external debt management in indonesia, by tarun das

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Management of External Debt -International Experiences and Best Practices

Dr. Tarun Das*, Economic Adviser, Ministry of Finance, India

And Resource Person, UNITAR, Geneva.

November 2005

_______________________________________________________________________

* This report expresses personal views of the author and should not be attributed to theviews of the Ministry of Finance, Government of India or the UNITAR. The author would like to express his gratitude to the UNITAR for providing an opportunity to

prepare this report and the Ministry of Finance, Government of India for grantingnecessary permission for that.

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Management of External Debt -International Experiences and Best Practices

Dr. Tarun Das, Economic Adviser, Ministry of Finance, India And Resource Person, UNITAR, Geneva.

Contents

1. Conceptual Issues1.1 Definition of external debt1.2 Debt Sustainability and Fiscal Deficit1.3 Debt Sustainability and Current Account Deficit1.4 Liquidity versus Solvency

2. Risk and Debt Sustainability Measurements2.1 Economy wide model in ALM framework 2.2 Different Types of Risk 2.3 Risk Management2.4 Sustainability Indicators2.5 World Bank Classification of External debt

3. Inter Country Comparisons 3.1 Top ten debtor countries

3.2 Selected countries in Asia and Pacific3.3 South Asia, and East Asia & Pacific

4. International Best Practices4.1 New Zealand4.2 Australia4.3 Ireland4.4 European Union4.5 India

5. External Debt situation in Indonesia

6. Lessons from international best practices

Selected ReferencesStatistical Tables

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1. Conceptual Issues

Debt sustainability basically implies the ability of a country to service all debts internaland external on both public and private accounts- on a continuous basis without affectingadversely its prospects for growth and overall economic development. It is linked to the

credit rating and the creditworthiness of a country. However, there is no simple answer tothe question- what should be the sustainable or optimal level of debt for a country?Before discussing various measures for sustainable debt management, it is useful toclarify certain basic concepts regarding measurement of external debt.

1.1 Definition of external debt

The Guide on external debt statistics jointly produced by the Bank for InternationalSettlements (BIS), Commonwealth Secretariat (CS), Eurostat, International MonetaryFund (IMF), Organisation for Economic Co-operation and Development (OECD), ParisClub Secretariat, United Nations Conference on Trade and Development (UNCTAD) and

the World Bank and published by the IMF (2003) defines Gross external debt, at anytime, as the amount of disbursed and outstanding contractual liabilities of residents of acountry to non-residents to repay the principal with or without interest, or to pay interest with or without principal.

This definition is crucial for collection of data and analysis of external debt:

1. First , it talks of gross external debt, which is directly related to the problem of debt service, and not net debt.

2. Second , for a liability to be included in external debt it must exist and must be

outstanding. It takes into account the part of the loan, which has been disbursedand remains outstanding, and does not consider the sanctioned debt, which is yetto be disbursed, or the part of the debt, which has already been repaid.

3. Third , it links debt with contractual agreements and thereby excludes equity participation by the non-residents, which does not contain any liability to makespecified payments.

4. Fourth , the concept of residence rather than nationality is used to define adebt transaction hereby excluding debt transaction between foreign-owned anddomestic entity within the geographical boundary of an economy. Besides, while

borrowing of overseas branches of domestic entities including banks would beexcluded from external debt, borrowing from such overseas branches by domesticentities would b included as part of external debt.

5. Fifth, it talks of contractual agreements, and excludes contingent liabilities. For aliability to be included in external debt, it must exist at present and must havecontractual agreement.

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6. Finally, the words principal with or without interest include interest free loansas these involve contractual repayment liabilities, and the words interest with or without principal include loans with infinite maturity such as recently popular

perpetual bonds as these have contractual interest payments liabilities.

Three other concepts- one relating to interest payments, another relating to currency andanother relating to short-term debt need some clarification. While calculating interest, ingeneral an accrual method rather than the actual cash-flow method is used. As regardscurrency, debt is made in different currencies and it is a common practice to convert alldebt in a single foreign currency, say US dollar, and also in domestic currency. In somecases, debt from non-residents could be denominated in terms of domestic currency. As

per definition of external debt, such debt should form a part of external debt, even thoughit may not be fully convertible.

In general, short-term debt is defined as debt having original maturity of less than oneyear. However, Southeast Asian crisis highlighted the necessity to monitor debt by

residual maturity. Short-term debt by residual maturity comprises all outstanding debthaving residual maturity of less than one year, irrespective of the length of the originalmaturity. Residual maturity concept is distinctly superior to original maturity concept.

1.2 Debt Sustainability and Fiscal Deficit

Debt sustainability is closely related to the fiscal deficit, particularly to the primarydeficit (i.e. fiscal deficit less interest payments). Sustainability requires that there should

be a surplus on primary account. It also requires that the real economic growth should behigher than the real interest rate. Countries with high primary deficit, low growth andhigh real interest rates are likely to fall into debt trap.

1.3 Debt Sustainability and Current Account Deficit

Economic theory states that high fiscal deficit spills over current account deficit of the balance of payments. Persistent and high levels of current account deficit is an indicationof the balance of payments crisis and needs to be tackled by encouraging exports andnon-debt creating financial inflows.

1.4 Liquidity versus Solvency

One important conceptual issue relates to the distinction between debt service problemsdue to liquidity crunch and those due to insolvency. These concepts are borrowed fromthe financial analysis of corporate bodies, but there are distinctions between firms andcountries (Raj Kumar 1999). If a firm has positive net worth but faces difficulty to meetthe obligations of debt service, it is considered to be solvent but to have liquidity

problem. When it has negative net worth, it is insolvent.

There is difficulty to apply these concepts to a country, as it is difficult to value all theassets of a country such as natural resources, wild life, antics in museum, heritage

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buildings and monuments. Besides, firms can disappear due to insolvency problems, buta country cannot become bankrupt nor disappear nor are overtaken or merged purely onaccount of financial problems. So we need to consider medium and long term prospectsof a country in terms of growth and balance of payments.

2 Debt Sustainability Measurements

There are broadly two approaches to determine debt sustainability of a country. One is todevelop a comprehensive macroeconomic model for the medium term particularlyemphasizing fiscal and balance of payments problems, and another is to assess variousrisks associated with debt and to monitor various debt sustainability ratios over time.

2.1 Economy wide model in ALM framework

Economy wide model in general is constructed in the Asset and Liability Management(ALM) Framework and is aimed at minimizing cost of borrowing subject to specified

risks or to minimize risk subject to specified cost. Benefits of such models are quiteobvious in the sense that the model can be used not only for debt management but alsofor determination of optimal growth, fiscal profiles, medium term balance of paymentsetc. However, building up such models requires not only huge data but also expertise onthe part of modelers for which there may be constraints in developing countries.

2.2 Different Types of Risk

There should be a framework that identifies and assesses the financial and operationalrisks for the management of external debt . Risks can be grouped in three broad heads viz.

(A) External market based risks which includeLiquidity risk Interest rate risk Credit risk Currency risk Convertibility risk Budget/ Fiscal risk

(B) Operational and Management Risks which includeOperational risk Control systems failureFinancial error risk, and

(C) Country specific and political risks. Box-1 provides a brief discussion the nature and implications of these risks.

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Box 1. Risks for Management of External Debt

(A) External Market-Based Risks

(A1) Liquidity risk. The pledging of reserves as collateral with foreign financial institutions as

support for loans to either domestic entities, or foreign subsidiaries of the reserve managemententity, renders reserves illiquid until the loans are repaid. Liquidity risks also arise from thedirect lending of reserves to projects (particularly in real estate and share markets) with returnsin domestic currency or to enterprises, which are subject to shocks in external and domesticmarkets and are unable to repay their liabilities in time.

In fact, one of the major factors leading to East Asian financial crisis in 1997-1998 was thatshort-term external borrowing was invested in protected or illiquid sectors having low return andlong gestation period ( real estate and petrochemicals in Indonesia, Thailand, Malaysia), sectorswith high or excess capacity having low or negative returns ( steel, ships, semiconductors,automobiles in Korea), non-tradable (such as land, office blocks and condominiums in Thailand)that generate return in domestic currency and did not generate foreign exchange; in

automobiles and electronics with inadequate attention to profitability, andspeculative and unproductive lending in share markets. This created liquidityproblem due to maturity mismatch between assets and liabilities of thefinancial intermediaries.

