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Macroeconomic & Financial Management Institute of Eastern & Southern Africa
Technical Paper
“The role of debt management and key considerations for a debt
office: the case of Rwanda”
Claude Murenzi
National Bank of Rwanda
Mentor: Khaled Ibrahim
This paper is submitted in partial fulfillment of the Award of MEFMI Fellowship
October 2010
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Table of Contents
ABSTRACT ................................................................................................................................................... 4
CHAPTER ONE: INTRODUCTION............................................................................................................ 5
1.1 OVERVIEW ........................................................................................................................................ 5 1.1.1 The evolution of debt management in Rwanda ............................................................................ 5 A) Before the Debt management Software (DMFAS) .......................................................................... 5 B) The DMFAS Project in Rwanda ...................................................................................................... 5 1.1.2 Current Situation of DMFAS in Rwanda ..................................................................................... 6 1.1.3 Key aspects and figures for Rwanda Debt ................................................................................... 7 1.1.3.1 Objectives and legal framework ................................................................................................ 7 a) Objectives of debt management ........................................................................................................ 7 b) The legal framework ......................................................................................................................... 7 1.1.3.2 The Rwandan debt figures ........................................................................................................ 7 A) The external Public Debt ................................................................................................................. 7 B) The Rwanda Domestic Debt ............................................................................................................ 9
1.2 PROBLEM STATEMENT .................................................................................................................... 10 1.3 JUSTIFICATION OF THE STUDY ............................................................................................................. 11 1.4 OBJECTIVE OF THE STUDY .......................................................................................................... 12 1.5 HYPOTHESIS OF THE STUDY ....................................................................................................... 12 1.6 LITERATURE REVIEW ................................................................................................................... 12 1.7 METHODOLOGY ............................................................................................................................ 13
CHAPTER TWO: CASE STUDIES OF DMO’S ....................................................................................... 13
2.1 WHAT IS A DEBT MANAGEMENT OFFICE? .......................................................................................... 13 2.2 DIFFERENT TYPES OF DMO ................................................................................................................ 13
a) Independent DMO .......................................................................................................................... 13 b) DMO located in the Ministry of Finance or Central Bank ............................................................. 14
2.3 THE DMO FUNCTIONS ........................................................................................................................ 14 2.3.1 The Back Office ......................................................................................................................... 14 2.3.2 The Middle Office ...................................................................................................................... 14 2.3.3 The Front Office ........................................................................................................................ 15
2.4 THE DEBT MANAGEMENT OFFICE IN RWANDA................................................................................... 15 2.4.1 Background ................................................................................................................................ 15 2.4.2 Current situation of Debt Office ................................................................................................ 15
2.5 THE BEST PRACTICE: SWEDISH NATIONAL DMO ............................................................................... 17 2.6 THE CASE OF RWANDA’S NEIGHBORING COUNTRY ............................................................................. 19
2.6.1 The case of Uganda .................................................................................................................... 19 2.6.1.1 The Uganda institutional framework ....................................................................................... 20 a) The Treasury Department .......................................................................................................... 20 b) The Macroeconomic Policy Department ................................................................................... 20 c) The Aid Liaison Department ..................................................................................................... 20 d) The Office of Auditor General .................................................................................................. 20 e) The Bank of Uganda .................................................................................................................. 21 i. The Statistics Department .......................................................................................................... 21 2.6.1.2 Ugandan debt figures .............................................................................................................. 21
2.7 THE DEBT MANAGEMENT POLICY ........................................................................................................ 22 2.7.1 Why the debt management strategy? ......................................................................................... 22 2.7.2 The Rwanda Debt Policy ........................................................................................................... 22 2.8.1 The Global Financial Crisis ....................................................................................................... 23 2.8.2 The case of Low Income Countries ........................................................................................... 24
CHAPTER THREE: RESEARCH FINDINGS, CONCLUSION AND RECOMMENDATIONS ............ 26
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3.1 PERSONS INTERVIEWED ...................................................................................................................... 26 a) Rwanda ........................................................................................................................................... 26 b) Uganda ............................................................................................................................................ 27
3.2 THE INTERVIEW METHODOLOGY ........................................................................................................ 27 3.3 RESULTS ............................................................................................................................................. 27
a) Rwanda ........................................................................................................................................... 27 b) Uganda ...................................................................................................................................... 28
3.4 CONCLUSION ...................................................................................................................................... 29 3.5 RECOMMENDATIONS .......................................................................................................................... 31
References: .......................................................................................................................................... 33 KEY FIGURES FOR RWANDA ..................................................................................................................... 34
The macroeconomic figures ................................................................................................................ 34
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Abstract
The paper examines the situation of debt office in Rwanda. It takes into account the
importance of the debt management in the economy, the place of debt and its impact in
the budget plan.
The aim of the study is to show the problems that the debt office in Rwanda faces, the
consideration given to the debt management of the country and after comparing it to
those of other countries in the region.
In order to have that picture, some methods like collection of data and interviews have
been used to achieve the performance goals.
Results from research show that there are some problems of neglect and follow up in the
debt area in both Ministry of Finance and the Central Bank. There is no capacity building
plan for debt office managers. The two institutions deal with external and domestic debt
and there is no clear mandate of each institution in the area of debt and this leads to
overlapping of responsibilities. The Ministry of Finance of Rwanda faces the lack of
human resources problem.
It’s crucial for Rwanda to develop a good structure of Debt Management Office including
a plan for capacity building in order to make its proper debt strategy analysis without
external support.
Authorities from Ministry of Finance and Central Bank should collaborate to set up the
mandate of each institution.
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CHAPTER ONE: INTRODUCTION
1.1 Overview
1.1.1 The evolution of debt management in Rwanda
A) Before and after the 1994 Genocide Rwanda has its proper evolution of debt management structure before and after the
genocide against the Tutsi, which took place in 1994. The interesting case here concerns
the period after 1994 until now, where the project of introducing the electronic debt
management system achieved its high level.
