An Assessment of the Use and Effectiveness of CS-DRMS for Managing Domestic Debt in the MEFMI Region

By Lekinyi N. Mollel
April 2015
Public domestic debt has gained significant importance globally since mid-2000s as a result of both external and external factors. In the MEFMI region, domestic debt has been increasing in absolute amounts, as a proportion of total public debt, and as a ratio of GDP. For instance, domestic debt increased from an average of 12 per cent of GDP in 2005 to 14 per cent by 2011. The domestic debt is already in the critical range of 15-20 percent of GDP in Malawi, Uganda and Zambia while Tanzania is also approaching this range.

Among the internal reasons behind the build-up of domestic debt in developing countries, including the MEFMI region, are: outcome of the reforms geared towards development of the domestic financial markets as a means of countering the perceived risks associated with external financing; implementation of monetary policies; and financing of infrastructure projects; and the relaxed fiscal policies to utilize the breathing space created by external debt reduction initiatives in 2000s. External factors, included the impacts of the global financial and economic crisis of late 2000s and the recent European debt crisis and to a lesser extent the aid inflows that necessitated government borrowing to sterilize them.

The general increase in public domestic debt and the associated cost and risks created a need for effective management of this category of debt using a sophisticated computer based debt management system. Against this, the Commonwealth Secretariat continued to enhance the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS) that was initially developed to address external debt crisis in mid 1980s. This study, therefore, assessed the use and effectiveness of CS-DRMS (Version 1.3) in managing public domestic debt. A total of 15 CS-DRMS user countries including eight from MEFMI region were assessed through a structured questionnaire. Views of the Commonwealth Secretariat were incorporated in the assessment.

The assessment found that most of the debt offices are only using the system at minimum level and in fact parallel databases and records are maintained using other systems. Most of the countries are only using the system for recording and producing limited reports on debt service forecasts for treasury bills and bonds. The limited use of the system emanates from inadequate user technical know-how, system capabilities and fragmented institutional framework for managing public debt in some countries. Deficiencies in managing public domestic debt, particularly, the reporting features were identified as a major challenge. CS-DRMS also has no features necessary to be used as a central depository system (CDS), a key function of domestic debt management. It was also noted that domestic debt issuance (auctions) in most countries is undertaken by central banks using their tailor made systems. This, is partly attributable to fragmented institutional arrangement in debt management. The consequence of all these is that domestic debt is not managed optimally and is characterized by duplication of resources including parallel records in spreadsheets. Nevertheless, the responses depicted users’ higher expectations on CS-DRMS version 2.0 released towards end of 2014 which was yet to be adopted in most of countries at the time of this assessment.

Thus to optimize the use of CS-DRMS for managing public domestic there is a need to address both technical skills of the debt managers and deficiencies of the system, as well as consolidation of domestic debt management. Regarding technical skills, COMSEC, MEFMI and countries need to organize training events (regional and in-country) targeting only domestic debt management using CS-DRMS rather that combining with external as experience shows that whenever they are mixed less emphasis is given to domestic debt. Given the increasing trend of domestic debt there is a need for deliberate acceleration of research and development towards further enhancement of the domestic debt module of CS-DRMS, by COMSEC, to respond to emerging issues in the financial markets. Country reforms toward consolidation of debt management functions along the sound functional units, including consolidation of debt databases, would help to enhance the use of CS-DRMS in managing domestic debt as an integral of total public debt. Consolidation will facilitate bringing together domestic and external debt back office functions and adoption of single system (CS-DRMS) for recording and reporting public debt in totality.

Findings of the study, if adopted, will enhance use of CS-DRMS in managing public domestic debt in the MEFMI region and improve management of public debt in totality with the ultimate goal of achieving the public debt management objectives of minimizing government financing costs and risks.