(A2) Interest rate risks. While fixed interest rate has the advantage of having fixed obligationsof interest payments over time, there may be a substantial loss in a regime of falling interestrates and global trends of soft interest rates. Solution lies to have a proper mix of variable andfixed interest rates.

Losses may also arise on assets from variations in market yields that reduce the value of marketable investments below their acquisition cost. Losses may also arise from operations

involving derivative financial instruments.

(A3) Credit risk. Losses may arise from the investment of reserves in high-yielding assets thatare made without due regard to the credit risk associated with the asset. Lending of reserves bythe Central Bank to domestic banks and overseas subsidiaries of reserve management entities,may also expose reserve management entities to credit risk.

(A4) Currency risk. Some element of currency risk is unavoidable with external debt. But,there are instances to denominate debt in a few currencies in anticipation of favorable exchangerates. Subsequent adverse exchange rate movements may lead to large losses.

(A5) Convertibility risk: Easy convertibility of domestic currency may lead to flight of capitalat the slight anticipation of crisis.

(A6) Budget/ Fiscal Risk: Fiscal risk may arise from unanticipated shortfalls in revenue or expenditure overruns. Government should consider both budget and off-budget liabilities and tryto minimise contingent liabilities, which may represent a significant balance sheet risk for agovernment and are a potential source of future fiscal imbalances. Sound public policyrequires that a government needs to carefully manage and control the risks of their contingent liabilities. The most important aspect of this is to establish clear criteria as to

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when government guarantees will be used and to use them sparingly.Experience in the industrialised countries suggests that more complete disclosure, better risk sharing arrangements, improved governance structures for state-owned entities andsound economic policies can lead to substantial reductions in the governments exposureto contingent liabilities.

(B) Operational and Management Risks

(B1) Operational Risk is the risk that arises from improper management systems resulting infinancial loss. It is due to improper back office functions including inadequate book keeping andmaintenance of records, lack of basic internal controls, inexperienced personnel, and computer failures. Probability of default is high with inadequate operational and management systems.

(B2) Control system failure risks arise due to outright fraud and money laundering because of weak or missing control procedures, inadequate skills, and poor separation of duties.

(B3) Financial error risk. Incorrect measurement and accounting may lead to large andunintended risks and losses.

(c) Country specific and political risks influence multinational companies choice between exports and investments, and act as deterrents for foreign investment, whereasscale economies, lower wages, fiscal incentives, high yields, trade openness andagglomeration effects stimulate non-debt creating financial flows. Foreign capital isattracted by countries which allow free repatriation of capital and profits, and donotinsist on appropriation of private capital in public interest.

2.3 Risk Management

Although there is no unique solution to tackle various types of risk, general risk management practices of the government aim at minimizing risk for government bodiesand public enterprises. These include development of ideal benchmarks for public debtand monitor and manage credit risk exposures. Typical risk management policies aresummarized in Table-1.

Table-1 Policies for Risk Management

Type of Risk Risk Management Policies

1. Liquidity risk (a) Monitor debt by residual maturity(b) Monitor exchequer cash balance and flows(c) Maintain certain minimum level of cash balance(d) Maintain access to short-term borrowing(e) But, fix limits for short-term debt(f) Pre-finance maturing debt(g) Do not negotiate for huge bullet loans(h) Smooth the maturity profile to avoid bunching of debt services

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(i) Develop liquidity benchmarks2. Interest rate risk (j) Fix benchmark for ratio of fixed versus floating rate debt

(k) Maintain ratio of short-term versus long-term debt(l) Use interest rate swaps

3. Credit risk (m) Have credit rating of various scrips by major credit ratingorganizations such as S&Ps, Moodys, Japan Bond ResearchInstitute etc.

(n) Identify key factors that determine credit-rating(o) Develop a culture of co-operation and consultation among different

departments and with credit rating organisations(p) Set overall and individual counter-party credit limits

4. Currency risk (q) Fix benchmark for the ratio of domestic and external debt(r) Fix ratios of short-term and long-term debt(s) Fix composition of currencies for external debt(t) Fix single currency and currency pool debt(u) Use currency swaps and have policies for use of market derivatives(v) Try to have natural hedge by linking dominant currency of exports

and remittances to the currency denomination of debt5. Convertibility risk (w) It is better to have gradual and cautious approach towards capital

account convertibility.(x) The liberalisation of capital accounts should be done

in an orderly manner in line with the strengthening of domestic financial systems through adequateprudential and supervisory regulations.

(y) The golden rule is to encourage initially non-debtcreating financial flows (such as foreign directinvestment and portfolio equity investment) followedby long term capital flows.

(z) Short term or volatile capital flows may be liberalisedonly at the end of capital account convertibility.

6. Budget Risk (aa) Enact a Fiscal Responsibility Act.(bb) Put limits on debt outstanding and annual borrowing as a

percentage of GNP or GDP(cc) Use government guarantees and other contingent liabilities (such

as insurance and pensions etc.) judiciously and sparingly(dd) Fix limits on contingent liabilities(ee) Fix targets on fiscal deficit and primary deficit(ff) Fix limits on short term borrowing(gg) Monitor debt service payments

7. Operational risks (hh)Allow independence and transparency of different offices(such as front, back, middle and head offices) dealing with

public debt(ii) Strengthen capability of different offices(jj) Try to achieve general political consensus in policy

formulations.

8. Country specificand political risk

(kk) Have stable and sound macro-economic policies(ll) Have co-ordination among monetary and fiscal authorities

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(mm)Try to achieve general political consensus for policyformulation.

2.4 Sustainability Indicators

Debt sustainability indicators are the most widely used ratios for debt management. Theseindicators express outstanding external debt and debt services as a percentage of grossdomestic product or other variables indicating the strength of the economy. Somecommonly used debt sustainability indicators are given in Table-2.

Table-2: Debt Sustainability Indicators

Purpose Indicators

1. Solvency ratios (a) Interest service ratio the ratio of interest payments to

exports of goods and services (XGS).(b) External debt to GDP ratio(c) External debt to exports ratio(d) External debt to revenue ratio(e) Present value of debt services to GDP ratio(f) Present value of debt services to exports ratio(g) Present value of debt services to revenue ratio

2. Liquiditymonitoring ratios

(h) Basic debt service ratio- Ratio of total debt services(interest payments plus repayments of principal) to XGS

(i) Cash-flow ratio for total debt or the total debt serviceratio (i.e. the ratio of total debt services to XGS)

(j) Interest payments to reserves ratio.(k) Ratio of short-term debt to XGS(l) Import cover ratio- Ratio of total imports to total foreign

exchange reserves.(m) International reserves to short-term debt ratio(n) Short-term debt to total debt ratio

3. Debt burden ratio (o) Total external debt outstanding to GDP (or GNP) ratio(p) Total external debt outstanding to XGS ratio(q) Debt services to GDP (or GNP) ratio(r) Total public debt to budget revenue ratio(s) Ratio of concessional debt to total debt

4. Debt structureindicators (t) Rollover ratio- ratio of amortization (i.e. repayments of principal) to total disbursements(u) Ratio of interest payments to total debt services(v) Ratio of short-term debt to total debt

5. Public sector indicators

(w) Public sector debt to total external debt(x) Public sector debt services to exports ratio(y) Public sector debt to GDP ratio(z) Public sector debt to revenue ratio

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(aa) Average maturity of non-concessional debt(bb) Foreign currency debt over total debt

6. Financial sector indicators

(cc) Open foreign exchange position- Foreign currency assetsminus liabilities plus long term position in foreign

currency stemming from off-balance sheet transactions(dd) Foreign currency maturity mismatch(ee) Ratio of foreign currency loans for real estate to total

credits given by the commercial banks(ff) External sector related contingent liabilities(gg) Trends of share market prices(hh) GDRs and Foreign currency convertible bonds issued(ii) Inflows of FDI and portfolio investment

