Economy 2024 Featured

The Public Debt Management Bill

The Public Debt Management Bill provides a comprehensive framework for the management of government debt, ensuring that borrowing activities are conducted prudently and transparently. The establishment of the Public Debt Management Office and the Public Debt Coordinating Committee ensures that debt management activities are well-coordinated and aligned with broader fiscal policies.
Upon the Bill becoming an Act of Parliament, the Minister of Finance (the Minister) will appoint, by Gazette notification, the date on which the sections of the Act will come into operation. This appointed date shall be no later than 6 months from the date the Bill becomes an Act.

Breakdown of the Public Debt Management Bill:
Establishment of the Public Debt Management Office

The Public Debt Management Office (the Office) is established as a key entity within the Ministry of Finance, tasked with the comprehensive management of government debt. This includes overseeing the issuance and management of loan guarantees, handling on-lending operations, and ensuring accurate recording and reporting of public debt. The primary purpose of the office is to ensure effective and efficient management of public debt, minimising costs and risks associated with borrowing while maintaining sustainable debt levels. The office is headed by the Director-General (DG), who is appointed by the Cabinet of Ministers. The DG is responsible for the overall management and strategic direction of the office. The DG’s role includes ensuring that the office’s activities align with the government’s broader fiscal and economic policies.

Functions of the Public Debt Management Office

  • The Office is tasked with preparing and publishing a medium-term debt management strategy, which outlines the government’s approach to managing public debt over a specified period. This strategy includes goals for debt sustainability, risk management, and cost reduction.
  • An annual borrowing plan is developed, detailing the government’s borrowing needs and strategies for the upcoming year. This plan is made publicly available to ensure transparency.
  • The office also prepares auction calendars for government securities, providing a schedule for the issuance of bonds and other debt instruments.
  • Negotiating terms for both domestic and external borrowings is a critical function of the office. This involves engaging with financial institutions, investors, and other stakeholders to secure favourable borrowing terms.
  • Maintaining relationships with financial markets is essential for the office to stay informed about market conditions and trends. This helps in making informed decisions about debt issuance and management.
  • Coordination with the Treasury is necessary to ensure that debt operations are integrated with broader fiscal policies and objectives.
  • The Office is responsible for assessing credit risk associated with loan guarantees and on-lending operations, ensuring that these activities do not pose undue financial risks to the government.

Public Debt Coordinating Committee

The Public Debt Coordinating Committee is established to provide a structured mechanism for coordinating debt management activities and ensuring a cohesive approach. The Committee is appointed by the Minister and includes key financial officers such as the Deputy Secretary to the Treasury (who serves as the Chairperson), Director-Generals of various Treasury departments (Treasury Operations, Fiscal Policy Management, External Resources), two officers from the Central Bank, and the Director-General of the Office. The committee is to meet at least once a month with a quorum of 5 members.

Responsibilities:

  • The Committee reviews and provides opinions on the debt management strategy, ensuring that it aligns with the government’s fiscal objectives and economic policies.
  • The annual borrowing plan is also reviewed by the Committee, which provides feedback and recommendations to ensure that it is feasible and aligned with market conditions.
  • Monitoring and assessing market (domestic and international) conditions is a key responsibility of the Committee. This involves analysing economic trends, interest rate movements, and other factors that could impact the government’s borrowing costs and risks.
  • The Committee makes recommendations on managing public debt risks, such as interest rate risk, refinancing risk, and foreign exchange risk.

Government Borrowing and Debt Management

The Office is to formulate a medium-term debt management strategy which will be updated annually on a rolling five-year horizon (updated annually to include the next five years). The strategy aims to ensure that borrowing and debt management operations are conducted within a structured and strategic framework. It factors in the cost and risk associated with the current debt portfolio, future borrowing requirements, prevailing market conditions, and other relevant factors. This strategy is to be reviewed by the finance minister and is submitted to the Cabinet for approval, where which the Central Bank is given the opportunity to provide comments before Cabinet approval. The approved strategy should be aligned with the medium-term fiscal framework which is developed in accordance with the Public Financial Management Bill. The approved strategy will be published in the official websites of the Ministry of Finance and of the Office and tabled in Parliament not later than the second reading of the Appropriation Bill of the year preceding the year as an accompanying document of the Annual Budget Document.

Similarly, the Office will prepare a borrowing plan for each year to meet the aggregate borrowing requirement in accordance with the Appropriation Act for any given year and will be reviewed bi-annually. The borrowing plan includes planned borrowings, the instruments and sources of borrowing, and the indicative timing of these operations. Once approved by the Cabinet, the plan is tabled in Parliament, not later than the second reading of the Appropriation Bill, as part of the Annual Budget Document and published on the official websites of the Ministry of Finance and the Office.

