordinating,
and managing domestic and external public debt. In a nutshell, the Debt Policy
set out the Government’s policy position on all stages of public debt
management process.
The main objective of the Debt Policy with regard to external and domestic
debt is to ensure that Government’s financing needs are met at the lowest
possible cost over the medium to long-term, consistent with a prudent degree
of risk. The policy is based upon the premise of enabling Government to pursue
developmental objectives whilst at the same time ensuring that debt remains
within sustainable levels.
The policy document further underlines the following requirements to facilitate
achieving the cost and risk objectives and importantly to evolve sound public
debt management:
Debt contracted is only entered into through legally established
structures by the Minister of Finance;
Debt contracted is done through full cooperation and consultation with
line Ministries involved;
Close coordination of public debt policy with monetary and fiscal
policies given the interdependencies of the three macroeconomic policy
areas;
Transparency and accountability to the public with regard to debt
management operations;
Maintaining comprehensive databases on public sector debt including
Government explicit and implicit contingent liabilities; and
Annual audit of debt administration by the Government Auditor
General.
3.2.2 Botswana
The Government of Botswana does not have a formal policy instrument to guide
public external and domestic borrowing and debt management. The line
Ministries tend to initiate project proposals for funding and external creditors
can pick from a poll of proposed projects to fund.
The Ministry of Finance and Development Planning react on a case-by-case
basis. The Ministry then assess these project proposals and their concessionality
in the context of the country’s development priorities, as spelt out in the
country’s Annual National Budget Speeches, Development Plans, National
Strategy for Poverty Reduction and Vision 2016.
Until recently, Botswana had mainly external debt, also underpinned by the
country’s strong international credit rating (A+). There is also no formal debt
strategy and the country total debt levels are guided by the Finance and Audit
Act, which itself, is being reviewed.
3.3 Institutional Arrangements
3.3.1 Swaziland
The institutional framework for public debt management in Swaziland consists
of a number of public institutions in carrying out all duties relating to
contracting and utilization of borrowed funds. Each institution has its specific
roles and responsibilities in the public debt management starting from the
initiation of the project to the financing requirements, contracting of debt, up-
to maturity (public debt cycle). The institutions involved include:
Ministry of Finance (Mof), - which is mandated by the Finance and Audit
Act, 1967 to administer and manage the public sector external debt. The
task is undertaken by the Budget and Economic Affairs Section of the
Ministry. The Ministry of Finance determines financing requirements
from external sources, maintains the overall public debt database,
manages, and monitors the overall public debt portfolio.
Also in existence within the Ministry of Finance is a formal structure for
negotiating and contracting debt. This structure is comprised of
representatives from Mof, Attorney General’s Office, Ministry of
Economic Planning and Development (MEPD) and the implementing
agencies involved for that particular project. There is also an Investment
Committee that oversees the management of government financial
activities. This Committee comprises of representatives from the Central
Bank of Swaziland, Accountant General’s Office, and Mof. The Principal
Secretary, Mof chairs this Committee.
Ministry of Economic Planning and Development (MEPD), - works with
line Ministries, to identify the projects that require external funding and
assess their viability. MEPD also participates in the loan negotiation
processes.
Central Bank of Swaziland (CBS), - is mandated through the provisions
of the Central Bank of Swaziland Order, 1974 to undertake issue,
placement, and service of any Government securities including
maintaining the domestic debt database. To carry out government
treasury bills auctions, a Treasury Bills Auction Committee was
established. Its members comprise of representative from the CBS and
Mof’s Fiscal and Economic Affairs Section. The Bank also advises the
Minister of Finance on contracting and managing domestic debt. The
Bank also monitors private sector external debt. Further, the Bank
externalizes debt services payments on instruction by the Accountant
General after receiving a request from the Mof.
Accountant General’s (AG) Office, - in conjunction with Mof and CBS,
the AG ensures that proper record of all government loans is kept and
the AG prepares a statement of all government loans at the end of each
fiscal year. The AG also ensures that funding for debt servicing is
available for onward transmission to the creditors by CBS.
Attorney General’s Chambers, - is entrusted with the responsibility to
ensure that all legal requirements are met before foreign loans are
contracted and that legal contractual terms are observed throughout the
loan cycle.
Line Ministries, - they identify and prepare project documents in their
respective sectors in line with government’s developmental policies and
partake in loan negotiations involving their departments, projects
implementation, and ensuring that loans are disbursed appropriately.
Public Enterprises, - participate in the negotiation of loans being
contracted to their benefit, monitor and manage the debt.
Auditor General’s Department, - responsible for monitoring compliance
of debt transactions with regulations and procedures governing the
utilization of loan resources and prudent management of the overall
public debt portfolio.
3.3.2 Botswana
The current institutional arrangements for the debt management in Botswana
are shared between the Ministry of Finance and Development Planning (MFDP)
and the Bank of Botswana (BOB). Each of these institutions has specific but
interactive offices handling decisions right from the strategic decision making
level to operational level.
MFDP, - as custodian of all public borrowing, the Ministry administer and
manage all public sector external borrowings. It has delegated domestic debt
management and administration to the BOB.
Bank of Botswana, - it is the fiscal agent of the government and therefore the
operational arm of the MFDP decisions through the Bank’s Financial Markets
Department. The department has a dedicated Open Market Operations Division
that specifically handles the implementation and monitoring in the domestic
market.
Attorney General’s Office, - the MFDP has a legal officer seconded from the
Attorney General’s Office. The legal officer has the responsibility to ensure
that all legal requirements are met before foreign loans are contracted and
consequently advice the Ministry on all legal issues pertaining to debt
management.
Internal Audit Unit, - the MFDP also has an internal auditing unit responsible
for monitoring compliance of debt transactions with regulations and procedures
governing the utilization of loan resources.