7. Corporate sector indicators

(jj) Leverage (debt/ equity ratio)- Ratio of debt to equity(kk) Interest to cash flow ratio(ll) Short-term debt to total debt

(mm) Return on assets(nn) Exports to total output ratio(oo) Net foreign currency cash flow(pp) Net foreign currency debt over equity

8. Dynamic ratios (qq) Average interest rate/ growth rate of exports(rr) Average interest rate/ growth rate of GDP(ss) Average interest rate/ growth rate of revenue(tt) Change of PV of debt service/ change of exports(uu) Change of PV of debt service/ change of GDP(vv) Change of PV of debt service/ change of revenue

Source: Raj Kumar (1999) and IMF (2003)

2.5 World Bank Classification of External debt

On the basis of ratio of PV to GNI and PV to XGS (exports of goods and services), theWorld Bank in their report on Global Development Finance 2005 has classified countriesinto three categories viz. low indebted, moderately indebted, and severely indebtedcountries as indicated in Table-3 . While PV takes into account all debt servicingobligations over the life span of debt, GNI indicates countrys total potentials and XGSindicates foreign exchange earnings reflecting debt-servicing ability. Countries are alsoclassified into low and middle income depending on the level of per capita income.

Table-3 Cross classification of countries by income level and indebtedness

Indebtedness

Income Level

Severely IndebtedEither PV/XGS > 220% Or PV/GNP > 80%

Moderately Indebted Either 132%


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capita between US$766and US$9,385

Middle income (SIMI) Middle income (MIMI) Middle income (LIMI)

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those in East Asia and Pacific. On the other hand, the ratio of reserves as a percentage of external debt is much higher in East Asia and Pacific than in South Asia despitesignificant improvement in the ratio in South Asia over the period.

Table-5 : Trends of Key Debt Indicators

Key external debt indicators East Asia and Pacific South Asia1980 1990 2000 2004 1980 1990 2000 2004

EDT/XGS (%) 179 132 78 49 154 303 155 113EDT/GNI (%) 17 36 32 24 16 31 27 23TDS/XGS (%) 27 18 11 8 12 28 15 10INT/XGS (%) 14 7 4 2 5 15 6 4INT/GNI (%) 1 2 2 1 1 2 1 1RES/EDT (%) 51 31 57 141 40 7 30 78RES/MGS (months) 9 5 6 8 6 2 5 10

Short-term/ EDT (%) 23 16 13 27 7 10 4 4Concessional/ EDT (%) 19 29 21 21 73 55 50 52Multilateral/ EDT (%) 9 15 13 12 25 31 38 36

Notes : EDT = External debt outstanding, GNI = Gross national incomeTDS = Total debt services, INT = Interest paymentsXGS = Exports of goods and services, MGS = Imports of goods and servicesRES = Foreign exchange reserves, Short term = Short term debtConcessional = Concessonal debt, Multilateral = Multilateral debt

3.3.1.1.1.1.1.1 International Best Practices

3.4 New Zealand

The New Zealand Debt Management Office (NZDMO) is responsible for themanagement of public debt since the separation of debt management policy frommonetary policy in 1988. Although NZDMO is placed in a division in Treasury, itmaintains some degree of autonomy from the rest of the government and has its ownadvisory board. The board meets at least four times a year and consists of a senior member of the Treasury and experts in risk management. The board provides advice andoversight on wide range of issues relating to operational risk management and promotestransparency in debt management policies and supervision.

The treasurer or the head of the NZDMO recommends benchmarks for sovereign debt interms of currency mix and interest rate sensitivity, and trading limits imposed on the portfolio manager. The basic objective of the NZDMO is to identify a low risk portfolioof net liabilities consistent with the governments aversion to risk and expected costs for risk reduction. In order to minimize the net risk exposure, the NZDMO has set theduration and currency profile of the liabilities to match its assets. As most of thegovernment assets are denominated in New Zealand dollars, the strategy has entailedgradual elimination of net foreign currency debt (which was achieved in September 1996)

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and lengthening maturity of domestic debt. Assets and liabilities are monitored on daily basis and the model also incorporates private sector debt management practices. Theactual performance of portfolio managers is evaluated against the benchmark portfolio ondaily basis.

Over these years NZDMO has undertaken considerable amount of works relating toanalysis and management of the government liabilities within an Asset and LiabilityManagement (ALM) framework (Anderson 1999). It has developed both economy widemodels and specific models for the management of public debt. In the wider model, basicobjective is to construct a debt portfolio, which aims at hedging the economy as a wholeagainst shocks to national income or net worth. It requires information on the nature anddegree of private hedging mechanisms, which are highly dispersed and very expensive tocollect. Therefore, NZDMO concentrates on the management of the government assetsand liabilities. It has improved accounting principals and has adopted generally acceptedaccounting and auditing practices.

In recent times, focus has been on maximizing returns and minimizing costs of assets andliabilities using the modern portfolio theory. In contrast to earlier works, it does notinclude physical assets that do not directly produce returns. The model estimates therelationship between the values of various asserts classes (e.g. equities, real estate etc,)and various government liabilities (e.g. debt and the undefended pension liabilities). Toreflect the Crowns total portfolio, the model also includes the measures of the Crownsfuture tax revenues and future social expenditure liability.

ALM relates essentially to the management of market risk and derivatives are used toachieve desired outcomes. On the basis of ALM modeling, NZDMO specifies

benchmarks for various sustainability indicators such as ratio of domestic and externaldebt, ratio between debts with floating and fixed interest rates, currency mix, maturitymix, limits on short term debt, interest rates etc.

Like many sovereign debt management agencies the NZDMO is committed to the principles of transparency, neutrality and even-handedness in its activities. Theexperience of NZDMO (Anderson 2000) leads to the following conclusions:

(a) ALM framework is conceptually appealing but requires huge data.(b) It is relatively easy to include all financial assets and liabilities.(c) The extension of ALM to physical assets and non-traded sovereign

instruments raises a number of issues and practical difficulties.(d) ALM framework is only one component of prudent debt management.

Measures to manage other risks, particularly refinancing, liquidity, andoperational risks need to be established. However, gains in risk management and cost reduction are considerable.

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3.5 Australia

The Australian Office of Financial Management (AOFM) established on July 1, 1999 isan independent agency within Treasury and a specialised office to manage Australiangovernments debt position (McCray 2000). However, it has important practical linkages

with the parent departments. Its major task is to identify, measure, monitor and analyzeall kinds of risk, particularly market risk, funding/ liquidity risk, credit risk, operationalrisk etc.

AOFM recognizes that capital account convertibility and liberalisation of trade andfinancial flows present both opportunities and challenges for debt management.Opportunities lie in accessing a truly global and expanded market for debt with

potentially low cost. However, risks arise due to increased financial market volatility andinternationally mobile creditors and investors leading to vulnerability of debt servicecosts, market exposures of debt portfolio and balance sheet net worth.

Australian government introduced accrual budgeting and accounting systems to tacklerisks and contingent liabilities. There is an increasing emphasis on outcomes-orientedapproach to performance reporting, public sector transparency and accountability, andfocus on net worth and risks to net worth.

A comprehensive risk management framework encompassing funding, market, credit,liquidity and operational risks provide the basis for a coherent and objective planning for debt. A unique feature of the Australian debt management is that the basic organisationalstructure, staffing numbers, skill net, financial resourcing, delegation powers andaccountability arrangements within AOFM had practically remained unchanged since itsinception.

3.6 Ireland

The National Treasury Management Agency (NTMA) in Ireland is an independent publicdebt office and is in charge of management of all public debt- either internal or externaland also all contingent liabilities (such as savings schemes of the government, pension,

provident and insurance funds). The benchmarks are designed in consistent with theannual debt-service budget within which the NTMA has to operate. As such the review of the benchmark is annual and matches the budget cycle.