There was no formal framework for external debt management in Rwanda, no clear
specific policy, and neither objectives nor guidelines. Two separate external debt
databases in excel were held at the National Bank of Rwanda and the Ministry of Finance
whose maintenance and coordination can only be achieved through a significant and
exhausting work due to the permanent lack of human resource in the ministry. Several
inconsistencies in both databases were identified and that could potentially lead to
discrepancies in the debt service projections used in the budget and in the balance of
payments. The IMF and World Bank were always given different reports and different
numbers from Ministry of Finance and central bank of Rwanda. A Debt Management
Committee has been created to deal both with strategic and operational aspects of the
Debt Management, providing the necessary coordination between MINECOFIN and
BNR. However, it didn’t work, as it should do. The lack of human resource and the staff
turnover in the Ministry of finance was the reason why the central Bank of Rwanda put in
place a debt unit in its departments in order to have the accurate and updated debt data for
its balance of payments. In that time, Rwanda were using excel spreadsheet to record
debt.
B) The first DMFAS Project in Rwanda The UNCTAD’s Debt Management and Financial Analysis System (DMFAS) is software
well designed to help countries to manage their external and domestic public debt,
including securities. The DMFAS activities started in Rwanda in 1991. By mid-1992 a
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database covering both external debt and government securities was fully operational at
the ministry of finance, but the installation was destroyed during the 1990-1994 war. The
project restarted in 1998, when a needs assessment mission was sent to Kigali. The
project envisages the installation of DMFAS 5.2 in the Ministry of Finance with a
possible link to the central bank. In 1999, the database was partially recovered by the
central team in Geneva and converted to DMFAS 5.2 format. The project restarted in
2006, when the team in charge of debt went to Geneva for updating the existing database
with all rescheduled agreements and for preparing the Euro conversion.
1.1.2 Current Situation of DMFAS in Rwanda Currently, DMFAS 5.3 has been installed in both Ministry of Finance and Central Bank
of Rwanda. The main server is located at MINECOFIN, whilst a backup copy of database
is kept at NBR, duplicating the one located at MINECOFIN at regular intervals.
The project is not at its end, when the last UNCTAD mission, whose objectives were to
evaluate the project achievements and to inform the local counterparts about the recent
developments of the Programme, left Kigali; the validation of the entire database was
almost completely achieved. The mission found an overall discrete quality of the
database after checks (discrepancies are still there and can undermine any debt analysis
or projections) and recommended to perform a complete validation of the database and to
carry out this exercise on a constant basis.
For the second semester of 2009, the two units in charge of debt are recommended to
correct all the errors found in the database while waiting for the last complete validation.
It can be noticed that these days, there is only one database and the two units in charge of
debt harmonize together their numbers and continue to publish and report data from excel
as long as the DMFAS data validation will not be effective.
The UNCTAD last mission came in late August 2009 to evaluate the work done
following the last recommendations. Now a remarkable work has been done as the
consultant said, a great number of database errors have been corrected but a small
updating work still remain before doing the so called automated repayments and the
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statistical bulletin production. It’s about correcting or verifying if the last repayment for
the principal and /or the interest have been recorded following the terms of the contract
for all creditors. Another point is to verify if the commitment fees have been recorded or
paid for ADB and IDA loans.
1.1.3 Key aspects and figures for Rwanda Debt
1.1.3.1 Objectives and legal framework
a) Objectives of debt management
The objectives of debt management in Rwanda are defined as follow:
a) To meet the government financing needs as oriented in the Government roadmap
EDPRS and Vision 2020;
b) To ensure timely payments of government obligations at minimum risk and cost and to
avoid arrears;
c) To maintain the public and domestic debt sustainable in the long term;
d) To develop the domestic debt market.
b) The legal framework
The legal framework for debt management is established following the constitution and
the Organic Budget Low of State Finances and Property of 2006 as modified and
complimented in 2007, without forget the Statute of National Bank of Rwanda of 1997 as
amended in 2007.
1.1.3.2 The Rwandan debt figures
A) The external Public Debt
Rwanda attained the completion point of the Heavily Indebted Poor Countries Initiative
(HIPC) in April 2005, after what it became eligible for the implementation of the
Multilateral Debt Relief Initiative (MDRI) related to multilateral debt cancellation
launched during the G8 Gleneagles summit in 2006.
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The external public debt stock decreased substantially from USD 1.5 billions at the end
of 2005 to USD 479.7 million at the end of 2006 resulting from the Multilateral Debt
cancellation aimed at helping low income countries to reach the Millennium
Development Goals (MDGs) in 2015. The total debt is composed over 85% of
multilateral debt for all the period 2000-2009, except for 2006 where it was 81%.
The ratio of the external debt stock to exports was 131% in 2006 and 113% in 2007
whereas the one of external debt service to exports was 10% in 2006 and 3% in 2007.
As at end of December 2009, the external public debt stock stood at US $ 736.6 million.
The status of March 2009 from millennium development goals database (United Nations
Statistics Division) shows that the debt relief delivered in full under MDRI initiative to
Rwanda as post completion point countries (in end-2007 net Present value terms) is USD
225 million.
The government will have to borrow only in prudent manner in order to maintain debt
sustainability. The large part of the annual amount will remain draw-down of the existing
commitments.
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Figure 1: Development of Rwandan external public debt
0,00
200 000,00
400 000,00
600 000,00
800 000,00
1 000 000,00
1 200 000,00
1 400 000,00
1 600 000,00
1 800 000,00
2004 2005 2006 2007 2008 2009
Years
Th
ou
sa
nd
s U
SD
BILATERAL MULTILATERAL TOTAL
It may be noticed that, looking at the above figure, Rwanda should make effort to stay in
the standards of sustainable debt by minimizing debt service costs and maintaining a
prudent debt structure, following the MEFMI recommendations in the debt management
strategy document.
