Case study - public debt management, cash management, and domestic debt market development

45222 Case Study Public Debt Management, Cash Management, and Domestic Debt Market Development Tanzania JUNE 2001 Macroeconomic and Financial Management Institute of Eastern and Southern Africa The World Bank   Table of Contents Acronyms and Abbreviations .................................................................................................. vi Acknowledgments.................................................................................................................... vii Update........................................................................................................................................ ix Objectives and Coordination...................................................................................................ix Transparency and Accountability...........................................................................................ix Legal Framework and Institutional Arrangements................................................................ x Structure of Debt Management Operations............................................................................ x Strategic Framework and Risk Management ......................................................................... x Cash Management ....................................................................................................................xi Developing the Market for Government Securities...............................................................xi Money Market..........................................................................................................................xii Central Depository System for Government Securities .......................................................xii Summary......................................................................................................................................1 Purpose and Scope..................................................................................................................... 1 Public Debt Management.......................................................................................................... 1 Objectives and Coordination................................................................................................ 2 Transparency and Accountability ........................................................................................ 3 Governance .......................................................................................................................... 4 Legal Framework........................................................................................................4 Institutional Arrangements..........................................................................................5 Structure of Debt Management Operations ................................................................6 Strategic Framework and Risk Management..................................................................... 13 Cash Management ................................................................................................................... 16 Budget Process................................................................................................................... 16 Revenue and Expenditure Management ............................................................................ 16 Donor-Financing Issues ..................................................................................................... 17 Debt-Servicing Payments................................................................................................... 17 Debt Issuance Decisions, Alternative Maturities, and Liquidity Management ................. 18 Operational Risk and Staffing Issues................................................................................. 19 Improving the Functioning of Domestic Debt Markets........................................................ 19 Developing the Primary Market for Government Securities............................................. 20 Developing the Secondary Market for Government Securities......................................... 22 Money Market.................................................................................................................... 22 Central Depository System for Government Securities..................................................... 23 iii  I. Introduction.......................................................................................................................25 II. Background ......................................................................................................................27 Origins of the Debt Burden..................................................................................................... 29 Enhanced Heavily Indebted Poor Countries (HIPC) Initiative........................................... 33 III. Public Debt Management................................................................................................35 Debt Management Objectives and Coordination.................................................................. 35 Objectives35 Current Practice ........................................................................................................36 Policy Issues..............................................................................................................36 Coordination ...................................................................................................................... 37 Current Practice ........................................................................................................38 Policy Issues..............................................................................................................39 Transparency and Accountability.......................................................................................... 40 Transparency...................................................................................................................... 41 Current Practice ........................................................................................................41 Policy Issues..............................................................................................................41 Accountability.................................................................................................................... 41 Current Practice ........................................................................................................41 Policy Issues..............................................................................................................42 Governance............................................................................................................................... 42 Legal Framework............................................................................................................... 42 Current Practice ........................................................................................................43 Policy Issues..............................................................................................................44 Institutional Arrangements................................................................................................. 45 Current Practice ........................................................................................................47 Policy Issues..............................................................................................................49 Structure of Debt Management Operations ....................................................................... 51 Front Office Functions..............................................................................................53 FO Current Practice ..................................................................................................55 FO Policy Issues .......................................................................................................57 Middle Office Functions...........................................................................................60 MO Current Practice.................................................................................................60 MO Policy Issues......................................................................................................61 Back Office Functions ..............................................................................................64 Back Office Current Practice....................................................................................64 Back Office Policy Issues.........................................................................................66 Strategic Framework and Risk Management ....................................................................... 68 Current Practice ................................................................................................................. 69 External Debt Strategy..............................................................................................69 Domestic Debt Strategy............................................................................................71 Policy Issues....................................................................................................................... 72 External Debt ............................................................................................................72 Contingent Liabilities and Government-Guaranteed Debt .......................................73 iv  IV. Cash Management ...........................................................................................................77 The Objectives of Cash Management and Related Policy Issues ........................................ 78 The Budget Process in Tanzania ............................................................................................ 79 Current Practice ................................................................................................................. 79 Policy Issues and Arrears of Government Expenditure..................................................... 79 Revenue and Expenditure Management................................................................................ 81 Current Practice ................................................................................................................. 81 Policy Issues....................................................................................................................... 81 Donor-Financing Issues........................................................................................................... 83 Current Practice ................................................................................................................. 83 Policy Issues....................................................................................................................... 83 Debt-Servicing Payments ........................................................................................................ 83 Current Practice ................................................................................................................. 83 Policy Issues....................................................................................................................... 84 Overall Government Bank Account....................................................................................... 85 Current Practice ................................................................................................................. 85 Policy Issues....................................................................................................................... 85 Debt Issuance Decisions, Alternative Maturities, and Liquidity Management ................. 85 Current Practice ................................................................................................................. 85 Policy Issues....................................................................................................................... 86 Operational Risk and Staffing Issues..................................................................................... 87 Current Situation................................................................................................................ 87 Policy Issues....................................................................................................................... 87 V. Improving the Functioning of Domestic Debt Markets.................................................89 Developing the Primary Market for Government Securities .............................................. 91 Current Practice ................................................................................................................. 91 Policy Issues....................................................................................................................... 93 Developing the Secondary Market for Government Securities........................................... 98 Current Conditions............................................................................................................. 99 Policy Issues....................................................................................................................... 99 Money Market........................................................................................................................ 101 Current Conditions........................................................................................................... 101 Policy Issues..................................................................................................................... 103 Central Depository System for Government Securities ..................................................... 104 Current Situation.............................................................................................................. 104 Policy Issue...................................................................................................................... 105 References................................................................................................................................106 Appendix 1. Public Debt management functions in tanzania............................................107 Appendix 2. The Trading Mechanism in an Open-Outcry Auction ..................................109 v  ACRONYMS AND ABBREVIATIONS AGD Accountant General's Department BoT Bank of Tanzania CDS Central Depository System CMSA Capital Markets and Securities Authority COMSEC Commonwealth Secretariat CS-DRMS Commonwealth Secretariat Debt Recording and Management System DCC Debt Coordination Committee DebtPro debt management software developed by International Debt Management DMC Debt Management Committee DMO debt management office DSA debt sustainability analysis DSE Dar es Salaam Stock Exchange DSM+ Debt Sustainability Model Plus software developed by the World Bank EFD External Finance Department FO front office GDP gross domestic product HIPC Heavily Indebted Poor Countries (Initiative) IDA International Development Association IFMS Integrated Financial Management System IMF International Monetary Fund MDF Multilateral Debt (Relief) Fund MEFMI Macroeconomic and Financial Management Institute of Eastern and Southern Africa MO middle office MPC Monetary Policy Committee NBC National Bank of Commerce OTC over-the-counter PAD Policy Analysis Department PRSP Poverty Reduction Strategy Paper TRA Tanzania Revenue Authority TZS Tanzania shilling vi  ACKNOWLEDGMENTS This case study was prepared by a joint mission of the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI), National Treasury of the Republic of South Africa, World Bank, and International Monetary Fund (IMF) that visited Tanzania June 11