Legal and institutional structures

Without effective coordination and oversight, debt cannot be effectively managed and government borrowing can quickly spiral out of control. Some of the most important steps in debt management therefore involve creating an effective legal and institutional structure to coordinate and control debt.

In the past, many countries had a highly fragmented debt management structure. Individual departments and ministries would borrow for their programmes; the central bank would issue Treasury bills and bonds; and no single institution had oversight of total public debt. Over time, new processes are increasingly being put in place to record and report on loans, but without accompanying institutional reforms there remains a risk of the hard work being undone.

The single most important reform is to introduce a means of coordinating debt. Various models exist, from an oversight committee on which key stakeholders – the Ministry of Finance, central bank and other institutions – are represented, to a specific debt management department in the Ministry of Finance, to an independent Debt Management Office.

Each has their merits; the most appropriate option will largely depend on country context, in particular the political economy of government finance and the capacities of the various institutions involved. Will a committee hold sufficient authority? Is the Ministry of Finance sufficiently robust to take on the additional responsibility? Are the resources and the political will available to set up a new debt management office?

Drawing on best practice in OECD countries, there is an increasingly standard model for a debt management office; a front office responsible for mobilising debt, a middle office focused on analysis and strategy, and a back office recording and managing payments. However, in OPM’s experience, gathered both in our direct field work and in the evaluation of debt management in Nigeria and in numerous countries supported by the Commonwealth Secretariat, the appropriate structure must reflect local conditions.

Whichever model is chosen, one vital way of supporting it is to revisit the legal framework around government debt. Typically, there may be a number of laws developed over time that cover, directly or indirectly, debt management. Consolidating these laws into an overarching framework which grants authority to borrow and establishes the structures, processes and reporting requirements for debt management is an important step in controlling borrowing.

For example, in Sierra Leone, we recommended and advised on the preparation of a comprehensive legal framework covering borrowing by central government, local government and public enterprises (including public private partnerships.) We conducted similar work in Bangladesh and Dominica.

For more on our debt management capacity, see our brochure below.

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