3.4 Procedures
3.4.1 Swaziland
Swaziland, with assistance from MEFMI, developed a Debt Management
Operations Manual in 2004. The manual helps build institutional memory that
will enable a new debt officer/manager to understand the operations of a debt
office and the embedded challenges and skill requirements. Thus, the manual
documents the operations and procedures in the functional/operational offices.
The procedures for back office operations in Swaziland are as follows:
Collecting and storing - the Mof’ BEAS, as custodian of public debt,
collects all information of different categories of external debt to include loan
contracts, disbursements and repayments. The information collected is
physically stored by the Mof in filing cabinets. On the other hand, the Bank
collects and stores information on private sector external debt through annual
surveys. Further, the Bank keeps a register of all information pertaining to
issuance of government treasury bills. Government appointed a Fund manager
to issue and register information on treasury bonds issued in 2002, with the last
maturity only falling due in August 2010.
Debt data recording - all external debt data (including guarantees
and private sector debt) is recorded by the Mof’s Budget & Economic Affairs
Department in CS-DRMS. This is done jointly with the Central Bank of
Swaziland, Research Department, Public Finance Section. The recording is done
after reconciliation of the debt data between Mof, Accountant General's Office
and Central Bank of Swaziland (CBS). CBS takes a copy of the debt data and
restore in its site of CS-DRMS since the two CS-DRMS sites in Swaziland; i.e. at
Mof and CBS are not yet electronically linked.
On the other hand, domestic debt recording is captured by the Central Bank of
Swaziland in two (2) systems (IMF Book Entry System and CS-DRMS). The
Investex department of the Bank uses the IMF Book Entry System to conduct
Auctions. After the Auction has been confirmed by the Treasury Bills Auction
Committee, Research Department captures this information manually in the
Domestic Debt Module of CS-DRMS since the IMF Book Entry System is again not
interfaced with CS-DRMS. The Research department also serves as Secretariat
to the Auction Committee and thus get information on allotments made from
primary source.
Disbursements - the contractor, attaching certificates of work done,
lodges a claim through the relevant line Ministry (implementing agency). After
satisfying herself, the implementing agency sends a withdrawal request to the
Mof's Budget & Economic Affairs Section (BEAS). After being approved by the
Mof, the withdrawal request is sent to the creditor. The creditor, depending on
the agreement; pay the sum to government for onward transmission to
contractor, or creditor pay directly to the contractor (direct disbursement), or
alternatively government pay the contractor upon receiving a claim and
forward the claim to the creditor to facilitate reimbursement. When
disbursements have been made, the creditor sends a disbursement statement
to the Mof’s BEAS. The BEAS verifies/checks the disbursed amount against the
withdrawal request, and enters the disbursement into the CS-DRMS.
In respect of treasury bills issuance, settlement is done by the Central Bank of
Swaziland, two business days following the auction date. Settlement is done
against Primary Dealers Accounts held at the Bank. Primary Dealers, who also
submit on behalf of their clients, are responsible to make settlements with
their clients. Non-competitive bidders, including individuals who come directly
to the Bank instead of Primary Dealers deposit their cash/cheque in a Treasury
Bills Disbursement Account at the Central Bank of Swaziland. All competitive
bidders come through Primary Dealers.
Debt service - it is initiated by the creditor who sends a bill to the
Ministry of Finance’s BEAS for any principal, interest, commitment fees or
service fees due. The bill is usually received before the actual due date of the
payment. The Mof having satisfied itself on the correctness of the bill as per
the Loan Agreement then instructs the Treasury Department or Accountant
General’ Office to authorize payment. In this regard, the Mof prepares a Debt
Service Payment Advice which is signed by the Principal Secretary, requesting
the Accountant General to authorize payment as indicated in the Advice form.
The Advice form specifies the payments to be made, that is, principal
payment, interest payment and/or commitment fees payment etc. The foreign
currency amount is specified, details of bank/account to be credited and due
date of payment are all indicated in the Debt Service Payment Advice.
After confirming the validity and accuracy of the payment, the Accountant
General signs the Advice form and instructs the Central Bank to effect payment
which is done through the Investment & Exchange Department (Investex) in CBS
as indicated in the Advice Form. The Investex also state the local currency
equivalent for any foreign debt service made.
After effecting payment, the Investex returns the original Advice Forms to the
Ministry of Finance and other copies sent to Treasury/Accountant General and
the Research Department of the Central Bank of Swaziland – Public Finance
Section. To indicate that debt service payments have been done efficiently,
the Public Finance and External Debt Section of the Research Department in
the Central Bank of Swaziland meets with the Ministry of Finance’s Budget and
Economic Affairs Section on a quarterly basis or as and when necessary to
reconcile debt service payments. This is done after Mof has reconciled with
Accountant General’s Office. This process ensures that there are no errors and
omissions made. The information is then captured in the debt recording
system, i.e. CS-DRMS.
For treasury bills, at maturity, the Central Bank of Swaziland credits the
Primary Dealers Accounts held at the Bank. Primary Dealers are responsible for
settlement with their clients. Where an applicant had applied directly to the
Bank, at maturity she receives a Bank Guaranteed cheque from the Central
Bank of Swaziland, which can be cashed at the Bank or from any commercial
bank.
Debt reporting, - external debt is reported to the World Bank on a yearly basis
using CS-DRMS Data Export Facility – World Bank Bridge. The IMF Article IV
Missions also gets various reports generated from the system. Information on
domestic debt is provided by the Central Bank of Swaziland. Some reports
(both for external and domestic debt) are done using Ms-excel generated
spreadsheets. Further, regional organisations like SADC, COMESA etc also get
debt statistics either from the Bank or Mof as and when required. Various other
reports, either generated from CS-DRMS and/or Excel spreadsheet, are
produced for internal use as and when required, i.e. by management, CBS BOP
Unit, government ministries, private users of debt information etc. The Bank
also publishes debt statistics in Quarterly Reviews and Annual Reports. Such
information is also available in the Bank’s website: www.centralbank.org.sz.