B) The Rwanda Domestic Debt The Rwanda domestic debt is issued for both monetary and fiscal policy purpose. It’s
composed of Treasury bills and bonds. The treasury bills have the maturity of 4, 13, 26
and 52 weeks whereas the Treasury bonds have 2, 3, 5, 7 and 10 years. At the end of
2009, the domestic debt outstanding was Rwf 253.6 billion, around US $ 444 million.
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1.2 Problem Statement Due to the importance of debt management in macroeconomic point of view and
economic development of a country, Rwanda should see how to improve its basic
infrastructure and analytical capacity for debt management, starting with implementation
of the best possible organizational set up for a national debt office.
The following question can help to understand the real problem: what is the relationship
between the weight given to the debt office in Rwanda and the importance of debt
management?
Rwanda needs to fulfill the following requirements in order to maintain effective debt
management:
a) Good debt office structure;
b) Trained, motivated and retained staff;
c) Office space;
d) Communication equipments
e) Organized debt management committee;
f) Good follow-up.
The problem concerns the minimum standards that Rwanda will have to fulfill in order to
maintain effective debt management:
The debt office structure known as front, middle and front office is not well defined in
the two debt units in charge of debt in Rwanda;
The luck of appropriate career development and staff retention constitute the main cause
of staff turnover, without forgetting the low wages;
There is no enough space allocated to debt offices as long as the importance given to debt
management is not significant;
The Debt Management Committee is not operational on regular basis. It has always been
proposed a quarterly meeting but in vain. The debt management committee is the main
key to a good follow up of the debt management problems or evolution by the authorities.
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1.3 Justification of the study The experience of the past few years with the debt difficulties of many countries has
demonstrated the importance of properly managing external debt. It’s not only important
in period of crisis, but must be seen as a crucial element of normal balance of payments
management. An important contributing factor to the debt crisis was the neglect by many
countries of the basic elements of debt management. (J. De La Rosière, 1985)
Public debt management is the process of establishing and executing a strategy for
managing the government’s debt portfolio in order to meet government funding
requirements to promote economic growth and development in an effective and
sustainable manner.
In a broader macroeconomic context for public policy, governments should seek to
ensure that both the level and rate of growth in their public debt is fundamentally
sustainable, and can be serviced under a wide range of circumstances while meeting cost
and risk objectives. (IMF-World Bank, 2002)
The aim of an effective debt management is to ensure that both the level and the growth
of debt are fiscally sustainable. It needs to define clear objectives for public debt
management in accordance with macroeconomic policies.
External debt management is one facet of macroeconomic policy and in particular,
balance of payments policy.
The paper presents the importance of good debt management and demonstrates the
weight given to the debt management office in Rwanda comparing to the case of Uganda.
Considering the above explanation and definition of debt management, it should be
understood that the structure, the basic infrastructure of debt management should be
taken into account in order to manage and produce good information and submit it to
other macroeconomic entities or government for budget plan.
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1.4 OBJECTIVE OF THE STUDY The aim of the study is to show the consideration given to the debt management office in
Rwanda by comparing it with those of other countries in the region and draw
recommendations that can help all the institutions involved to improve the debt
environment area for a sustainable debt management.
1.5 HYPOTHESIS OF THE STUDY
As long as it’s agreed that good debt management is a key to a better projection which
lead to a good budget plan and balance of payments in particular and economy in general,
the question for the case of Rwanda is: “Do the authorities consider the importance of
debt management for the country so that they can plan for implementation of good
structure of debt management office and indirectly long term capacity development
for their staffs?”
1.6 LITERATURE REVIEW
Experience reminds that there is a range of institutional alternatives for locating the debt
management functions across one ore more institutions: the Ministry of Finance, central
bank, independent debt management agency etc. Wherever the debt office is, the key
requirement is to make sure that the organizational framework is clearly specified, there
is coordination and sharing of information, and that the mandates of the respective
players such as legal framework are clear (World bank/IMF 2001).
For countries in which financial market is not developed, it is preferable to maintain the
main debt management functions in the Ministry of Finance in close collaboration with
the central bank (Blejer, 1999).
Kalderen (1997) argued that under the same conditions, a separate debt office may
complicate rather than facilitate the development of the broader debt management
functions, the development of domestic debt market included.
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1.7 METHODOLOGY The research was carried out using different research methods. The methods used were
the following:
- Interviews with debt managers from Ministry of Finance and National Bank of
Rwanda;
- Reading books and reports;
- Internet research;
- Collection of information from some debt offices in the East African region
Primary data was obtained through interviews with persons involved in debt, three staffs
are from the Ministry of Finance and three others are from the Central Bank of Rwanda.
The secondary data were collected from books, reports and Internet research (websites).
CHAPTER TWO: CASE STUDIES OF DMO’s
2.1 What is a Debt Management Office?
The debt management office DMO is defined as an entity responsible for managing
government debt data through its participation in negotiations, initiating the debt
servicing, keeping debt accounts and providing all country debt statistics. The DMO
carries out the government debt management policy by minimizing the costs and the risks
associated with such borrowings.
2.2 Different types of DMO The DMO can either be independent or located in the Ministry of Finance and/or Central
Bank and the location varies from country to another.
a) Independent DMO
The case of independent DMO is more specific in developed economies that have the
most developed financial markets. In that case, the Ministry of Finance put in place the
debt policies and the DMO is the only entity in charge of implementing them. These are
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the cases of the UK and Sweden national debt management offices. Some of these DMOs
play the role of issuing financial instruments like bonds and T-bills (Case of the Swedish
DMO).
b) DMO located in the Ministry of Finance or Central Bank
DMO located in the MOF is the case of less developed economies where debt
management seems to be more linked to other macroeconomic policies due to the
importance of debt and absence of developed financial market.
