Five compelling reasons for parliamentary involvement in public debt management

16 July 2020
Geoff Dubrow
Five compelling reasons for parliamentary involvement in public debt management
On July 14th, the Westminster Foundation for Democracy (WFD) released its new brief, entitled “The Role of Parliament in Public Debt Management Weathering the COVID-19 Crisis and Beyond”. Here are five compelling arguments, discussed in the brief, for parliamentary involvement in public debt management.

#1: Getting the full picture

Parliamentarians need guidance on how public debt should be defined and measured and on the key indicators of public debt. For example, with respect to the latter, it is important to move beyond the ‘headline indicator’ of debt-to-GDP ratio and consider other key indicators such as level of external debt and maturity structure. These issues are addressed in chapter 3 of the brief starting on page 16. Additionally, chapter 4 looks at contingent liabilities, which are hidden debt risks that are generally not found on the balance sheet but can, if ignored, have dire consequences on the country’s economy.

One of the challenges associated with understanding public debt is often the Ministry of Finance will only report central government (rather than whole-of-government) debt. It may not include the debt of SOEs or sub-national governments. So it’s difficult for parliamentarians, when trying to analyse the fiscal space available for new programs, to do so if the figures that are being provided don’t paint the full picture. Parliamentary committee hearings with the Ministry of Finance can help to generate a dialogue about the debt information required by Parliament. A parliamentary committee recommendation to the Ministry of Finance (and subsequent committee follow-up) can be used to articulate Parliament’s voice.

#2: Bringing public debt into the budget debate

The hype around the budget process is usually related to the litany of new government programs and infrastructure that voters are going to ‘receive’ from the government. Debt and debt management are rarely serious considerations during the formulation and approval phases of the budget.

The formulation stage of the budget is usually characterised by pressure on the minister of finance from his or her cabinet colleagues to spend on their ministerial portfolios. Debt is not as exciting and often takes a back seat. Incorporating a discussion in Parliament during the formulation phase about the “hard budget constraints”, which are in part informed by the public debt situation (as well as macroeconomic forecasts), can help to temper expectations ahead of the tabling of the annual budget. That’s why the pre-budget statement and medium-term economic framework, which is the government’s rolling expenditure plan that sets out medium-term expenditure priorities and hard budget constraints, need to be debated in parliament.

#3: Political will

In addition to its oversight role, parliament’s legislative role related to debt management is of critical importance. In one country that I have worked in, I remember a senior representative of an aid agency sitting across from the permanent secretary of the finance department and emphasising the importance of adopting a new debt management framework. It was clear to me at that moment that not enough emphasis is placed on working with the political leadership. Parliament and the minister of finance need to see a legislative framework for debt management as a priority in order for it to happen.

I think specifically, but not exclusively of small island states in which legislative drafting capacity, but also the sitting time of Parliament is very limited and there are number of competing priorities. It’s not enough to work the public administration angle, it’s important and crucial to make sure that parliamentarians are both aware and have the time and resources to adopt a debt management framework that is in line with international best practices. The key tenets of a legal framework are covered in chapter 5 of the brief.

#4: Proper scrutiny of loan agreements

I’ve worked in countries where the minister of finance has bypassed the debt management unit, gone abroad and signed a binding legal agreement with a foreign government. The minister then returned to his own country, provided a copy of the loan to the debt management unit and said here, ‘record this in your database’. So parliamentarians cannot assume and the country cannot assume that due diligence has been done on loan agreements. That would also be the case with respect to loan agreements that have been vetted by the debt management unit.

On page 13 of the brief, we look at the case of Mozambique where the political leadership illegally bypassed Parliament with huge ramifications for both the economic health of the country and the political reputation of those who negotiated these loans in secret. This underscores the reason why loans need to be publicly scrutinised.

Page 26 of the brief sites statistics from a 2013 study conducted by the Inter-Parliamentary Union and the World Bank, in which just under 60% of respondents stated that they have laws requiring Parliament to ratify loan agreements before they become effective. Even statistics like this can be somewhat optimistic because often we don’t know how much time Parliament has actually allocated to review and adopt or ratify the loan agreement. Furthermore, what is the basis or the criteria for ratifying the loan? Page 27 of the brief looks at the four stages of the Public Investment Management process (appraisal, selection, costing and monitoring) and suggests that these stages could form the basis of potential lines of inquiry for parliamentarians when ratifying loan agreements.

#5: SOE Oversight

SOE debt is often a major cause of debt accumulation and debt crises. What underlies SOE debt however is often the poor state of SOE governance. This often entails patronage appointments to boards of directors, weak internal controls and a limited accountability framework. Where the central government is underwriting SOE debt, this issue is all the more serious.

SOEs require stronger parliamentary oversight. However, parliamentary oversight committees are generally overstretched and have a limited capacity and little time in most low-income and middle-income countries. Because of the nature of audit reports, focused mostly on compliance, PACs are often backlogged on central government and local government accounts. They cannot be expected to oversee SOEs as well. Many countries recognise this limitation. On page 38 of the brief, it is noted that Public Investment Committees (PICs) are prevalent in many East African and South Asian countries. These committees operate separately from the PAC and are exclusively focused on SOEs. While the solution to any problem is rarely to form another committee, in this particular case improved scrutiny of SOEs by a dedicated committee could yield significant results.

I was in Ethiopia in January and learned that the SOE oversight committee that had existed previously was folded into the work of the Finance Committee. Finance Committee members were very clear that they simply did not have the capacity, time or resources to take on this magnitude of work.

Geoff Dubrow is a consulting specialising in public financial management, governance and gender equality. He is the author of the brief.