The Minister of Finance, also, on an annual basis, reports to Parliament on
public debt when delivering his Budget Speech.
3.4.2 Botswana
Data collection and storing, - all information on public debt is collected and
stored by the MFDP's Public Debt Service Unit (PDSU). The information is
obtained from the MFDP's Development Programmes Section, Development
Unit, Bank of Botswana's Financial Markets Department and correspondence on
loan agreements, disbursement and debt service that is received from external
creditors is through the office of the Permanent Secretary, MFDP.
Disbursements, - disbursements tracking and recording are the responsibility
of the Development Unit. Disbursements are recorded by this office in the
Government Accounting and Budgeting System (GABS).
Debt service, - the PDSU of the MFDP is responsible for performing the debt
service function in collaboration with the MFDP's Banking and Remittance Units.
All these Units are staffed with officers seconded from the Accountant
General's Department. After getting a bill from creditors, the PDSU initiate the
debt service process. Eventually, such is externalized by the BOB.
Debt recording and reporting, - the PDSU and Cash Flow Unit (CFU) are the
two units of the MFDP responsible for debt recording with the latter also
handling budget execution functions. In addition, the PDSU records lending and
on-lending. The PDSU records debt information that relates to debt contracting
and debt service in GABS whilst the Development Unit records the
disbursements component. The CFU uses GABS information to capture debt
data in CS-DRMS. The PDSU reports debt statistics to World Bank manually
using information generated by GABS. CFU who uses CS-DRMS are not aware of
the Data Export Facility available in CS-DRMS to report to the World Bank.
3.5 Staffing
3.5.1 Swaziland
3.5.1.1 CS-DRMS Users
In Swaziland, CS-DRMS is installed and used in two sites; i.e. Mof and CBS.
There are two officers currently maintaining the CS-DRMS external debt
database in the Mof’s BEAS. These are the same officers who are responsible
for initiating debt service payments after receiving bills from creditors. These
officers perform such a task on “part-time basis” since they are budget officers
and are always busy with budget monitoring. The Director, Budget and
Economic Affairs Section is involved in loan negotiations. Accountant General’s
staff had been previously trained in CS-DRMS, but do not have access to it even
on a view basis.
In the Central Bank of Swaziland, CS-DRMS is installed at the Research
department, where two officers use it. This is mainly the domestic debt
module, since the Bank issues and manages domestic debt (treasury bills) on
behalf of the government. The same officers also support or work together with
the Mof in recording instruments, debt services etc in the External Debt Module
of CS-DRMS maintained by the Mof. Thus, only four people in Swaziland are
familiar with CS-DRMS.
3.5.1.2 System Support Staff
Swaziland has only one (1) CS-DRMS System Support Officer. He is employed by
the Central Bank of Swaziland and also attends to CS-DRMS IT issues at the
Ministry of Finance. Amongst other training attended, the officer has been
previously trained on CS-DRMS Training For New Users, CS-DRMS System
Administration and CS-DRMS Report Writer.
On another note, two (2) ICT staff currently support the IMF Book Entry System
on a trial and error basis since they have not been trained on it.
3.5.2 Botswana
3.5.2.1 CS-DRMS Users
Three (3) officers use the system only for recording both external and domestic
debt. These are officers from the Cash Flow Unit of the Ministry of Finance and
Development Planning. The Bank of Botswana does not use CS-DRMS. In
conducting auctions, the Bank's Financial Markets Department uses Ms-Excel
Spreadsheet. On a rare basis, specifically when calculating the grant element
for loan(s) still being negotiated for possible contracting, the Director
Development Unit who also has the system installed in her office uses CS-DRMS
specifically for that purpose.
3.5.2.2 System Support Staff
The computer system that is used by PDSU, i.e. the Government Accounting
and Budgeting System is technically supported by IT staff from the Government
Department of Information Technology. On the other hand, CS-DRMS which is
used by the Cash Flow Unit is technically supported by Development Unit Staff.
3.6 Technology
3.6.1 Swaziland
The Ministry of Finance and Central Bank of Swaziland use CS-DRMS 2000+ v1.3
for both external and domestic debt recording and management. The Bank, as
an agent for the issuance and management of Government of the Kingdom of
Swaziland’s debt and as an institution with a keen interest in the domestic
financial system also uses the IMF Book Entry System for treasury bills issuance.
Hardware used by these institutions include personal computers; Pentium 2
with a 4.5 giga bytes. The memory is a 128 MB.
CS-DRMS 2000+ is running on Windows 2003, Structured Query Language (SQL)
2000 both client and server and Borland Data Engine (BDE) Administrator.
There is a centralized database architecture. Two (2) users access the database
from their workstations through the Local Area Network (LAN), and the users
are set to have different access profiles depending on the tasks they perform
on the database. Debt Sustainability Module Plus has also been installed.
Over and above this, the Mof is working toward upgrading the existing
hardware and software in support of the CS-DRMS 2000+. This will include the
networking of the system internally and to all agencies involved in debt
management including Treasury or Accountant General' Office.
Further, for conducting auction of treasury bills which are done on a weekly
basis, the Central Bank of Swaziland uses the IMF Book Entry System. This
system is interfaced with the Globus Financial and Accounting System
(Termenos T24) to facilitate settlement and redemption of the treasury bills
issued. The Globus system is inturn interfaced with RTGS.
3.6.2 Botswana
The Ministry of Finance and Development Planning also uses the latest version
of CS-DRMS 2000+, i.e. version 1.3. The installation is similar to Swaziland's,
that is, CS-DRMS 2000+ is running on a Windows 2000 Client-Server Technology.
They also have a centralized database architecture running Microsoft SQL2000
server (MSSQL2000). All the users share one password. Thus, the users access
the database from their workstations through the Local Area Network (LAN),
and all of them are set as system administrators.