2.3 The DMO functions Regardless of the location, the DMO is composed of the back office, the middle office
and the front office.
2.3.1 The Back Office
The back office is the principal rear base of the DMO and its main role is to maintain the
debt database, to make it accurate and consistent. It is sometimes important in case of
existence of two different DMOs to do the reconciliation of data when one is located in
the Ministry of Finance and another in the Central Bank. The back office performs two
functions related to recording and executing operations. The recording function can be
defined as the process of collecting, storing, processing, validating and disseminating
data. The execution of operating function is considered as the process of capturing,
verifying disbursement and keeping up repayments on time in order to avoid falling into
arrears. The important objective of the Back Office is to provide the accurate and
consistent data to other entities concerned by the so called statistical information.
2.3.2 The Middle Office
The middle office is one of the DMO segments in charge of analytical and risk analysis
function. Its real role is to analyze debt situation in the global macroeconomic context.
This entity is more concerned when comes for the country the time for debt sustainability
analysis in order to propose the policy makers to adopt the convenient strategies.
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The risk analysis appears when the middle office has to balance the cost and risk in terms
of new borrowings.
For the case of Rwanda for example, the macroeconomic unit in charge of debt will be
proposed to play the role of middle office.
2.3.3 The Front Office
The front office is the part of DMO in charge of issuing or negotiating with external
creditors (multilateral, bilateral or others) for loans and international financial markets for
instruments. For countries where the financial market is most developed, the front office
main duty is to create the market infrastructure by incitation to public securities. In
Rwanda, the entity concerned by loans negotiation is called CEPEX (Central Public
Investments and External Finance Bureau).
2.4 The Debt Management Office in Rwanda
2.4.1 Background
The debt management office in Rwanda was only operating in the Ministry of Finance
since 1990 and in 1996 the central bank decided to create a new debt unit in the research
department due to the lack of statistics for the balance of payments and high level of staff
turnover in the Ministry of Finance in the past.
2.4.2 Current situation of Debt Office
Currently there are two debt management offices in Rwanda, located in the Ministry of
Finance and central bank. They all work on the same debt database.
In the Ministry of Finance there is a lack of staff, only one person is in charge of external
public debt where he deals with disbursements, repayments, registration, archive and
external audit. It’s important to point out that a high level risk may occur in ministry of
finance debt management office to such level that in case of his resign, the situation of
debt may restart from the beginning point. There is also one IT person who works both
with the DMO and the IT department and lastly the one in charge of domestic debt.
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The structure is not well defined as long as they don’t have back office space, middle
office and front office. They don’t have their own office and have been separated in
different floors although they are still under the treasury supervision.
Concerning the Ministry of Finance Structure, the debt management is under the
Accountant general supervision, in the Treasury Division. Debt managers are called Debt
expert
Figure 1: The Central Bank Debt Management Office (department structure)
For the Central Bank, they have also two external public debt managers, one for the
external private debt and another one in charge of domestic debt located in research
department while the three cited are in the statistics department under the balance of
payment division.
The two DMOs face the lack of human resources capacity plan and personal career
development. Some of the debt managers may have benefited from different trainings but
these are still not planned for an adequate period of time so that they can be beneficial for
all the team.
Director, Statistics Department
Manager, BOP
Senior Officer, Capital Transfers & Services
Senior Officer, Trade
Senior Officer, Debt Management
Officer DebtManagement
Manager Monetary Statistics
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The debt management committee as said, which reflects the image of the debt
management organization in the country, has always been a problem. The team always
met when it was announced that some official missions were about to come to Rwanda
and some important points were discussed during the session but without any level of
confidence for the follow up of the decisions in the future.
In summary, the debt management office in Rwanda faces now the following problems:
Existence of external public and domestic debt both in Ministry of Finance and
National Bank of Rwanda
No good structure and appropriate offices in the two institutions involved in debt;
Use of excel and sometimes DMFAS as long as data validation is not effective;
Permanent need of external support to deal with DSA.
The risk for the two debt offices is the small number of human resource persons who
are also DMFAS users. The case of resign or departure of some debt managers from
debt office would affect the debt management of Rwanda for a long period of time.
The case of the IT person who left the debt office in the past and came back after two
years should be considered as a good example for the management. The knowledge
and trainings that those debt managers have benefited would be for the management
the cause of retention and motivation in order to avoid to loose them and struggling
with the long apprenticeship of new comers in the debt area. The same consequences
as the high level staff turnover that happens now in the central bank and in the
ministry of finance.
2.5 The Best Practice: Swedish National DMO
The Swedish National Debt Office was founded in 1789 by the Riksgad of Estates. The
first objective of the debt office was to finance the war against the Russia started in the
reign of King Gustav III. It was not possible to use the central bank (Riksbank) notes
because they had to be backed by the silver to two thirds while the promissory notes
(from the DMO) were not subject to those restrictions.
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Now the National DMO is known as a major player in financial market in Sweden. It’s a
public authority reporting to the Ministry of Finance. The head of the DMO, the Director
General and the DMO board are appointed by the government.
Their main tasks are clearly defined as to be the internal bank of the government, to
manage and fund the central government debt and to issue government guarantees and
loans.
a) As internal bank, they are government cashier and government agencies borrow and
invest cash with the so called DMO. For them, the payments have an impact on the debt
and it increases or decreases following that expenditure are higher or lower than the
incomes. The surplus means of course that the debt shall decrease.
b) In the area of managing central government Debt with minimum risk and costs,
treasury bills and government bonds are sold to investors and pension funds in order to
finance the central government debt. The same debt is financed by private savings and
lottery bonds but at a lower level.
c) The Swedish National DMO issues guarantees or loans and the State assumes by
taking a charge for accepting the risk aiming at covering losses in long run.