At the beginning of the year, NTMA signs a Memorandum of Understanding (MOU)with the Finance Minister and specifies benchmarks for various parameters such as extentof internal and external loan, currency mix, maturity mix, interest rare mix etc. These

benchmarks are developed after careful examination and measurement of various riskssuch as liquidity, debt refinancing, maturity of debt etc. MOF does not interfere with theday-to-day working of the NTMA, which has distinct front, back, middle and headoffices and dealing rooms.

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The NTMA attempts to beat the benchmark both by funding at different dates than the benchmark stipulations in order to take advantage of favourable market conditions, and by issuing at different maturities within the broad guidelines regarding proportions of foreign currency and floating rate debt. The performance of the NTMA is evaluated at theend of the year in terms of actual and benchmark portfolios and costs. If NTMA performs

better than the benchmarks agreed in the MOU, it retains the profits of debt management.Over the years, NTMA has emerged as a highly technical, efficient and profitableorganisation in debt management.

3.7 European Union

The Maastricht Treaty of the European Union set up the framework for the EuropeanMonetary Union, which includes introduction of common currency the Euro. TheTreaty also sets out four convergence criteria to achieve price stability, fiscal prudenceand debt sustainability. These include the following:

(1) Average consumer price inflation should be sustainable and, in the year prior to

examination, should not be more than 1.5 percentage points over that of, at most,the three best performing countries.(2) The country should not have an excessive deficit. Prima facie a governments

budget deficit should not exceed 3% of GDP, and(3) Its debt should not be more than 60% of GDP.(4) Average nominal long-term interest rates should not exceed, by more than two

percentage points the long-term interest rates of, at most, the three best performing member states in terms of price stability.

Individual countries within European Union have developed independent debtmanagement systems and procedures within these broad principles. Several countrieshave developed benchmarks for currency composition and maturity mix of external debt.Institutional constraints that limit influence the benchmarks include limiting currencycomposition of foreign debt to that of reserves portfolio (e.g. United Kingdom ) andmaintaining a fixed percentage of foreign exchange in a specific currency such as theECU to develop debt market of that currency (e.g. France and Italy ).

In Sweden, the benchmark serves as the limit within which the foreign currency debt may be exposed to currency and interest rate risks. The Sweden debt Office (SNDO) laysdown the risk limits and takes position in the foreign exchange and bond markets to bringthe long-term cost of the debt below that of benchmark portfolio. The currencycomposition of the benchmark primarily matches the weights of the currencies in theECU basket while US dollar and Japanese Yen are included in the portfolio for diversification. The SNDO may deviate from the currency mix benchmark by 3

percentage points, and that for duration benchmark by 0.5 percentage points. The interestrate structure of the benchmark is based on diversified borrowing along the yield curve toreduce shocks to specific parts of the yield curve and to reduce bunching of debt

payments over time. In Denmark, benchmarks for various indicators and the maximumlevel of deviations from the benchmarks are specified.

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In Hungary , the debt management office located in the Ministry of Finance is responsiblefor servicing the cost of the net sovereign external debt. The authorities align the currencycomposition of the external debt through hedging operations with that of the currency

basket to which the national currency is pegged. Emphasis is placed on lengthening thematuring of the debt, maintaining more than three quarters of the debt in fixed rate

instruments, and evenly spreading debt redemptions to avoid rollover risks.

3.8 India

External debt indicators of India showed steady improvement over time. Despite severe balance of payments difficulties due to the impact of the gulf crisis in early 1990s andhardening of international oil prices in recent years, India never defaulted on itsobligations of external payments. On the contrary, India pre-paid $7 billion worth of external debt to multilateral and bilateral lenders during 2003-2004. In terms of totalexternal debt stock, Indias position improved from the first rant in 1980 to third rank after Brazil and Mexico in 1990 and further to the eighth rank after Brazil, China,

Argentina, Russian Federation, Mexico, Turkey and Indonesia in 2003 (Annex-2-A). Thedebt-to-GDP ratio declined continuously from 38 % in 1991 to 20 % in 2003 and further to 18 % in 2004. The debt-service ratio (i.e. the ratio of total debt services to grossreceipts on the current account of the external sector) also declined continuously from 35% in 1990 to 16 % in 2003-2004 and further to 6 % in 2005. The World Bank nowclassifies India as a low indebted country . External debt is predominantly long-term.The share of short-term debt in total debt declined from 10.2 per cent in 1990-91 to 5.7

per cent in 2004-05. Eighty per cent of government debt comes from multilateral and bilateral sources.

Table-6-A: Trends of external debt of IndiaYear End

Total Ext Debt As % of GDP Short term OfficialCreditors

OfficialDebtors

Conce-ssional

(US$ Bln) Per cent Per cent Per cent Per cent Per cent

1990-91 83.8 28.7 10.2 64 60 461995-96 93.7 27.0 5.4 64 57 452000-01 101.3 22.6 3.6 51 43 352001-02 98.4 21.2 2.8 52 44 362002-03 105.0 20.3 4.4 48 42 372003-04 111.7 17.8 4.0 45 40 362004-05 123.3 16.7 5.7 43 39 34

Table-6-B Debt sustainability indicators for India during 1990-2005 (per cent)Year Debt service ratio Debt/ Current

Receipts ratioShort Term debtto Forex reserves

Short term debtto GDP ratio

Int. to currentreceipts ratio

1990-91 35.3 329 382 3.0 161991-92 30.2 312 126 3.2 131995-96 26.2 189 30 1.4 92000-01 16.2 110 9 0.8 62003-04 16.2 99 4 0.7 42004-05 6.1 95 5 0.6 2

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Contingent Liabilities

Government of India raises external loans on its own account under external assistance program and also provides guarantees to external borrowings by the public sector enterprises, developmental financial institutions and a few private sector companies

under the BOT schemes for infrastructure development. All loans taken by the non-government sectors from multilateral and bilateral creditors involve guarantees by thegovernment. Such guarantees given by the government form part of sovereign liability asthe guarantees could be invoked in the case of default by the borrower. Thus, guaranteestantamount to contingent liability of the government. However, share of guaranteed loansin total external debt has declined continuously over the years and now accounts for only5.5% of total external debt.

External Debt Management- Policies and Organisational Set-up

India has been able to manage its external debt situation despite serious balance of

payments problems at the beginning of 1990s on account of gulf war leading todisruptions of Indian exports and remittances by non-resident Indians living in the gulf.Policy emphasis has been on resorting to concessional and less expensive fund sources,

preference for longer maturity profiles, monitoring short-term debt, pre-payment of highcost debt and encouraging exports and non-debt creating financial flows.

Careful management of external debt allowed India to retain policy-making sovereigntyand not to be wholly influenced by the conditionalities imposed by the multilateralfunding agencies. In fact, in recent years India prepaid a part of more expensive debtfrom the World Bank, the Asian Development Bank and some bilateral countries. Theyinsisted for substantial reduction of food and fertilizer subsidies and overall fiscal deficit,which were not politically feasible for a coalition government. Effective public debtmanagement also helped government to adopt a step-by-step approach to liberalizationand to adopt effective safety nets for the weaker and vulnerable sections of the society byexpanding and strengthening various anti-poverty and poverty alleviation programs.

India adopted a cautious, gradual and step-by-step approach towards capital accountconvertibility. Initially non-debt creating financial flows (such as FDI and portfolioequity) were liberalized followed by liberalization of long-term debt flows and partialliberalization of medium term external commercial borrowing. There was tight control onshort-term external debt and close watch on the size of the current account deficit. Capitalaccount restrictions for residents and short-term debt helped India to insulate from theEast Asian economic crisis during 1997-2000. There was high share (80% at the end of March 2000) of concessional debt in government accounting and there was nogovernment borrowing from external commercial sources and no short-term external debton government account. Maturity of government debt concentrated towards long-end for the debt portfolio (GOI-MOF 2005).

The organisational structure for sovereign external debt management consists of thefollowing offices:

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(a) Front offices , which are responsible for negotiating new loans. Variousdivisions in the Ministry of Finance (MOF) such as Fund-Bank, ADB, EEC,Japan, America, ECB divisions, and the Reserve Bank of India (for IMF loans)act as front offices.

(b) Office of Controller of Aid, Accounts and Audit in the MOF acts as the Back Office, which is responsible for auditing, accounting, data consolidation and thedealing office functions for debt servicing.