The main system used in Botswana for debt recording is the Government
Accounting and Budgeting System. This system is updated on a real time basis
and is mainly used by the Public Debt Service Unit. The Cash Flow Unit uses it
on a view basis to extract the necessary data in order to update CS-DRMS.
4. Back Office functions available in CS-DRMS
4.1 Overview
CS-DRMS 2000+ is a versatile tool for recording and monitoring of debt
activities. It is designed to capture all activities pertaining to the loan cycle
from the stage of signing the loan agreement till maturity. As such, the system
requires information on several types of debt transactions like disbursements,
debt service payments, enhancements, cancellations and any other debt
restructuring to generate the amount of actual liability.
The current version is Windows based. It is used by government agencies for
monitoring and managing the debt portfolio of the country, including the
government debt. The scope of CS-DRMS has significantly evolved over the
years, undergoing a series of enhancements as earlier discussed.
Described in the sections below are the functionalities currently available in
the system and plans on future development.
4.2 Operational Functions
4.2.1 Recording Functions
The recording functions in CS-DRMS can be broadly categorised into two
modules, i.e. Domestic and External Debt Modules. Filing of Data Entry Sheets
(DES) before specific details are recorded into CS-DRMS is necessary. These DES
are filed when extracting details for array of loan agreements and securities.
4.2.1.1 Data Entry Sheets
Proper recording of loans and/or other debt instruments require one to extract
details from loan agreements and other debt instruments and compile them in
a manner that allows for easy input into CS-DRMS.
The data input screens of CS-DRMS have been revised and updated and new
ones added to represent the requirement of a more comprehensive debt data
by debt managers. All these developments are reflected in data entry sheets
which have been designed to facilitate easy input of loan data into CS-DRMS.
Each input screen in the system has its own DES. In practice, however, it may
not be necessary to complete a whole set of DES for every instrument.
The main data types used and covered in DES include; loan details, forecasting
rules, actual transactions, codes, rates. DES can also be filed for debt
securities like Bonds, Treasury Bills, Promissory Notes etc.
4.2.1.2 Domestic Module
Treasury Bills and Bonds (Zero coupon and Fixed coupon bonds) are the most
common domestic debt instruments issued in MEFMI member states. The
recording of treasury bills and zero coupon bonds is similar in almost all
aspects. Both are issued at a discount, and at maturity, the holder gets the
face value. The interest paid would be the difference between the face value
and the purchase price. The differentiating factor between these two is that
treasury bills are short-term debt instruments issued at a discount for not more
than a year (365 days) and anything with an original maturity of over 12 months
is a treasury bond/note.
The basic principle for recording these follows a standard format where no step
can be skipped even if there was only one bidder. The three (3) steps followed
are the recording of instrument details, tranche details (usually differentiated
by competitive and non-competitive bids) and bid details. The system has
validation checks for these, which are outlined under database management
section below. Similarly, other domestic debt instruments follow the same
format except that one has to define fixed interest in case of a fixed coupon
bond, variable interest in case of floating rate bond, stepped rate for stepped
bonds. These can also be indexed to some other variable that need to be
specified, e.g. indexed to consumer price index.
Once information about instrument details, tranche and bid details have been
recorded, the system will automatically general forecasts. Thus, actual
transactions can be generated simply by clicking processing and generate
actuals. This is based on the assumption that no government can ever default
on domestic debt, thus it is assumed that actuals will always be equal to
forecast. Nevertheless, the system still provides an option to manually capture
actual transactions if they happen to differ from forecasts.
For promissory notes, only the promissory note details are entered. There are
neither any tranches nor bids required. However, depending on the promissory
note details, sometimes you may need to specify the interest rate charged or
penalty interest to be charged in case of default payment.
The practical business processes, which would require checks and
authorisation, is not adequately catered for in CS-DRMS. System administrators
can, however, set users with access rights such as to add, modify, delete or
view basis only. This means that if one user has rights to add, she can add
everything, thus there is almost no segregation of duties observed in the
system. The usual front, middle and back office operations and authorisation
processes as they happen in practice are not robust. Nevertheless, there is an
audit trail facility that can be set on to track as to who did what and when.
As mentioned, currently, the authorisation process is not vigorous as is the case
with the Commonwealth Secretariat Securities Auctioning System. Such
functionalities will, however, be incorporated in future releases to represent
the debt management process as they practically occur within debt
management institutions.
4.2.1.3 External Module
The external module provides the necessary links between various aspects of
the loan cycle, e.g. loan registration, disbursements, debt service and any
restructuring that may occur during the life of an instrument. To avoid
inconsistent debt data for a country, it is necessary that one institution
manages such and network links can be set up for other institutions within the
system for analytical purposes.
Recording of external debt in the system is completely different from capturing
domestic debt instruments. The recording of loans ideally is done immediately
after the signing of the loan agreement. Like in domestic debt module, the first
four digits of the instrument id refer to the year in which the agreement was
signed. All other information concerning basic details is recorded as indicated
below. Most fields under basic details are mandatory. Other fields like title and
reference are optional.
On other details screen, there are fields that are automatically calculated by
the system after all the loan details, including forecasting rules have been
entered and loan having been processed. The fields calculated by the system
include grant element and maturity (i.e. maturity date, original maturity,
remaining maturity and grace period).
Another important screen is for utilization where critical fields like effective
date, terminal date of disbursement, disbursement agency are recorded. Status
screen indicate status of loan at any point in time. Documents screen allows
scanned documents to be stored for future reference.
Forecasting rules is the core function in the recording of external debt
instruments. This is where information such as how disbursements are to be
made, interest is to be paid, principal payments are to be made etc are
captured. Information entered here is the one used by the system when it
generates forecasts. Since disbursements are always tricky to record,
considering that most loan agreements have conditions precedent that need to
be full-filled before the loan can start disbursing, effectively meaning that
disbursements dates are not immediately known to enable recording in system.