This case of Swedish National Debt Office is different from the kind of African DMOs
and has been raised as example of best practice just to show that there are some
difference even among independent DMOs themselves first and between independent
ones and those inside the Ministry of Finance. Most of DMOs in general play only the
role of managing Government Debt as long as the Swedish plays three or four roles
(Government internal bank, Government debt manager and Government guarantees and
loans issuer).
Nigerian DMO is one of known independent DMOs in the African region but it’s not an
example among the best practices. The DMO located in the Ministry of Finance or
Central Bank can also be a good example in its own way considering the organization put
in place and satisfying or fulfilling the points somehow required to maintain an effective
debt management, like good debt office structure, qualified staff, office space etc.
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Figure 2: The Swedish DMO Structure
2.6 The case of Rwanda’s neighboring country The comparison will concern the structure of debt management office among countries
and the situation of capacity building planning in the two countries. Some constraints
didn’t allow using the same methodology used in Rwanda to collect information. The
country selected among others was Uganda.
2.6.1 The case of Uganda The Ugandan debt office is also a big entity situated in Treasury Department for the
Ministry of Finance and for the Central Bank it’s the Statistics Department which is
composed of different divisions like Trade Statistics and Remittances Monitoring
Division, Grants and Public Debt Division, Foreign Private Capital, just to mention three
among the total of four. The common characteristic of the east African community
countries except Rwanda is that others have department or division of debt management
Board
-Management Director General -Deputy DG
Cash Management
Guarantee Debt Management
Retail Market
Internal Auditing
Chief Economist
International Relations
Administration Back Office
IT Public Affairs
Legal Department
Risk
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in their structures. Rwanda has many things to learn from its neighbors and other
countries in terms of debt management and DMO structures.
The debt management functions are carried out by both Bank of Uganda and Ministry of
Finance. The Front Office and the middle office for external debt are in the Ministry of
Finance while those of domestic debt are in the Bank of Uganda.
2.6.1.1 The Uganda institutional framework
Concerning their Institutional Framework, the following administrations are concerned:
The Parliament, the Treasury Department, the Macroeconomic Policy Department, the
Aid Liaison Department, the Office of the Auditor General and the Bank of Uganda.
a) The Treasury Department
Collect all information about loans and contracts signed as official debt
Record all disbursement, interest and principal payments
Monitor the on-lending agreements
b) The Macroeconomic Policy Department
Set the ceiling on external borrowing and payments
Set the minimum terms and conditions for each borrowing
Take care of the composition of the external debt stock and debt service scenarios
c) The Aid Liaison Department
Report on new prospects of donor funding
Warns any loan which might breach the borrowing guidelines
Identify the appropriate sources of finance
Negotiate new loans grants
d) The Office of Auditor General
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Conduct financial and value for money audit in respect of any projects involving
public funds
e) The Bank of Uganda
i. The Statistics Department
Maintain accurate database on all public and publicly guaranteed external debt
Update the system with new loans, disbursements, payments, exchange rates
Provide data on debt to stakeholders
Analyze debt sustainability and advise policy makers
Process external debt service
ii. The Financial Market Department as front office of Domestic Debt
iii. Settlement and Payment System Department as back office of external debt
2.6.1.2 Ugandan debt figures
Before 2006/07 the Ugandan outstanding stock was over US$4.4 billion and in 2006/07
the MDRI relief was amounted to US$ 3.5 billion received from AFDF, IDA and IMF.
At the end of June 2010, the total stock of external debt was around $ 2.8 billion and the
gradual increase in stock is due to the new disbursement from old and newly signed
loans.
The Ugandan external debt is mostly composed of multilateral institutions such as IFAD,
IDA, AFDB and EIB accounting for 89.1%.
Concerning the domestic debt, it’s solely issued for monetary purposes and is composed
of Treasury bills and bonds. The Treasury bonds are sold in terms ranging from 91, 182
and 364 days while the Treasury bonds have maturity of 2, 3, 5 and 10 years.
At the end of June 2010, the total domestic stood at Ushs 2.79 trillion (Us $1.27 billion).
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2.7 The debt management policy
2.7.1 Why the debt management strategy? The strategy draws the intensions of the government as regards to debt management in
medium or long term. It gives the picture on how the government debt should be
managed taking into account its impact on the state budget, the balance of payments, the
financial system and the capital market for the country. When talking about the debt
management policy, one should think about the effort of the government to maintain the
macroeconomic and fiscal stability. Debt management needs to be linked to a clear
macroeconomic framework where governments try to be sure that the level and rate of
growth in public debt are effective. Often the origins of debt management problems are
found in the lack of attention paid by policy makers to the importance of having a prudent
debt management strategy and the effect of sickly macroeconomic management. In one
hand, the unsuitable monetary and exchange rate policies can cause uncertainty in
financial markets related to the future returns available on local currency-denominated
investments. In the other hand, the concerned authorities should take into account the
value of having a sound debt management strategy, framework and policies that are in
coordination with an effective macro policy framework.
2.7.2 The Rwanda Debt Policy Rwanda lunched the debt management strategy aimed at not falling back into the vicious
circle of excessive debt after having benefited from important debt forgiveness in the line
of Multilateral Debt Relief Initiative put in place in 2006. The Rwandan Debt Policy
document was approved by the cabinet in November 2008. This was a positive point and
great achievement as long as long the debt policy recommends that the borrowing cap
should be on a rules based approach rather than a hard ceiling amount and defined for
medium term (three years), to avoid debt distress. In the same line the document
recommended to consider the terms of new borrowings and to privilege the concessional
loans with IDA standards: 40 years maturity, 10 years grace period and 0.75 percent
interest rate with grant element above 50 percent.
23
In the future the growth of the government debt volume is planned to be controlled and
the new disbursements should necessary grow in parallel with the growth of exports.