The bill allows the Minister on the recommendation of the Office to borrow directly from banks, other financial institutions, sovereign lenders, or any other person or institution through loan agreements or advances by overdraft, with terms and conditions approved by the Cabinet of Ministers.

Government Loan Guarantees

The Minister has the exclusive authority to issue and manage loan guarantees on behalf of the government. This includes the collection of guarantee fees related to obligations of Provincial Councils, local authorities, State-owned enterprises, or other entities with parliamentary approval. The issuance of these guarantees must consider that the borrower is not experiencing financial difficulty based on a credit risk assessment, and that the guarantee should promote economic development in Sri Lanka. Additionally, loan guarantees must adhere to debt reduction objectives. The debt reduction objective stipulates that the public debt be reduced and maintained at a sustainable level adhering to the limits and time frame specified in the financial strategy statement in the Public Financial Management Bill.

If the borrower be in financial difficulty, the guarantee cannot be issued. Loan guarantees must be documented legally, ensuring the borrower agrees to repay any amount paid under the guarantee with interest and discloses required information. Subsequently, if the borrower fails to meet obligations, the Minister has the right to take necessary actions to recover any owed money.

Government On-lending

The Minister has the sole authority to on-lend government funds to Provincial Councils, local authorities, State-owned enterprises, or other entities with parliamentary approval. This lending must consider that the borrower is not in financial difficulty based on a credit risk assessment and that the on-lending promotes Sri Lanka’s economic development. The results and methodology of this risk assessment, along with the proposed interest rate, must be submitted to the Cabinet for approval. If a borrower is deemed to be in financial difficulty, the on-lending transaction will not proceed. And each on-lending transaction must be legally documented, ensuring the borrower agrees to service its debt obligations on due dates and includes a clause on penal interest for any payment failures.

Suppliers’ Credit Agreements

Suppliers’ credit agreements are entered into by the Minister, or a specially authorised person, after a thorough assessment by the Office. These agreements typically involve the government purchasing goods or services on credit, with repayment terms negotiated with the supplier. The Office’s assessment ensures that the terms of these agreements are favourable and do not impose undue financial burdens on the government.

Finance Lease Agreements

Similar to suppliers’ credit agreements, finance lease agreements are managed under the authority of the Minister or a designated representative. These agreements involve the government leasing assets, with the option to purchase the assets at the end of the lease term. The Office assesses the cost and terms of finance lease agreements, providing recommendations to ensure that these arrangements are cost-effective and aligned with the government’s fiscal policies.

Recording and Publication

The Office is mandated to maintain comprehensive and accurate records of various financial obligations and transactions related to public debt. This includes outstanding public debt, suppliers’ credit agreements, finance lease agreements, derivative transactions, loan guarantees, and on-lending operations. These records must be kept in an appropriate database. The Office is granted the authority to request necessary data and information from SOEs, Provincial Councils, Ministries, Departments, other institutions coming under the Provincial Councils and local authorities and other relevant entities,

The Office is required to prepare and publish a quarterly statistical debt bulletin within 60 days from the end of each quarter. This bulletin must provide accurate and timely information on several key aspects of public debt, including:

  • Aggregate debt stock, debt flows, debt service costs, and redemption profiles, along with risk measures of the debt portfolio and details of any new government borrowing.
  • Details of derivatives and loan guarantees
  • Aggregate non-guaranteed debt stock of State-owned enterprises, Provincial Councils, and local authorities.
  • Details of on-lending facilities provided by the government.
  • Details of suppliers’ credit agreements entered by the government.
  • Details of finance lease agreements entered by the government.

The office is also responsible for preparing an annual report. The Minister must review the draft annual report, obtain Cabinet approval, and then table the approved report before Parliament no later than 180 days following the end of the financial year. Additionally, the approved report must be published on the official websites of the Ministry of Finance and the office.

Offences and Penalties

Any public officer or governing body of an entity required to furnish information under this Act commits an offence if they:

  • Make any false or misleading statement or declaration.
  • Provide misleading information for any statement, declaration, or information required by the Act or regulations made under it.
  • Resist or obstruct the duties and functions of the office.
  • Fail or refuse to furnish any required information, document, report, or material within the specified period, unless prohibited by other laws.

Offenders, upon conviction by a competent court, may face a fine not exceeding Rs. 25,000, or a term of imprisonment not exceeding 3 months.

The Office has the authority to declare information regarding documentation (related to issuance, placement or repurchase of Government debt securities) that could generate losses or conditions unfavourable to the interests of the Government as secret and reserved until it is made available to the market. Once the transaction or auction is complete, all relevant information must be published promptly. Any person who becomes aware of such information is obliged to maintain its confidentiality. Anyone who contravenes this obligation is liable to a fine not exceeding Rs. 25,000, a term of imprisonment not exceeding 3 months, or both.

By Trent Hemachandra
Research Associate
The Ceylon Chamber of Commerce

Published 19.06.2024

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