Thus, CS-DRMS has a facility known as Assumend Disbursement Profile (ADIPS),
which allow user to switch it on where disbursements are not known how they
would be made. The ADIPS is based on the economic sector of the project to be
financed. Once switched on (ADIPS), it would make disbursements forecasts for
that particular instrument. There is still an option to amend it if user is not
comfortable with its projections for disbursements. However, users are not
encouraged to use this facility.
Transaction screen is where all actual transactions are entered. These include
actual transactions for; disbursements, interest, principal, other payments and
penalties. Since disbursements trigger interest payments, it is important to
keep track of disbursements in order to be well positioned to forecast correctly
the interest to be paid.
Similar to domestic debt recording, there is again a weak authorisation process
set for external debt recording throughout the system. This means that one
user can record all types of external debt transactions like disbursements, debt
service payments, enhancements, cancellations and any other debt
restructuring without being properly authorized by a supervisor. Once a user
has access rights to add, he/she can add almost everything. The authorization
in place is not robust.
4.2.1.3.1 Bill
Bill transactions refer to payment transactions to be made as advised by
creditor through creditor payment advices. As such, bill transactions are
entered in actual transactions. This is usually done if the actual payment made
is not the same as the one forecasted by the system. Thus, the bill overrides
the forecast. As a procedure, it is recommended that always, the bill be
entered once received from the creditor and actual transactions would then be
recorded once they occur. The problem is that the bill, even if entered, system
will not use it to calculate debt stock; i.e. DOD, CUB. It is merely a tool to
eliminate arrears.
4.3 Exchange Rates and Interest Rates
Exchange rate captured in CS-DRMS is used by the system to convert the
transaction amount to Local Currency Equivalent (LCE) from the foreign
currency amount. The LCE is the most important transaction since all reports
convert amounts to the reporting currency through the LCE amount. Once the
instrument amount has been updated, the LCE can either be converted using
the rate stored in the transaction table or LCE can be specified manual. It is
recommended that users use the ‘Specify LCE Amount’ rather than using the
latest exchange rate stored in then system since such may not have been
updated or may not necessarily corresponds to the resultant LCE.
Likewise, floating/variable interest rates need to be updated frequency since
the the system apply such rates when calculating interest forecast based on
DOD.
The manual recording of rates can be tedious and time consuming and can
easily allow errors to go unnoticed. Current functionalities available in CS-DRMS
do not allow such information to be uploaded from systems where such data is
sourced like Bloomberg and Reuters. Further, there is no proper tool for
validating the rates other than the use of graphs.
4.4 Reporting Functions
There are various in-built standard reports available in the system for both
external and domestic debt. There is currently an effort to increase the array
of domestic debt reports to respond to user needs. System also provides the
report writer facility which enables users to design their own reports based on
the specifications that suit their needs. There is also the data export facility
which is used to report debt information to the World Bank on a calendar year
basis. This facility has been modified to meet the requirement/needs of the
World Bank.
Reports in CS-DRMS are in reference to the cut-off date. All actual transactions
after the cut-off date are not included in the aggregate figures. In order to
incorporate these, it is important for the user to carry out a period end
processing to move the cut-off date after the dates of the actual transactions.
Further to note is that cut-off date is used system wide. It cannot be applied to
a specific instrument or specific components of an instrument.
4.5 Database Management Functions
4.5.1 Validation
Validation checks in recording of treasury bills include the following:
o Instrument Number should start with the year in which the debt
instrument was issued. Other years will not be activated.
o System will not accept as a treasury bill if that instrument has a
maturity of more than 365 days.
o Total of bids amounts cannot exceed tranche amount.
o Total of tranche amounts cannot exceed instrument amount.
o With the exception of the 365 days being the maximum maturity period
for a treasury bill, the above validation checks also hold for zero coupon
bonds.
o For a fixed coupon bond, system will lead you to define the fixed
interest rate.
o The validation checks are similar even for floating (where system would
lead user to define the variable interest rate) and for stepped (to
defined stepped interest) bonds.
Ideally, there is no separate tool for database validation in the system.
However, CS-DRMS does validation in three distinct stages:
A number of checks and validations take place at the time of data
entry. System prompt user to a different stage, provide
warnings/error messages, during this period;
System provides either warnings or validation error messages or both
during processing.; and finally
System has sequenced procedures to be followed when doing an
upgrade.
4.5.2 Use of Graphs
The use of graphs is the only currently available ‘tool’ to enhance validation of
exchange rates and interest rates.
Any strange movements can be easily traced through the use of graphs and
accordingly verified in records for accuracy.
4.5.3 Processing
This refers to the activity where CS-DRMS integrates all the relevant records
pertaining to an instrument to create day- by -day account on the activity of
the instrument. Specifically, during processing, system carries out extensive
validation between instrument details, forecasting rules, actual transactions
and balance record. Any inconsistencies found will either lead to warnings or
error messages or both.
Violation of business principles and any system pre-set limits and criteria will
result to errors. Where a validation error message has been posted, that
instrument will be excluded from any reports generated, which will therefore
result in inaccurate reports. Minor inconsistencies will lead to warnings. Even
though such instruments with validation warnings will be part of the reports,
the reports generated would provide a warning that it contains instruments
which have not been successfully processed.
Processing is one of the critical activities within CS-DRMS and it is only at this
time that all the diverse elements of an instrument are examined together.
All efforts should be made to fix and/or correct all validations warnings and
errors in order to produce accurate reports. The system is user friendly, as it
will also provide user with the validation error messages or warnings for ease of
reference when correcting these.
Once all validation warnings and errors have been cleared, period end
processing may be run. This is basically advancing the cut-off date by one
month. The cut-off date is the reference date which is a common point
between historical and future transactions for all instruments. Transactions
before cut-off date are referred to as historical or actual transactions whilst
those after cut-off date are known as future or forecast transactions. Reason
for having monthly period end processing in CS-DRMS instead of real time is
because the flow of information in debt offices is usually monthly. It also
allows for a month lag for reconciliation of debt figures before they are
actually recorded in the system. This is the view of the system developers’ i.e.