All the planning will meet capital improvements if the Debt Management committee is
really operational in positive way different from the past. The Debt management Office
to be reorganized and all partners involved in debt to follow-up the respect of the debt
strategy recommendations. The question remaining here is to know if the study on debt
management policy has taken into account the actual global financial crisis because in the
debt strategy document it’s said that the growth of the debt volume will have to take into
account the exports growth. It’s evident that in period of crisis, exports will considerably
decrease and Rwanda like other low income countries will need more concessional loans
and aids to finance the budget.
For the domestic debt, the document recommends to develop the domestic market by
issuing treasury bills and treasury bonds in domestic currency in the medium term in
order to strengthen the short term cash management and provide the reference rate for the
domestic market.
2.8 Debt management against the Global Financial Crisis
2.8.1 The Global Financial Crisis
The current financial crisis is more global than any other period of financial turmoil in
the past sixty years as announced by the International Monetary Fund. The magnitude of
the crisis that began with the bursting of the housing bubble in late 2007 in the United
States of America shows factors that are common compare to the previous crises and
others that are new.
a) In ancient time, the period before the crisis was characterized by unstable asset
prices that proved unsustainable, a prolonged credit expansion leading to
accumulation of debt, the emergence of new types of financial instruments and
the incapability of regulators to keep up.
b) The new thing is the expansion of the securitization which changed the incentives
for lenders and made lower the credit standards. Systems became fragile because
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of the complexity of the balance sheets due to the use of off-balance-sheet
instruments; financial market players were high leveraged (with risk of
bankruptcy) and were affected by the wholesale funding and external risk
assessments. The cross-border spillovers increased significantly during the crisis
because financial institutions and market across borders were closely linked and
risks highly correlated.
The world economy is facing a recession and following the IMF projections the global
growth will slow from under 3 ½ percent in 2008 to about ½ in 2009 before the eventual
recovering in 2010.
2.8.2 The case of Low Income Countries At the beginning low income countries were really not affected by the financial crisis
considering their low level of integration with the international financial markets. But
now some signals (as informed by IMF studies) show that those countries could also live
the financial crisis due to their high level of dependence on foreign direct investments,
remittances and international trade that they deal with the rest of the world.
The good example is the decrease of thirty percent in terms of exportations in Rwanda in
the first semester of 2009 comparing to the same period in 2008.
In this sub division, we’ll talk more about low income countries as regard to global
financial crisis because all countries concerned by our study are considered as less
developed economies.
Many Low Income Countries have benefited from MDRI debt relief and with the global
financial crisis many of them could see their debt situation worsened because the impact
of the crisis will oblige them to increase their borrowings in order to fill the budget gap,
also because their volume of exportations and tax revenues will decrease.
Another problem will be that the source of concessional borrowings will not be the same
as few years ago. The multilateral agencies will not be able to fund the low income
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countries needs due to the change of international economic situation that affects the
donors’ countries.
In brief, the less developed economies are the innocent victims of the global financial
crisis but although they had no role in that economic recession, they will endure its
impact and may be, it will be too late for them to be rescued by the donors in bad
situation and on the way to reduce or close the source of grants and very low interest
loans. The IMF worries about the case of many low income countries that will loose their
orientations by changing their priorities (education, infrastructure, poverty reduction,
etc), when the source of grants and concessional loans will dry up, wanting as we said to
fill the budget gap by using their last reserves.
Many of Sub-Saharan countries in particular, presented a high growth in recent years
attributed to good economic policies. They also benefited from external support in the
form of debt relief and higher inflows. Some external shocks like 2007-08 fuel and food
prices shocks slowed the trend and reduced the external position of importers of food and
fuel, caused inflation acceleration and reduced the intensity of the growth.
The developed economies, the emerging markets and the low income countries were
affected differently by the global financial crisis. The developed countries (USA and
Europe) were affected in banking system whereas the emerging markets were affected by
cross-border financial linkages through capital flows, exchanges rates and stock market
investors. The less developed economies were initially affected by trade and growth.
For the African continent, Nigeria, South Africa, Ghana, and Kenya (called frontier and
emerging market) through their financial activities with the rest of the world were
affected first, with falling markets equity, pressure on exchange rates and capital flows
reversals.
Other countries like Liberia, Burundi, Tanzania, Uganda and Zambia etc depend on very
concessional financing and will be affected due to the lack or reduction of those aid or
debt flows.
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The danger for the Sub-Saharan area and the rest of the African continent for the
financial sector which is not really affected is the probability for the parent banks to
withdraw their funds from subsidiaries or local banks without forgetting the contagion
effect from parent banks to subsidiaries.
CHAPTER THREE: RESEARCH FINDINGS, CONCLUSION AND RECOMMENDATIONS
This chapter talks about the research analysis and findings of the survey carried out
through interviews done with persons involved in debt management in the units in charge
of debt management in the ministry of finance and central bank of the countries
concerned. The aim of the study is to show the consideration given to the debt
management office in Rwanda and after compare it to those of other countries in the
region and draw recommendations that can help all the institutions involved to improve
the debt environment area for a sustainable debt management.
3.1 Persons interviewed
a) Rwanda In order to have a global picture of Rwanda debt management in general and the weight
given to the debt office in particular, interviews were carried out with debt officers in
Rwanda.
The following table illustrates the percentage and the number of respondents to our
interview.
Table 2: The Picture of Respondents in Rwanda
Institution Persons interviewed
(number)
Percentage
Ministry of Finance 3 50%
Central Bank 3 50%
Total 6 100%
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b) Uganda For Uganda, the total number of respondents is four, two from the Ministry of Finance
and two from Bank of Uganda. From 5 questionnaires provided to the Bank of Uganda
and Ministry of Finance employees, only four were filled and collected.
