An Investigation Of The Effectiveness Of Domestic Debt Sustainability Analysis Methodologies

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By Frank Chikuta
2012

This study explores the effectiveness of public domestic debt sustainability analysis methodologies with reference to the MEFMI region in view of the growing importance of domestic financing in the region. Two aspects which impact the effectiveness of domestic debt sustainability analysis are investigated, viz: domestic debt definition and data coverage; and analytical tools.

A risk based definition of domestic debt for the region is recommended where domestic debt refers to all instruments issued in the local currency. This is premised on the fact that the currencies of the countries in the region are not freely convertible such that local currency debt is purely distinct from foreign currency debt. In addition, even though some middle income countries in the region have considerable access to international capital markets they cannot issue debt in domestic currency and most countries have limited or no access to the international capital markets.

The domestic debt database should include a comprehensive coverage of all liabilities of the public sector and all issuers falling under the public domain. A two pronged approach to domestic debt sustainability analysis is recommended which on the one hand assesses the fiscal burden of domestic debt modelled on the DRI indicators and on the other assesses the macroeconomic effects of domestic debt based on the econometric approach pioneered by Christensen (2005).

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