ComSec.
4.5.4 Backup and Restore
This facility is available in the system and is fairly up to users to decide how to
use it. It is a question of establishing right procedures for employees to
perform it and such a facility would work well with good ICT support.
Back up and restore should be done occasionally including testing of disaster
recovery plan in place. Keeping a backup off-site is also vital. Scanning
documents for future reference also help to avoid going though a pile of files
when looking for information on any particular instrument.
4.6 Future Plans for CS-DRMS
4.6.1 Software
The Secretariat intends to move CS-DRMS to a new development platform and
is looking to re-engineer the application software to closely mirror debt
management business processes as they practically occur within debt
management institutions.
The new software will be based on a workflow system to model the flow of
information and authorization procedures as they happen in practice. ComSec,
inturn commissioned a consultant to undertake a study and compare businesses
processes in different countries (a mix of advanced economies, emerging
market economies and developing countries) and come up with a comparative
generic model which captures best practices that can be replicated in the
software.
The scope of the study include a comprehensive documentation for public debt
management which clearly describe business processes, information flow,
authorization process, functions and responsibilities within the different debt
management institutions and units. These include; front office, middle office
and back office as well as between the debt management institutions and
external entities like Accountant General Office and Central Banks. These will
allow different users to have different controls and audit trails. System will
cascade down the different processes in the debt management cycle. The
outcome of the study would be a documentation that would then be used by
ComSec to tailor CS-DRMS to support each step in the debt management chain.
4.6.2 Domestic Debt Module
The Secretariat, to meet user requirement launched a Securities Auctioning
System (SAS). The SAS is interfaced to CS-DRMS thus auction results can be
easily imported from SAS to CS-DRMS Domestic Module. ComSec, still in an
effort to meet user requirements is also exploring having a facility to record
secondary market trading in the system.
On another note, seeing that domestic debt reports are insufficient to satisfy
the diverse needs of CS-DRMS users, the Secretariat is currently pursuing a
project meant to increase the array of reports in the Domestic Module of CS-
DRMS. This on-going process tries to implement and incorporate a number of
reports already identified in the next version of the system. A number of
countries were invited to make an input to this development. The reports
would be categorized into two:
- Operational; and
- Analytical (to include tables and charts).
Below are examples of some of the recommended reports to be incorporated in
the domestic debt module for the next release of CS-DRMS:
4.6.3 Linking CS-DRMS to IFMIS
The Secretariat is planning to do a pilot project meant to link CS-DRMS to
IFMIS. Crown Agents has already done such work in Lesotho and have
accordingly shared experiences and/or lessons learnt with ComSec. It is
important for ComSec to make some changes in CS-DRMS for the smooth
running of the project. A major change observed is to consider CS-DRMS being
real time processing and generate real time loan balances. This is to facilitate
linking system to IFMIS which itself is real time.
5. Ideal Back Office operations in MEFMI Member States
5.1 Overview
This section tries to summarize some pertinent issues around best practices in
back office operations and thereby recommend an ideal arrangement for MEFMI
member states. It comes about after research on best international practice
including familiarization of UK DMO, Comsec DMS and Crown Agents amongst
others. It is also a result of studies undertaken in two MEFMI member countries
and sharing of experiences in the subject matter during several regional
workshops attended over the years. The outcome and recommendations
thereof are based on the findings made and sharing of experiences and are
assumed to be representative of the MEFMI region. The range to be covered in
recommending ideal practice for MEFMI surrounds; Legal and institutional
frameworks governing debt management and its coordination, operational
functions or procedures, staffing and debt management systems in place.
5.2 Critical Analysis of DMO Models
A DMO in the Ministry of Finance, Multi institutional DMO or a single/separate
and independent DMO are the most commonly used practices. In order to
recommend the best practice for MEFMI member states, one needs to
understand how these different set-ups generally operate. In the context of
back office operations, below are some observations drawn from these diverse
arrangements.
5.2.1 DMO in the Ministry of Finance
The advantage of setting up a DMO in the Ministry of Finance is that in most
cases, by law, the Minister of Finance is legally entrusted to contract and
manage debt on behalf of the government. Having a DMO in the Ministry of
Finance also facilitates the smooth interaction between the ministry economic
and financial forecasting functions and preparation of borrowing programme.
This will also enable all debt transactions (disbursements and repayments) to
be timely fed in the budget process. The disadvantage with this arrangement is
the high rate of staff turnover which is associated with poor remuneration for
civil servants. Also, in most cases, the Ministry of Finance does not have the
required expertise/skills to carry out the task.
5.2.2 Multi-institutional DMO
The advantage of this arrangement is that it allows for consistent coordination
amongst the institutions involved. The key institutions being the Ministry of
Finance and Central Bank. The Treasury or Accountant General Office also
plays a crucial role. Through proper coordination, potential conflicts amongst
the institutions involved would be eliminated. The size of the debt offices and
debt itself can also influence the ideal set-up depending on country to country.
On the contrary, such an arrangement may be problematic if there are no
clearly defined roles and responsibilities to be played by the different entities
involved in public debt management. These may lead to persistent conflict of
interest and might even compromise efficiency.
5.2.3 Single/separate and independent DMO
The advantage of this set-up is that it eliminate staff turnover as a result of poor
remuneration aligned to government salary scales. It also allows greater focus on
debt management policy and separates fiscal policy advice from debt
management. It also provides greater operational independence, increases
success in obtaining budget resources and decisions can be made timely.
Managing the government’s public debt requires controls. There are daily
internal controls set in into the DMO activities that are based on segregation of
duties and responsibilities. There are also regular controls within the DMO and
by Internal Auditors. The controls implanted in the DMO activities vary according
to the functions of the different offices namely; front, middle and back offices.
Then, they would be the senior management who would control and monitor
that each one of the offices perform their duties efficiently and in due time.