(c) External Debt Management Unit (EDMU) in the MOF acts as the MiddleOffice, which is responsible for identification, measurement and monitoring of debt and risk, dissemination of data and policy formulation for both short andmedium term.

(d) The Finance Minister acts as the Head Office and accords final approval for both internal and external debt.

Under the Indian constitutional provisions, States cannot borrow directly from external

sources and the Central government has to intermediate external borrowings and bear exchange rate risk for the states. Currently, external assistance is passed on to the stateson the same terms and conditions as for normal central assistance for state plans i.e. in90:10 mix of grant and loan to the hilly and backward states (the so-called specialcategory states) and 30:70 mix of grant and loan to other states. Loans carry an interestrate of 11.5% with maturity of 20 years including moratorium of 5 years. The systeminvolves certain amount of concession provided to the states.

Recently, on considering the high transactions cost of large number of low value projects,tied assistance, and strict conditionalities, government has taken a policy decision to

prune the number of bilateral creditors from over 18 to only six namely Japan, UnitedKingdom, Germany, USA, European Commission and Russian Federation. Governmenthas also decided to pre-pay outstanding bilateral debt except to Japan, Germany, USAand France. The decision was also partly influenced by the substantial build up of foreignexchange reserves and low interest rates in the domestic countries.

Those bilateral countries, from which it has been decided not to receive developmentassistance on government account, have been advised to provide their developmentassistance to non-governmental organisations and the Universities etc. Accordingly,countries like Australia, Belgium, Canada, Denmark, France, Italy, Netherlands, Norway,Sweden, Switzerland and others are now providing assistance directly to the NGOs for

primary education, urban water supply and sanitation, HIV/AIDS prevention and care,strengthening environment institutions and poverty alleviation program.

India provides technical assistance under the Technical and Economic Cooperation(ITEC) Program and the Special Commonwealth African Assistance plan (SCAAP) to141 developing countries in Asia, Africa, Latin America, Eastern Europe and the Pacific.India is also participating actively in the international initiative for economicdevelopment of HIPC (Heavily Indebted Poor Countries) and other developing countries.Under the HIPC, India is providing credit lines to seven eligible HIPC countries viz.

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Mozambique, Tanzania, Zambia, Ghana, Guyana, Nicaragua and Uganda. Thegovernment has waived the outstanding dues from these countries. In addition, India

provides credit lines to a number of developing countries.

An effective system is in place to measure and monitor the level and indicators of debt.

Some of the important sustainability and liquidity indicators include external debt to GDPratio, debt service ratio, maturity and present value of debt, short-term debt by originaland residual maturity, ratios of debt to other indicators such as exports of goods andservices, and foreign exchange reserves. Statistical improvement and technologicalupgradation have been done to monitor these parameters on real time basis.

Fiscal Responsibility and Budget Management (FRBM) Act 2003

Indian government enacted a Fiscal Responsibility and Budget Management Act in 2003.The Act came into force in April 2004. The Act mandates the Central government toeliminate revenue deficit by March 2009 and to reduce fiscal deficit to 3% of GDP by

March 2008. Under section 7 of the Act, the central government is required to lay before both houses of Parliament Medium Term Fiscal Policy Statement, Fiscal Policy StrategyStatement and Macro Economic Framework Statement along with the Annual FinancialStatement. Four fiscal indicators to be projected for the medium term. These includerevenue deficit, fiscal deficit, tax revenue and total debt as % of GDP.

The Act stipulates the following targets for the Central government: Reduction of revenue deficit by 0.5% of GDP or more every year. Reduction of gross fiscal deficit by 0.3% of GDP or more every year. No assumption of additional debt exceeding 9% of GDP for 2004-05 and

reduction of this limit by at least one percentage point of GDP in each year. No government guarantee in excess of 0.5% of GDP in any financial year. Greater transparency in the budgetary process, rules, accounting standards and

policies having bearing on fiscal indicators. Quarterly review of the fiscal situation.

Monitoring, Dissemination and Capacity Building

100% government debt data and 78% of total external debt data are computerized on the basis of Commonwealth Secretariat DRMS. The Ministry of Finance has undertaken projects to computerise fully NRI deposits and short-term debt, which account for theresidual 22% of total external debt.

Historical trends and future projections of debt stock and debt services are available for analysis, scenario building and as MIS inputs. Debt Data are updated quarterly for March,June, September, December. June 2005 debt data are now under compilation. Data by

both Creditors and Debtors classification and by currency, maturity and interest mix areavailable. Data cross-classified by institutions and instruments are also available.

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Time lag for data update is 8 weeks, which is well below the IMF benchmark set under the Special Data Dissemination Standard (SDDS). A Status Report on External Debt is

presented by the Finance Minister to the Parliament every year. The report is also postedon the MOF homepage.

World Bank provided a Grant under the Institutional Development Fund (IDF) for strengthening capacity building and policymaking process for management of Indianexternal debt. The Grant yielded rich dividends and involved all stakeholders in the

policy of policymaking and helped in bridging research and policy. The IDF Grant helpedto computerise the database and disbursements and payments system for external publicdebt on real time basis and reduced transactions cost significantly. Under the IDF grantthe Ministry of Finance organized three international seminars and one workshop withactive participation by the World Bank, RBI, academicians and all stakeholdersconcerned with external debt and non-debt creating financial flows. The executiveagencies published three Books on papers and proceedings (CRISIL 1999 and 2001 andRBI 1999). These seminars recommended various reforms for external sectors. Most of

the policy recommendations were accepted by the government.

Ministry of Finance also set up various working groups comprising members from thegovernment, RBI, financial institutions, private and public corporate bodies and

professionals having expertise and the experience on the selected subjects. Membersvisited foreign countries to understand international best practices for management of external debt. These countries included Australia, Ireland, New Zealand, UK and USA.

5. External debt situation in Indonesia

Along with other countries, World Bank publishes external debt statistics for Indonesia in

the Global Development Finance (GDF). In the latest issue of GDF (2005), the WorldBank has classified Indonesia as a severely indebted middle-income country. As per theWorld Bank statistics summarised in Table-7, in recent years, external indebtedness of Indonesia has improved to some extent. The external debt to GNI ratio decreased from117 per cent in the crisis year 1999 to 189 per cent in 2003, external debt service ratioalso declined from 30 per cent in 1999 to 26 per cent in 2003 and the share of concessional loan in total external debt improved from 21 to 27 per cent over the same

period. The share of multilateral debt in total debt remained around 14 per cent and thatof short-term best remained around 6 per cent during 1999-2003.

However, external debt to export ratio decreased from 257 per cent to 333 per cent over

the same period and the country has foreign exchange reserves, equivalent to only 6months imports cover.

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Annex-7: External Debt in Indonesia (in US$ billion)

1970 1980 1990 1999 2000 2001 2002 2003Total Debt stock (EDT) 4.5 20.9 69.9 151.2 144.4 134.0 131.8 134.4Long term debt 4.0 18.2 58.2 120.9 110.9 103.1 100.1 101.3

Public & guaranteed 3.6 15.0 48.0 73.7 69.8 68.7 70.1 73.4

Private non-guaranteed 0.5 3.1 10.3 47.3 41.2 34.4 30.0 27.8Use of IMF credit 0.1 0 0.5 10.2 10.8 9.1 8.9 10.3Short-term debt 0.3 2.8 11.1 20.0 22.6 21.8 22.8 23.0Total debt service 0.2 3.1 9.9 17.7 16.7 15.5 17.0 18.4Interest payments (INT) 0.05 1.5 4.0 6.0 7.4 5.9 4.0 4.3

Interest on long term debt 0.05 1.2 3.4 4.6 5.7 4.6 3.2 3.4Interest on short term debt 0 0.3 0.5 0.9 1.2 0.9 0.6 0.6Interest on IMF loan 0 0 0.1 0.4 0.5 0.5 0.3 0.2

Gross national income (GNI) 9.7 74,8 109.2 129.3 139.2 137.1 167.1 198.0Exp.of goods and services (XGS) 29.9 58.8 74.3 65.9 68.4 71.0

