In post-HIPIC countries improved debt management capacity is one ingredient of a policy framework to ensure that in future debt remains sustainable. This case study has been developed to provide policy makers and officials with a tool to assist them improve their understanding of the issues involved in sovereign debt and cash management and domestic debt market development. The case study format permits a focus on practical issues in a real-life context. Studying the situation of other countries may cast light on issues relevant to policy makers and officials in their own countries. The case study covers debt management, cash management and developing the domestic debt market in order to allow policy makers and officials to better understand the inter-relationships between these areas and the need for coordination of the Government’s activity. Due to the short maturities issued by Malawi, a situation common to many countries in the region, the discussion of debt market development is more accurately termed money market development.

While the case study tries to be comprehensive in its approach, the discussion is broken into separate modules to allow readers to more easily identify particular issues that are of most interest to them. The discussion of debt management is built around the structure of a debt management operation – the Front, Middle and Back Offices. The responsibilities of each of these units are discussed and, for each responsibility, the discussion follows the format: what is sound practice?; what is the current situation?; how relevant is sound practice to Malawi?; what are the gaps between sound practice and the current situation?; action plan. This same format is followed in the discussions of developing cash management and developing the domestic debt market.

In the last decade governments have paid closer attention to their debt financing strategies than previously: improved information and systems to ensure timely payment of debt; improved information to understand the present and future costs and risks of the sovereign debt structure; developing capacity to interact with the market to get the best terms; developing methods to determine the mix of debt types best suited to the government’s needs and risk tolerance; and ensuring that the government has access to a number of different sources of funding in order to reduce the risk of relying on a narrow funding base and to provide the ability to structure its debt in an optimal manner.

Governments’ increased interest in more active and professional debt management parallels the development of more liquid and sophisticated capital markets which provide greater opportunity for active management of costs and risks and which also impose greater opportunity costs and penalties on those who fail to manage costs and risks.

Content

Acknowledgements
Introduction
General Summary of Main Action Points
Sovereign Debt Management:
Overview
The Front Office

- Objectives
- Structure of a Front Office
- Front Office responsibilities
- Summary of current situation
- Legal and regulatory process for debt issuance
- Evaluation of new loan proposals
- Analysis of markets in which the Government borrows
- Loan negotiations
- Coordination with the Middle Office
- Communication with markets

The Middle Office

- Objectives
- Middle office responsibilities
- Summary of current situation
- Projection of debt service flows
- Debt profile reviews
- Sustainability analysis
- Quantification of financial risks
- Coordination with other entities
- Advice on alternative debt strategies
- Design of benchmarks
- Role as secretariat to the Debt Management Committees
- Implement risk control
- Contingent liabilities
- Action Plan

The Back Office

- Objectives
- Back Office responsibilities
- Summary of current situation
- Registration of external loans
- Monitoring and recording disbursements
- Debt service payments
- Recording domestic debt
- Data validation
- Recruitment and training

Sovereign Cash Management:

- Objectives
- Cash Management responsibilities
- Summary of current situation
- Monitoring expenditure relative to budget
- Approval of expenditure
- Sanction of excess or unauthorized expenditure
- Dedicated cash management staff
- Reporting and accountability
- Incentives for departments to manage their cash
- Forecasting cash flows
- Banking arrangements
- Managing short term borrowing needs

Domestic Debt (Money) Market Development:

- Objectives
- Summary of the current situation
- Level of macroeconomic risk
- Issuance needs relative to the size of the market
- Variety of buyers
- Competitive primary market
- Matching issue size with market capacity
- Design of debt instruments
- Adequate notice of issuance plans
- Homogeneous issues to assist liquidity
- Title registration and transfer
- Ability to transfer funds
- Secondary trading – competitive pressure on term saving institutions
- Secondary trading – Central Bank operating procedures

Annexes:
Annex 1: Matching quantity offered with the markets ability to absorb
Annex 2: Impact of liquidity management on the inter-bank market
Annex 3: Reconciling MoF funding needs and Central Bank liquidity management needs

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