The disadvantage might be that even though its independent, but it may not be
totally independent with regard to financing of its activities. It may still rely on
government subventions since it might not be capable of generating enough
revenue to mange its operations. Since it still serves the government, its
success and efficiency will also depend on getting accurate program of action
(financing requirements) from the treasury timely.
5.3 Ideal Back office operations in MEFMI member states
Although there is no sufficient prove that a single DMO institution is the answer
to all the problems for debt management, it is still the best approach to solve
the problems in the MEFMI region. The problems that can be cracked include;
o Capacity as a result of staff turnover and lack of developmental
individual plans and training in other se-ups
o Faster and independent decision making
o Clear responsibilities and reporting lines
o Resource mobilisation
5.3.1 Can MEFMI adopt a single DMO then?
If MEFMI member states are to adopt a single DMO, they have to critically look
at the following issues:
5.3.1.1 Legal framework
The legal provision for debt contraction and management need to be updated
regularly. This would avoid a situation where countries still refer to very old
and outdated laws which would no longer suit today's environment. Further,
the laws need to be realistically implementable and effectively binding as an
instrument of control. Appropriate enforcement of this legal framework is
vital. There should be no room for public sector officials to obtain funding
without the consent of the Minister for Finance. There should also be debt
related policy high level and technical committees working under clear
guidelines that address debt management. These should meet routine rather
than ad-hoc.
5.3.1.2 Institutional structure
In order to attain best practice, MEFMI member states should work towards
having an institutional structure that provides clear accountability and
responsibility for managing debt with clear reporting lines and coordination of
information flows among the various units, and a well-trained and adequately
compensated staff with the necessary skills to carry out their responsibilities.
The institutional arrangement should not be characterized by duplication of
some functions by entities involved in debt management, which might hinder
operations and thereby cause even delays in debt services. The fragmentation
of responsibilities implies a need for high coordination and continual processing
of information flows.
Ultimately, centralized or consolidation of the debt management functions can
lead to efficiency gains, which can also help address the shortage of qualified.
There should be improved coordination of monetary and debt management
policy. It might also be necessary to have committees that coordinate debt
related activities with outside entities.
5.3.1.3 Procedures
Not necessarily to be stipulated in the law, there should be procedures manual
that define how each tasks are undertaken and the flow of information. MEFMI
states should also consider having updated job descriptions for each of the
staffs of the institution(s) involved in public debt management.
It would also be important for MEFMI member’s states to develop good internal
controls that would automatically identify discrepancies in loan transactions
and allow an accurate and timely servicing of the debt. Information flows
should be improved in order to promote better coordination between debt
management, cash management, budgeting and monetary policy. Such can be
facilitated by the establishment of appropriate committees and by formal
responsibilities for regular reporting and management information reports.
5.3.1.4 Staffing
For sound public debt management, MEFMI member countries should engage
staff with a good combination of financial, macroeconomic and public policy
skills, and ICT. It is therefore crucial for member states to have the ability to
recruit and retain highly skilled debt management staff in order to mitigate
both policy and operational risks.
5.3.1.5 Technology
It is also crucial to have experienced staffs that are conversant with CS-DRMS in
order to use the system efficiently. These include loan interpretation to
extract data relevant for CS-DRMS, data validation and an analysis of the debt
portfolio. Moreso, the system in place should be well supported by qualified
ICT personnel. To avoid duplication that may lead to errors, network links
should be developed between Ministries of Finance, Central Banks and
Treasury/Accountant General Office. Controls should be in place as to can
access database and make changes.
5.3.2 Probably multi-institutional for now but transitional to single?
It might be ideal for MEFMI member states to consider continuing with the
multi-institutional arrangement at least for now which would be transitional to
single and independent DMO in the near future. For our economies, the multi-
institutional arrangement might help for now considering the peculiar
circumstances in relation to:
o The different country’s specific goals and objectives of debt – a
number of MEFMi member states have been reviewing the core functions
of central banks and restructuring their ministries of finance. Focus of
central banks have been issuance and registration of domestic debt
instruments whilst ministries of finance building capacity to centralize
the management and coordination of national debt with the formation
of some routine or ad hoc committees.
o The institutional and human capacities of the different stakeholder’s
institutions involved – as a result of capacity advantage of one
institution over the other, it might be necessary to share the
responsibilities in debt management. Usually, the Ministry of Finance
would be designated the central coordinating role, and also vested with
the legal borrowing authority.
o The legal mandates or statutory provisions effectively in place –
changing the set-up can not be done haphazardly considering that it
might be based on that country’s legal framework or a statutory
mandate. It could also be as a result of a deliberate policy decision.
Some laws are lagging behind thus becoming inadequate to effectively
support best practices in debt management.
As a practice, notably by western countries, it might be necessary for
MEFMI member states to adopt the growing tendency to hive off debt
management functions to a centralised autonomous debt office. This
would lead the DMO to become independent of the institutional
structures of central banks or ministries of finance. Where the debt
office is organised as a centralized agency, it is easier to structure the
functions to cover all categories of debt according to Front Office,
Middle Office and Back Office. The institutional structures for debt
management in the MEFMI region, as in other developing countries, are
still evolving towards international best practice
ComSec need to improve on the following functionalities of CS-DRMS:
6.1 Data Export facility
The data export facility to World Bank Bridge currently available in CS-DRMS
2000+ external Module need to be improved. Currently, when exporting data to
the World Bank, the system excludes all loans originating from creditors
classified in the as Multilateral in the creditor category.
Ideally, it should exclude only those creditors reporting directly to the World
Bank like IMF, IBRD, IDA, ADB, ADBf. Presently, the facility excludes even
creditors like IFAD, EIB, BADEA who are all classified as multilateral creditors
but do not report directly to the World Bank. In order to have these creditors
reported to World Bank, one needs to change the creditor category to 'other' or
anything else as long as it is not classified as a multilateral creditor. An
improvement on this is necessary.