Workers remittances 0 0 0.2 1.1 1.2 1.0 1.3 1.4Imp.of goods & services (MGS) 33.1 53.9 66.9 59.5 60.8 63.9International reserves (RES) 0.2 6.8 8.7 27.3 29.4 28.1 32.0 36.3Current account balance

Sustainability Debt indicators (in per cent)

EDT/ XGS 234 257 194 203 193 189EDT/ GNI 47 28 64 117 104 98 79 67TDS/ XGS 33 30 23 24 25 27

INT/ XGS 13 10 10 9 6 6

INT/ GNI 0.5 1.9 4 5 5 4 2 3RES/ EDT 3.5 33 12 18 20 21 24 28RES/ MGS (months) 3 6 5 6 6 7

Short-term/ Total debt 7.7 13 16 13 16 16 17 18

Concessional/ EDT 62 34 26 21 21 21 24 28Multilateral/ Total debt 0.1 9 20 13 14 15 15 15

Source: (1) World Bank, Global Development Finance 2005

6. Lessons from international best practices

International best practices for management of external debt lead to the following broadconclusions:

(a) Management of external debt is closely related to the management of domesticdebt, which in turn depends on the management of overall fiscal deficit.

(b) Debt management strategy is an integral part of the wider macro economic policies that act as the first line of defense against any external financial shocks.

(c) For an emerging economy, it is better to adopt a policy of cautious and gradualmovement towards capital account convertibility.

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(d) At the initial stage, it may encourage non-debt creating financial flows followed by liberalization of long-term and medium-term external debt.

(e) Big bullets are bad for small economies, as these can create refinancing risk that

many countries would be well advised to avoid.(f) It is not enough to manage the government balance sheet well, it is also necessary

to monitor and make an integrated assessment of national balance sheet and to putmore attention on surveillance of overall debt- internal and external, private and

public. In each of the major Asian crisis economies- Indonesia, Korea andThailand- weakness in the government balance sheet was not the source of vulnerability, rather vulnerability stemmed from the un-hedged sort-term foreigncurrency debt of banks, finance companies and corporate sector.

(g) It is not sufficient to manage the balance sheet exposures, it is equally importantmanage off balance sheet and contingent liabilities. Emerging as well as advancedeconomies have experienced how bad banks and poorly designed bank safety netscan lead to large costs to he public sector and an unexpected weakening of thegovernments balance sheet. Government guarantees of private debt can also havesimilar adverse impact.

(h) It is necessary to adopt suitable policies for enhancing exports and other currentaccount receipts that provide the means for financing imports and debt services.

(i) Detailed data recording and dissemination are pre-requisites for an effectivemanagement and monitoring of external debt and formulation of appropriate debtmanagement policies.

(j) There is a need for setting up an integrated Public Debt Office for the followingfunctions:

To deal with both domestic & external debt To set bench marks on interest rate, maturity mix, currency mix, sources

of debt Identification and measurement of contingent liabilities

Policy formulation for debt managementMonitoring risk exposures

Building Models in ALM framework

(k) It is vital that external forward liabilities and short-term debt are kept within prudential limits.

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(l) It is important to strengthen public and corporate governance and enhancetransparency and accountability.

(m)It is also necessary to strengthen the legal, regulatory and institutional set up for management of both internal and external debt.

(n)(o) A sound financial system with well developed debt and capital market is an

integral part of a countrys debt management strategy.

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External Debt Management Strategy

In all the East Asian crisis economies, weaknesses in financial systems as a result of weak regulation and supervision and a long tradition of a heavy government role in creditallocation led to misallocation of credits and inflated asset prices. Another vital weakness

of all countries was associated with large unhedged private short-term foreign currencydebt in a setting where the private corporate sector was highly leveraged.

Short-term foreign currency denominated debt created two kinds of vulnerabilities inthese economies. First, if some creditors pulled out their money, each individual creditor had an incentive to join the queue. As a result, even a debtor that had been fully solvent

before the crisis could be plunged into insolvency. Second, such debts also createdvulnerabilities associated with the exchange rate depreciation. Exchange risk was either

borne directly by the financial institutions or passed on to the corporations as the fundswas on lent (thereby converting exchange risk into credit risk). These factors were further complicated by the interaction of exchange rate and credit risks. Currency depreciation

led to wide spread insolvency and created additional counter-party risk, which in turnadded momentum to the exit of foreign capital.

The management of debt crisis faced by the East Asian countries was not without precedence. Following the inception of the Latin American debt crisis in 1982, and on the presumption that the debt problem was one of liquidity and not solvency, the initial debtmanagement strategy aimed at normalising the relationship between the debtors andcreditors through a combination of economic adjustment by debtor countries andnegotiations on financial relief. The financing modalities provided debtor countries withsome financial relief through interest rate spreads, reduced fees, and extension of maturities and provision of some new finances. The negotiations conducted on a case-by-case approach for debtor countries were co-ordinated by the private bank steeringcommittees in consultation with the IMF, World Bank and governments of the creditor

banks home countries (Islam 1998).

In the case of Asian crisis, countries succeeded in striking a reasonably comprehensivedebt-rescheduling strategy with creditor banks. The implementation of the deal wasvoluntary and all creditors did not join the scheme. So long as free movement of international capital is allowed, there is no guarantee that the debt crisis will not recur infuture. Whenever such a financial crisis occurs in future, it is necessary to formulate aninternational debt management strategy on the basis of negotiations among international

private lenders, investors and borrowers for sharing the responsibility for debt relief, for rescheduling or for delaying claims on repayment.

More effective structures for orderly debt workouts, including better bankruptcy laws atthe national level and better ways at the international level of associating private sector creditors and investors with official efforts are needed to help resolve sovereign and

private debt problems.

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In the case of East Asian crisis, considerable thought was given to mechanisms thatinvolve private sector to forestall and resolve crisis in a more timely and systematic way.A range of options are available in this respect, viz. (a) to contract credit and swapfacilities with groups of foreign banks, to be activised in the event of liquidity pressures,such as those contracted by Argentina and Mexico; (b) embedding call options in certain

short-term credit instruments to provide for an automatic extension of maturities in timesof crises; (c) feasible modifications of terms of sovereign bond contracts to includesharing clauses; and (d) a possible role for creditor councils for discussion betweendebtors and creditors. However, these are complex issues and need to be designedcarefully so that there are no perverse incentives, which may encourage private creditorsto bail themselves out at the first sight of difficulty, rather than providing net newfinancing in the event of a crisis.

Developing countries need to strengthen their debt management strategy by developingcomprehensive debt sustainability models, which will integrate external sector,

particularly the flows of external debt, with broad macro-economic variables and provide

early warning regarding any possible debt trap. In this respect, separate debt models may be developed with respect to sovereign external debt and private debt.

All countries need to monitor very carefully short-term debt, long-term debt by residualmaturity, all guarantees and all contractual contingent liabilities arising out of both debtand non-debt creating financial flows.

A more comprehensive approach is needed when trying to deal with excessive private borrowing and risk taking in the presence of large capital inflows and weak financialsystems. This often means applying more flexible exchange rates, tighter fiscal policyand improved financial system. Domestic financial sector liberalisation should also

proceed carefully and in step with tighter financial regulation and supervision, andinternationally recognised prudential norms for capital adequacy and provisioning for non-performing assets by commercial banks and financial institutions.

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Selected References

Das, Tarun (1999a) East Asian Economic Crisis and Lessons for External DebtManagement, pp.77-95, in External Debt Management, ed. by A. Vasudevan, April 1999,RBI, Mumbai , India.

_______ (1999b) Fiscal Policies for Management of External Capital Flows, pp. 194-207, in Corporate External Debt Management, edited by Jawahar Mulraj, December 1999, CRISIL, Bombay .

_______ (2000) Sovereign Debt Management in India, pp.561-579, in Sovereign DebtManagement Forum: Compilation of Presentations , November 2000, World Bank,Washington D.C .

_______ (2002a) Implications of Globalisation on Industrial Diversification in Asia, pp.ix+1-86 , UN Publications Sales No.E.02.II.F.52, March 2002, ESCAP, Bangkok .