Table 3: The Picture of Respondents in Uganda
Institution Persons interviewed
(number)
Percentage
Ministry of Finance 2 50%
Central Bank 2 50%
Total 4 100%
3.2 The Interview Methodology The questions formulated for the interview were related to the key points that Rwanda is
supposed to fulfill in order to have properly debt management. The methodology used
was based on open-ended questions (not leading ones) and follow-up questions to collect
more details.
3.3 Results
a) Rwanda The main lesson is that the debt management in general has many problems in
Rwanda. 100% of the interviewees said there is no capacity development plan in
their institutions, they can benefit from some training from MEFMI or other
institutions but there is no specific capacity building plan or individual career
development.
There is no strong structure for their debt office. In MINECOFIN the debt office
is within the direction of treasury while in NBR, it is located in the department of
statistics under the balance of payment division since it was itself a division
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before the restructuring of January 2009. It can be understood by this issue that all
the two units involved in debt management have the office space problem.
66% of them are not satisfied of how the DMFAS project has been followed up
from the beginning up to now.
Concerning the debt management committee, 100% of them agreed that it exists
but confirmed that it is not operational and should be restructured. Some of them
recommended MEFMI, when they were working on Debt Management Strategy,
to propose the change of the head of debt committee and to involve some head of
departments from central bank and the entire group in charge of debt
management, without forget to reinforce the role of debt management committee.
83% of them emphasized that debt management is not considered as it should be.
The authorities want result but never ask themselves to what step is the DMFAS
project for example. Some other problems have been revealed during the
interview and those coincided with the notices in the UNCTAD last mission
report. There is no clear mandate of each institution and the human resource in
debt management offices is limited.
On that issue, it was noted that: There is an evident overlapping of responsibilities
between MINECOFIN and NBR.
b) Uganda 100% of the respondents confirmed that the DMO in Uganda is structured.
There is a clear separation of roles and duties of different players in debt
management within the Ministry of Finance and central bank. Meanwhile,
it was underlined that the DMO is not structured in a standard notation of
a DMO. Nobody mentioned the problem of duplication of external debt
between BOU and the Ministry of Finance often rose during MEFMI
workshops.
100% of them are satisfied by the capacity development plan. For some
it’s in built in the overall capacity building plan. The departments involved
in debt management have a capacity development plan to develop and
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enhance the capacity in debt management. For others each member of staff
is given opportunity to develop capacity from basic debt management
programs to advanced trainings.
100% of the respondents confirmed their debt unit has its proper office,
equipments and electronic system. The challenge for them is to keep
abreast of the new versions of DMFAS.
75% of the interviewees confessed that the management committee is not
operational although it was set up. Its composition is known but it has not
held any meeting.
100% of them confirmed that their authorities follow up their work at
different level and are aware of their problems and try to solve them.
Some of them reported that the department holds meeting on a monthly
basis where each division is supposed to report on its activities,
achievements and challenges.
3.4 Conclusion If it’s agreed that public debt management is the process of establishing and executing a
strategy for managing the government’s debt portfolio in order to meet government
funding requirements to promote economic growth and development in an effective and
sustainable manner, then the debt office will play a capital role to maintain an effective
debt management.
Rwanda has two debt management offices, in Ministry of Finance and Central Bank and
has benefited from the HIPC and MDRI initiative. It’s now a crucial moment for the
country to do its best to maintain the debt structure in standards of debt sustainability
considering that the current stock at the end of 2009 is $736.6 million and that the debt
management policy is there as an advisor to a long run behavior. To achieve that goal,
authorities should begin by building strong basics of debt management office
environment.
The research has showed some weaknesses in the debt area of Rwanda. The first one is
that the debt management office in Rwanda has no work space and strong structure and
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the second one is that two debt management offices are not complementary but reveal an
overlapping of responsibilities in their own structures. The roles are not defined in the
two DMOs and it’s not possible to really know where to find the back office, the middle
office and the front office. When there is no good structure and link among different
players, debt managers can sometimes have a problem to find a loan agreement recently
signed between the country delegates and a creditor for example.
The third weakness is the lack of capacity development plan in the two institutions
involved in debt management.
The last one concerns the debt management committee which is not operational.
The big difference with the Ugandan case is that for them the structure of debt unit in
central bank is defined as a division with domestic and public debt as well as grants while
for Rwanda it’s just a small unit in Balance of Payments Division. For Ministry of
Finance, the structure is the same in the two countries but the structure of front, middle
and back office is well defined in Uganda. Another difference is the involvement of the
authorities in debt management and their follow up at different levels for Uganda, even if
it’s better to underline also that no one from Ugandan respondents mentioned a well
known duplication of external debt recording in DMFAS by the Ministry of Finance and
Bank of Uganda.
Again for all the east African countries the DMOs are structured as department or
division while in Rwanda it’s a unit.
All those facts lead us to the conclusion that the debt management office and the debt
management as an indirect consequence are neglected and need more improvement.
As recommendations, some proposals presented below can help the authorities or any one
concerned by the same situation in debt management area to make some improvements.
For the question that authorities considerer the weight of debt management so that they
can plan for the implementation of a well structured debt office and all relevant effects,
the answer is “no they don’t” and the recommendations below help and show the way to
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achieve the goal of implementing the good basics and environment of debt management
office.
3.5 Recommendations
The first crucial point would be that the debt management committee be operational and
involves all the parties concerned by debt and macro economy, where everything needing
improvement can be discussed.
Taking into account the lack of clear mandate between the ministry of finance and the
central bank in the area of debt in general, the top management of the two institutions
should sit together and through the debt management committee proposals, define the
role of each institution. This will avoid them to be redundant. One of the proposals will
be that the ministry of finance should take care of public external debt related to
transactions whereas central bank of the domestic and private external debt.
It’s important for Rwanda to develop the good structure of debt management office, the
individual career and planning for human capacity building in the debt area in order to
make its proper debt strategy analysis without external support.