6.2 Real-time
System should move from period end processing to real time. Because of period
end processing, it means system can only generate data at the end of the
month. You cannot have debt data for daily basis or weekly. So how would
interface with IFMIS be achieved in the if CS-DRMS is not real time?
6.3 Link with IFMIS
If system was to move from period end processing to real-time that could also
facilitate smooth link with other Integrated Financial Management and
Information systems. Build in automated billing procedures, e.g. link with
SWIFT.
6.4 Reports in CS-DRMS Domestic Module
Array of reports in domestic module not sufficient. There is no variety of
domestic debt reports on debt stock especially as at a point in time not there.
One needs to filter such by knowing the instrument ids.
Report 529 on summary of existing treasury bills confusing. It is not accurate
unless the cut-off date is as close as possible to the current date. Otherwise, it
shows instruments that have already matured even if actual transactions have
been entered. This is not supposed to be. There should be no need to update
actual transactions for the report to work.
Report 165 should indicate that it is cumulative.
6.5 CS-SAS
Auctioning module looks good, but it cannot handle functions like settlements
and redemptions which can be handled by other in-house developed system
already in place. Problem with CS-SAS is that it handles only auctions. That
needs to be changed if system is to be adopted by countries that already have
systems that handle settlement and redemption over and above auctions.
Whether it should be in CS-DRMS Domestic Module or CS-SAS, there should
eventually be a facility to hale secondary market trading.
6.6 Other observations
- Auto aggregation, no need to allow user to untick this option because
there would be no way to calculate aggregate reports.
- Authorisation not robust as it should be in a typical business process.
- CS-DRMS should extend beyond traditional types of users and cover other
users like Audit department.
- Internal controls functions are not adequately displayed. Instead, they
are hidden in security/audit trail.
- ComSec can learn from other systems and improve on the, in order to
make CS-DRMS a much better product, e.g. there is still a lot that can be
learnt from IMF Book Entry System currently used by some MEFMI
members states in handling auctions, settlements and redemptions.
- System allows period-end-processing even if one have not entered some
actual transactions. It means it will indicate that as arrears.
Appendix A: UK Government Securities: gilts
A gilt is a UK Government security issued by HM Treasury.
The term gilt (or gilt-edged) is a reference to the primary characteristic of gilts
as an investment: their security. The UK Government has never failed to make
interest or principal payments on gilts as they fall due.
The UK Government has the highest, AAA credit rating from all major credit
rating agencies.
As gilts are marketable securities, their market value may go down as well as
up. The UK DMO issues gilts to the market on behalf of the Government of the
United Kingdom, and hold gilts itself for market management purposes.
Since April 2008, gilts have been issued by the UK DMO, an Executive agency of
Agency of HM Treasury. The reorganization followed the transfer of operational
responsibility for setting official UK interest rates from HM Treasury to the
Bank of England in May 1997. Financing plans are published a year ahead in the
DMO’s remit from HM Treasury which is contained in the Debt and Reserves
Management Report.
The DMO introduced electronic bidding at gilt auctions in 2007. As a
consequence, the average time taken to publish results fell to 10 minutes in
2007/08, compared to 20 minutes the previous financial year.
The UK Government through the UK DMO issues gilts to finance two major
components in the national accounts:
(i). The Central Government Net Cash Requirement (CGNCR)
This is essentially the difference between Central Government’s income
and expenditure in cash terms. The Government publishes annual
forecast for the CGNCR in the Budget each Spring. The forecast is
revised in the Pre-Budget Report each Autumn.
(ii). The redemption of maturing gilts
This is the amount needed to finance the annual repayment of maturing
gilts and is taken into account when setting the annual gilt financing
requirement.
Appendix B: Objectives of UK Government Debt
Management
The primary objective of UK debt management is:
“to minimise over the long term, the cost of meeting the Government’s
financing needs, taking account of risk, whilst ensuring that debt management
policy is consistent with the objectives of monetary policy”
In so far as gilts are concerned, this objective is to be realized by:
Pursuing an issuance policy that is open, predictable and transparent;
Issuing conventional gilts that achieve a benchmark premium;
Adjusting the maturity and nature of the Government’s debt portfolio
primarily by means of the maturity and composition of debt issuance and
potentially by other market operations including switch auctions, conversion
offers and buy-backs; and
Developing a liquid and efficient gilt market.
Maturity and composition of debt issuance
In order to determine the maturity and composition of debt issuance the
Government takes into account a number of factors including:
Investors’ demand for gilts;
The Government’s own attitude to risk, both nominal and real;
The shape of both the nominal and real yield curves and the expected effects
of issuance policy; and
Changes to the levels of Treasury bill stocks and other short-term debt
instruments.
REFERENCES:
1. Comsec, (January 2008), External Debt Manual, Domestic Module
Manual, Reference Manual for Reports in CS-DRMS 2000+,
London.
2. Comsec, (February 2008), Management Tools Reference Manual,
London.
3. Government of Swaziland – with assistance from MEFMI, (2003),
Swaziland Public Debt Policy, Mbabane.
4. IMF, (2001), Government Finance Statistics Manual, Washington.
5. IMF, BIS, Comsec, Eurostat, OECD, the Paris Club Secretariat,
UNCTAD and the World Bank (2003), External Debt Statistics:
Guide for Compilers and Users, Washington.
6. MEFMI, (2007), Public Debt Management Procedures Manual,
Harare.
7. MEFMI, South African Debt Office, World Bank (June 2000),
Sovereign Debt management, Cash Management and Domestic
Market Development (Case Study-Malawi).
8. MEFMI, World Bank (June 2001), Public Debt Management, Cash
Management and Domestic Debt Market Development (Case Study-
Tanzania).
9. UK, Debt Management Office (6th Edition May 2008), UK
Government Securities: a Guide to ‘Gilts’.
10. World Bank and IMF, (2001, 2003 and 2007), Guidelines for Public
Debt Management, Washington.