By Felister Saliku Kivisi
January 2011

The Commonwealth Secretariat Debt Recording and Management System (CS-DRMS) is designed to provide borrowers with a comprehensive information management system for the effective recording, administration and analysis of their debt portfolio. The CS-DRMS project began in 1983 and to take into account developments in debt management (including creditor practices, new loan products) and user requirements, the scope and features in CS-DRMS has evolved over the years, undergoing a series of enhancements in terms of increased functionality. CS-DRMS 2000+ is aimed at supporting core debt management functions such as recording, reporting and analysis for wide range of debt instruments.

Over the last few years, financial products offered by creditors to sovereign borrowers have significantly changed both in terms of complexity as well structure. As a result, borrower nations are now presented with various types of loan products and financial practices from multilateral and commercial creditors. This study looked at the various loan products and creditor practices offered by major multilateral creditors, assesses how these products are currently being recorded and managed in the MEFMI member states who use the CS-DRMS, and finally recommends how these products and practices can be recorded and managed in CS-DRMS using the existing features or proposed new features.

Without a doubt most sovereign borrowers now have substantial internal capacity for active liability management largely through the support of international and regional organizations like MEFMI. This development has seen an increased in demand from borrowers for flexible debt management financial products (i.e. derivatives) to allow borrowers themselves better manage their own portfolios. Technical assistance on managing loan products in the MEFMI region has hugely targeted standard financial products and the need for implementing debt management best practices. Assessing the extent at which MEFMI countries have started using derivatives or the existing potential of using derivatives to manage debt portfolios, will assist MEFMI in designing new technical assistance programmes to support the development of capacity and institutional arrangements required for liability management activities in the member states. In so doing, member states will be better prepared both in terms of institutional structures, systems and capacity (skills) to undertake the liability management operations when the need arises.

Whilst CS-DRMS has been instrumental in assisting countries better record and manage their debt portfolios, the format and structure of standardizing loan products for the purposes of recording in CS-DRMS has in a way contributed to the fact that CS-DRMS users are somehow detached from the actual financing products and can therefore not use the system to effectively manage these products. Now that there is need for borrowers to undertake active liability management operations in addition to mere recording, the new generation of CS-DRMS should look for ways of reengineering the system to take account of all the features of the new products and functions that are increasingly modifying their products to provide a high degree of flexibility to assist borrowers better manage their loan portfolios.

Enhancing CS-DRMS to allow for implementation of liability management operations would have little impact unless it is backed by comprehensive awareness programmes in the member states. Liability management operations are a risky exercise and require a good understanding of the international market. There are a number of risks that any sovereign debt manager should consider and mitigate through active debt management. The risks include market risks, currency risks, exchange rate risks and operational risks. Risk Management products (RMPs) are financial products which allow clients to transform the financial risk characteristics of their obligation under a loan or other instrument without renegotiating or amending terms of the original instrument. These products are technically referred to as derivatives or hedging products. The multilateral institutions have moved to offer the Risk Management Products (RMPs) because there is a belief that over the years, most sovereign borrowers have developed internal capacity (skills) for active liability management. Furthermore, borrowers are now increasingly demanding for debt management financial products in the quest to better manage their portfolios.

The survey which was undertaken in a number of MEFMI CS-DRMS countries as part of this project clearly showed that most countries have not used the RMPs since most of the countries are classified as IDA only and therefore have limited access to the international market. This means that they mostly borrow from concessional sources. The concessional lenders do not provide any RMPs. This however, does not negate the need to recommend to the CS-DRMS developers to look ahead and improve it to take care of the RMPs. This is so much more since the system is not only used by the MEFMI countries but in 75 sites in 60 countries in the world. The concessional borrowers may also in the future move to different levels and be required to borrow from non-concessional sources where RMPs are an important feature. This is amply demonstrated by Swaziland whose classification has recently been changed from IDA only to a Low middle income country. The study also revealed that Tanzania and Lesotho have undertaken or were approached by creditors/investment banks to undertake liability management operations. Although the use of liability management operations is currently low in the member states, there is every indication that this is a growing demand and thus the need for countries to start putting in place structures for liability management operations.