_______ (2002b) Management of Contingent Liabilities in Philippines- Policies,Processes, Legal Framework and Institutions, pp.1-60 , March 2002, World Bank ,Washington D.C .

______ with Raj Kumar, Anil. Bisen and M.R. Nair (2002) Contingent LiabilityManagement- A Study on India, pp.1-84 , Commonwealth Secretariat, London

_______ (2003) Management of Public Debt in India, pp.85-110, in Guidelines for Public Debt Management: Accompanying Document and Selected Case Studies, 2003,IMF and the World Bank, Washington D.C .

_______ (2004) Financing International Cooperation- A Case Study for India, pp.1-46,Office of Development Studies., March 2004, UNDP, UN Plaza, New York .

________ (2005a) Sustainable external debt management- International Best Practices, pp.1-46, paper prepared for UN-ESCAP, Bangkok, September 2005.

ESCAP (2005) Implementing the Monterrey Consensus in the Asian and Pacific Region-Achieving Coherence and Consistency, United Nations, New York, 2005.

Government of India, Ministry of Finance (2005) Indias External Debt- A StatusReport, June 2005, New Delhi.

International Monetary Fund (2003) External Debt Statistics- Guide for Compilersand Users, 2003, IMF, Washington D.C .

_______ and the World Bank (2003) Guidelines for Public Debt Management:Accompanying Document and Selected Case Studies, 2003, Washington D.C .

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Jensen, Fred (2000) Trends in sovereign debt management in IBRD countries over the past two years, pp.14-25, in Sovereign Debt Management Forum: Compilation of Presentations , November 2000, World Bank, Washington D.C .

McCray, Peter (2000) Organisational models for sovereign debt management, pp.297-

310, in Sovereign Debt Management Forum: Compilation of Presentations , November 2000, World Bank, Washington D.C .

Raj Kumar (1999) Debt Sustainability Issues- New Challenges for LiberalisingEconomies, pp.53-76, in External Debt Management, ed. by A. Vasudevan , April 1999,RBI, Mumbai, India .

Reserve Bank of India (RBI) (1999) External Debt Management- Issues, Lessons andPreventive Measures, pp.1-372, edited by A. Vasudevan, RBI, Mumbai , April 1999.

Sullivan, Paul (2000) The design and use of strategic benchmarks in managing risk,

pp.175-191, in Sovereign Debt Management Forum: Compilation of Presentations , November 2000, World Bank, Washington D.C .

World Bank ( 2000) Sovereign Debt Management Forum: Compilation of Presentations , November 2000, World Bank, Washington D.C .

_______ (2005a) World Development Indicators 2005, World Bank, Washington . DC .

_______ (2005b) Global Development Finance 2005, World Bank, Washington . DC.

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Annex-1 Economic Size of Selected Economies in 2003

CountryPopulation

Million

Area'000

sq. km.

PopulationDensity

per sq. km.

GNPUS$

billionGNPRank

PCGNPUS$

PCGNPRank

LifeExpec-tancy

Years

LiteracyRate

PercentTop 10 Debtor Countries

1. Brazil 172 8547 20 480 13 2720 95 68 872. China 1272 9598 138 1417 6 1100 134 70 873. Russian Federation 145 17075 9 375 16 2610 97 66 994. Argentina 37 2780 14 140 30 3810 84 74 975. Turkey 66 775 86 198 24 2800 93 70 866. Mexico 99 1958 52 637 10 6230 68 73 917. Indonesia 209 1905 115 174 27 810 146 66 888. India 1032 3287 347 571 12 540 159 63 589. Poland 39 323 127 202 22 5280 72 74 10010.Philippines 78 300 263 88 41 1080 135 70 95

SAARC Countries other than India11.Pakistan 141 796 183 78 44 520 161 63 4312.Bangladesh 133 144 1024 55 51 400 173 62 4013.Sri Lanka 19 66 290 18 14 930 140 73 9214.Nepal 24 147 165 6 113 240 192 59 4315.Bhutan 0.8 47 18 0.6 630 63 16.Maldives 0.3 0.3 934 0.7 2350 69 97

Pacific Islands17.Fiji 0.8 18 45 2 2240 69 9318.Papua New Guinea 5 463 12 3 144 508 163 57 6519.Samoa 0.2 2.8 61 0.3 1440 69 9920.Solomon Islands 0.4 29 15 0.3 560 69 21.Tonga 0.1 0.8 140 0.15 1490 71 22.Vanuatu 0.2 12 17 0.22 1180 68

Other Developing Countries in Asia23.Armenia 3 30 108 3 143 950 139 74 9924.Azerbaijan 8 87 100 7 104 820 145 65 25.Cambodia 13 181 76 4 126 300 183 54 7026.Iran Islamic Rep 65 1648 39 133 32 2010 110 69 6727.Kazakhstan 15 2725 6 27 62 1780 119 63 9928.Kyrgyz Rep 5 200 26 2 156 340 179 66 29.Lao PDR 5 237 23 2 152 340 179 54 6530.Malaysia 24 330 72 96 37 3880 82 73 8831.Mongolia 2 1567 2 1 164 480 165 65 9932.Myanmar 48 677 73 57 8533.Tajikistan 6 143 44 1 162 210 195 67 9934.Thailand 61 513 120 136 31 2190 105 69 9535.Turkmenistan 5 488 10 5 116 1120 131 65 36.Uzbekistan 25 447 61 11 88 420 172 67 9937.Vietnam 80 332 244 39 58 480 165 69 93

Source: World Bank, World Development Indicators 2005

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Annex-2A: Top ten debtor countries in 2003

Country ranked interms of stock of

external debt

Total externaldebt

(US$ billion)

Share of concessional

debt (per cent)

Debt /GNPratio

(per cent)

Ratio of shortterm debt

to Total debt(per cent)

Ratio of short term debtto Foreign exch.

(per cent)

1. Brazil 235 1 30 8.3 39.82. China 194 17 15 32.7 17.53. Russian Fed. 176 1 50 17.6 39.34. Argentina 166 1 104 13.8 162.45. Turkey 146 4 77 15.8 64.76. Mexico 140 1 23 6.6 15.57. Indonesia 134 27 80 17.0 63.28. India 114 38 22 4.2 4.69. Poland 95 7 40 20.5 57.410.Philippines 63 23 77 9.9 39.0

Annex-2B: Top ten debtor countries in 2003

Country ranked interms of stock of

external debt

Debt serviceratio

(per cent)

Present Valueof external debt

(US$ billion)

PV/ GNPratio

(per cent)

PV toexportsratio (%)

Indebtednessand income

Classification

1. Brazil 63.8 254.1 54 323 Severe/ Middle2. China 7.3 188.5 15 48 Less/ Middle3. Russian Fed. 11.8 186.5 117 531 Severe/ Middle4. Argentina 37.9 184.2 52 135 Moderate/ Middle5. Turkey 38.5 157.1 25 83 Less / Middle6. Mexico 20.9 153.0 81 243 Severe/ Middle7. Indonesia 26.0 136.9 82 200 Severe/ Middle8. India 18.1 100.3 19 106 Less/ Low9. Poland 25.1 93.5 48 147 Moderate/ Middle10.Philippines 22.1 65.4 80 147 Moderate/ Middle

Source: World Bank, Global Development Finance 2005

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Annex-3: Key Indebtedness Indicators in 2001-2003

Country

TotalExternal

Debt Stock(EDT)

($ Billion)

PresentValue of Ext.Debt

(PV)($ Billion)

Ratio of EDT toExportsEDT/XGS(per cent)

Ratio of PV to

ExportsPV/XGS

(per cent)

Ratio of EDT to

GNIEDT/GNI

(per cent)

Ratio of PV toGNI

PV/GNI(per cent)

1. Brazil 235 254 299 323 50 54

2. China 194 189 49 48 15 153. Russian Fed 175 184 128 135 50 524. Argentina 166 187 473 531 104 1175. Turkey 146 153 232 243 77 816. Mexico 140 157 74 83 23 257. Indonesia 134 137 196 200 80 828. India 114 100 120 106 22 199. Poland 95 94 150 147 49 4810.Philippines 63 65 141 147 77 8011.Pakistan 36 30 232 189 50 4112.Bangladesh 19 13 188 128 37 2513.Sri Lanka 10 8 134 110 62 51