The three functions as developed above should be defined and separate in different
offices. It’s about the back office, the middle office and the front office.
Another point is that shortly the DMFAS system will be fully operational and the need
for new users will be felt as long as the team is not complete.
A course denominated organizational/institutional changes for an effective debt
management office should be provided to the Rwandan authorities and all other persons
involved in debt management in order to stimulate them to know or consider the
importance of organized debt management office and indirectly to compare the current
situation of Rwanda to other countries. The result would be a positive change in debt
area.
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The MEFMI Procedures Manual should also be given to our institutions in order for them
to have an idea of what approximately a debt office in the MEFMI region should be or
work.
The debt management office both in ministry of finance and in central bank should be
provided with a good structure, good governance and a long term capacity development
for the human resource. The management should provide to the debt management staff a
stimulating workplace environment and try to develop employee retention strategies.
It appears that the central bank considers the debt management as the responsibility of the
ministry of finance and itself as the substitute. The central bank top management said in
the meeting with the UNCTAD consultants that the ministry of finance should define
their responsibilities vis-à-vis debt management and the central bank will therefore know
what to do. This can explain definitely why the debt management in central bank changed
the position from a full division to a small unit under the balance of payments division in
the statistics department.
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References:
1. Pal Borresen and Enrique Cosio-Pascal 2002: “Role and organization of debt
office”. DMFAS Programme Technical Paper N° 1, United Nations, New York
and Geneva, UNCTAD.
2. Hassanali Mehran, International Monetary Fund, Washington DC 1985: External
Debt Management
3. IMF-World Bank 2002 (amended in 2003) Guidelines for Public Debt
Management
4. UNCTAD Virtual Institute, Debt Sustainability Analysis (DSA): an E-learning
Training Course: Debt Management Office Framework (from internet).
5. MEFMI, Kigali 2008: Rwanda Debt Management Policy
6. IMF publications.
7. UNCTAD, Kigali 2008: Technical Cooperation Mission Report
8. Elisabeth Currie, Jean Jacques Dethier, Eriko Togo : Institutional Arrangements
for Public Debt Management
9. Enrique Cosio-Pascal, New York 2007: The Debt Management Office and the effective Debt Management Functions: An institutional and operational framework
10. Maureen Burke, March 2009 Poor countries need extra help to get through global
crisis
11. The World Bank 2009: The Little Data Book on External Debt;
12. Philip Anderson 2005, The Changing Role of The Public Debt Manager;
13. Emmanuel Frot 2009: The consequence of financial crisis on aid;
14. IMF 2009: Impact of The Global Financial Crisis on Sub-Saharan Africa;
15. Hans Lofgren, Hannah Nielsen, and Kene Ezemenari (WB 2009): Scaling up aid
or scaling down, The Global Economic Crisis and the Rwanda’s MDGs
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Annex 1
Key figures for Rwanda
The macroeconomic figures Rwanda has made considerable progress in recovering from the 1994 war and genocide
against the Tutsis, achieving remarkable growth close to 8 percent a year during the long
period 1996-2005. In 2006 and 2007 the GDP growth were respectively 7.3 percent and
7.9 percent while for 2008 it was 8.5 percent, exceeding expectations despite strong
inflationary pressures.
For the external position, coffee remains the important export product followed by the
tourism sector which has grown steadily to become the second source of export earnings,
ahead of tea and mining. As a result of imports growing faster than exports, the current
account deficit of Rwanda has increased in 2008 to 6.6 percent and is expected to average
the same amount in 2009. Meanwhile, it was noted that the current account deficit has
fallen from 7.7 percent of GDP in 2006 to 5.3 percent in 2007 due to a large increase in
official transfers.
Rwanda is an example of good macro-economic policies. It joined the East African
Community at the end of 2006 and has taken a leading role in promoting favourable
business conditions. During the last decade Rwanda has been among the most active
reformers of business regulation worldwide. Late this year 2009, it was the first sub-
Saharan country to head the list as the top reformer since the first rankings six years ago,
rising from 143rd to 67th place on the ease of doing business rankings.
The investment into Rwanda was expected to rise 10% in 2009 from nearly $500 million
in 2008 due to strong economic growth, legal framework and leadership.
The country has averaged 5-6 percent economic growth rate over the last decade,
reaching 11.2 percent in 2008.
The International Monetary Fund said in June that Rwanda would grow at 5.3 percent in
2009 and 2010 as the global economic crisis hit investments, exports and tax revenues.
35
Rwanda’s economy has been rebuilt with focal point on technology, agriculture, tourism
and mining.
The country has attracted interest in the natural gas deposits in Lake Kivu and other
infrastructure projects like the construction of the big Rusumo hydroelectric project.
The African Development Bank (ADB) said that remittances, aid and investment inflows
had increased in Rwanda due to reforms, and improved economic conditions.
The source from National Bank of Rwanda announced the increase of twenty six percent
in term of remittances in the first half of 2009 and it appears that by the end of the year
2009 the inflows will be around $175 million from $60 million in 2006 and $110 million
in 2007.
It may be noticed that the growth in remittances is attributed to government programme
to facilitate Rwandan Diaspora to invest in Rwanda.
In 2009 the Central Bank of Rwanda established an investment fund denominated
Rwandan Diaspora mutual fund to facilitate Rwandans living abroad to invest in their
own country through remittances as a way of contributing to national development.
The accession of Rwanda into the commonwealth group of nations is another crucial
positive change for the country. As a reminder, Rwanda was admitted to the
commonwealth as the 54th member on November 29, 2009 by the commonwealth heads
of government meeting in Trinidad and Tobago.
The commonwealth is a club of nations with a population of more than two billion and
$2.8 trillion in annual trade. Its main focus concern the promotion of trade, education and
good governance among member countries.