14.Nepal 3.3 2.1 200 131 57 3815.Bhutan 0.4 0.4 270 252 79 7416.Maldives 0.3 0.2 54 41 45 3517.Fiji 0.3 0.3 25 24 15 1518.Papua N Guinea 2.5 2.3 113 104 87 8019.Samoa 0.4 0.3 253 209 148 12220.Solomon Islands 0.2 0.1 224 176 76 6021.Tonga 0.084 0.059 106 74 57 4022.Vanuatu 0.095 0.068 64 46 39 2823.Armenia 1.1 0.7 131 85 45 2924.Azerbaijan 1.7 1.4 58 47 28 2325.Cambodia 3.1 2.7 125 107 82 70

26.Iran Ism Rep 12 10 33 30 9 827.Kazakhstan 23 23 181 183 94 9528.Kyrgyz Rep 2 1.6 282 221 125 9829.Lao PDR 3 2 611 356 155 9130.Malaysia 49 50 44 45 55 5631.Mongolia 2 1 188 149 127 9532.Myanmar 7 6 247 187 33.Tajikistan 1 1 139 112 96 7734.Thailand 52 51 59 59 41 4135.Turkmenistan* 2.3 231 86 36.Uzbekistan 5 5 149 142 49 4737.Vietnam 16 14 77 67 45 39

* in 1998.

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Annex-4: Key External Debt Sustainability Indicators in 2003 (per cent)

CountryEDT/XGS(per cent)

EDT/GNI(per cent)

TDS/XGS(per cent)

INT/XGS(per cent)

INT/GNI(per cent)

Indebtedclassification*

Top 10 Debtor Countries1. Brazil 265 50 64 17 3 SIMI2. China 38 14 7 1 1 LIMI

3. Russian Fed 107 42 12 5 2 MIMI4. Argentina 449 136 38 6 2 SIMI5. Turkey 199 611 39 9 3 SIMI6. Mexico 73 22 26 6 1 LIMI7. Indonesia 190 68 26 6 3 SIMI8. India 101 19 18 5 2 LILI9. Poland 125 46 25 3 1 MIMI10.Philippine 135 72 22 6 3 MIMI

SAARC Countries other than India11.Pakistan 192 45 16 5 1.1 MILI12.Bangladesh 169 34 6 2 0.3 LILI13.Sri Lanka 126 57 8 2 1.0 MIMI

14.Nepal 174 56 6 2 0.5 LILI15.Bhutan 273 72 5 1 0.4 SILI16.Maldives 47 42 4 1 0.8 SIMI

Pacific Islands17.Fiji 21 14 3 1 0.5 LIMI18.PN Guinea 100 90 12 3 2.6 MILI19.Samoa 152 138 5 3 3.3 SIMI20.Solomon Islnd 73 75 5 2 1.6 MILI21.Tonga 67 52 3 1 0.5 LIMI22.Vanuatu 65 34 2 1 0.4 LIMI

Other Developing Countries in Asia23.Armenia 105 39 9 1.2 0.4 LIMI

24.Azerbaijan 52 27 8 0.8 0.4 LIMI25.Cambodia 115 77 1 0.3 0.2 MILI26.Iran Is Rep 27 8 4 1 0.3 LIMI27.Kazakhstan 149 82 35 5 3 SIMI28.Kyrgyz Rep 238 109 17 3 0.9 SILI29.Lao PDR 592 137 10 2 0.6 SILI30.Malaysia 48 50 7 2 2.2 MIMI31.Mongolia 165 118 32 2 1.3 MILI32.Myanmar 253 4 1 MILI33.Tajikistan 120 80 9 2 1.1 SILI34.Thailand 54 37 16 2 1.5 LIMI35.Turkmenistan* 231 86 32 9 4 MIMI

36.Uzbekistan 131 51 21 4 1.5 MILI37.Vietnam 67 40 3 1 0.8 LILIAll developing 105 39 17 4 2

East Asia & Pacif 60 26 11 2 1South Asia 119 24 16 5 1

Annex-5: Key External Debt Sustainability Indicators in 2003 (per cent)

CountryRES/EDT(per cent)

RES/MGS(months)

Short Term/EDT (%)

Concess/EDT (%)

Multilateral/ EDT (%)

Indebtedclassification*

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Top 10 Debtor Countries1. Brazil 21 7 8 1 8 SIMI2. China 215 11 38 17 14 LIMI3. Russian Fed 45 7 18 1 4 MIMI4. Argentina 9 6 14 1 10 SIMI5. Turkey 24 5 16 4 5 SIMI6. Mexico 41 3 7 1 13 LIMI7. Indonesia 28 6 18 27 14 SIMI8. India 91 11 4 37 26 LILI9. Poland 36 5 21 7 3 MIMI10.Philippines 27 5 10 23 12 MIMI

SAARC Countries other than India

11.Pakistan 33 8 3 67 45 MILI12.Bangladesh 14 3 3 93 73 LILI13.Sri Lanka 22 3 5 80 41 MIMI14.Nepal 40 8 2 97 84 LILI15.Bhutan 87 16 2 50 35 SILI16.Maldives 57 3 9 64 56 SIMI

Pacific Islands17.Fiji 160 5 33 12 71 LIMI18.Papua N Guinea 21 3 5 36 36 MILI19.Samoa 23 6 54 46 43 SIMI20.Solomon Island 20 3 6 79 58 MILI21.Tonga 51 3 1 91 82 LIMI22.Vanuatu 46 3 16 77 74 LIMI

Other Developing Countries in Asia23.Armenia 45 4 1.2 70 66 LIMI24.Azerbaijan 49 2 13 53 33 LIMI25.Cambodia 31 4 7 89 26 MILI26.Iran Ism Rep 28 0 3 LIMI27.Kazakhstan 22 4 12 4 8 SIMI28.Kyrgyz Rep 19 5 2 68 50 SILI29.Lao PDR 9 6 0 96 49 SILI30.Malaysia 91 5 18 3 2 MIMI31.Mongolia 16 3 20 76 46 MILI32.Myanmar 8 2 20 67 18 MILI33.Tajikistan 10 1 7 74 31 SILI34.Thailand 81 6 21 19 6 LIMI35.Turkmenistan* 61 9 23 0 2 MIMI36.Uzbekistan 25 5 4 27 13 MILI37.Vietnam 39 3 8 74 25 LILIAll developing 50 7 16 18 15

Annex-6: Classification of selected countries in ESCAP by levels of external indebtednessAnd per capita income in 2003

Severely indebted Moderately indebted

Less indebted

Low income Middle income Low income Middle income Low income Middle income

SILI SIMI MILI MIMI LILI LIMI

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(1) (2) (3) (4) (5) (6)

BhutanKyrgyz RepLao PDRMyanmar

Tajikistan

IndonesiaKazakhstanMaldivesSamoa

Turkey

CambodiaMongoliaPakistanPN Guinea

Solomon IslandUzbekistan

MalaysiaPhilippinesRussian FedSri Lanka

Turkmenistan

BangladeshIndiaNepalVietnam

ArmeniaAzerbaijanChinaFiji

Iran Ism RepThailandTongaVanuatu

Acronyms

LILI Less Indebted Low IncomeMILI Moderately Indebted Low IncomeSILI Severely Indebted Low IncomeLIMI Less Indebted Middle Income

MIMI Moderately Indebted Middle IncomeSIMI Severely Indebted Middle Income

Classification as per incomeLow Income Per capita GNP less than US$765Middle Income Per capita GNP between US$766 and US$9385

Classification as per indebtedness:

Less Indebted PV/XGS less than 132% and PV/GNI less than 48%.Moderately Indebted PV/XGS less than 220% but higher than 132%, and

PV/GNI less than 80% but greater than 48%.Severely Indebted PV/XGS higher than 220% or PV/GNI higher than 80%.

external debt management in indonesia, by tarun das

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