Should debt managers be concerned with utilisation?

The Revised Guidelines for Public Debt Management published by the IMF/WB in 2014, define PDM as follows:

… the process of establishing and executing a strategy for managing the government’s debt in order to raise the required amount of funding at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk. It should also meet any other public debt management goals the government may set, such as developing and maintaining an efficient market for government securities”.


One comes across this definition, in one form or another, in practically all debt management strategies published by countries. Achieving that fine balance between cost and risk remains, and rightly so, the major preoccupation of all debt managers, as is the development of the government securities market which is a longer term goal.


Looking at the above definition more closely, one notes that the focus is mainly on resource mobilization (“raising the required amount of funding”) and the management of the debt portfolio per se, which includes any deliberate actions taken to achieve the lowest cost at an agreed level of risk. Such actions can occur at any time during the loan cycle  e.g. from the time a loan is negotiated until the final repayment. Some measures can be taken at both the portfolio or sub-portfolio level. For example, the more advanced countries can engage in “active debt management” to fine tune the cost and risk trade off through the use of derivative products or by simply refinancing expensive loans.


In trying to define the scope of PDM, we are often reminded what falls outside its remit. For example, the difference between fiscal and debt management policies is often alluded to. Put simply, fiscal policy determines the level of borrowing (which is subject to medium and long-term debt sustainability conditions) while debt management per se focusses on funding the borrowing requirement, subject to the cost and risk tradeoff discussed above. Indeed, separate methodologies and tools exist for the two purposes –  Debt Sustainability Analysis (DSA) which is considered as a fiscal exercise and the Medium Term Debt Strategy (MTDS), which is the framework and tool commonly used to inform the design of debt management strategies.


What about the utilisation of borrowed funds?

It is interesting to note that the above definition of PDM is silent about the subsequent utilization of borrowed funds.


In practice though, borrowing does not occur in a vacuum. While a certain amount of borrowing is contracted for liquidity purposes – usually raised on the domestic market through short-term instruments such as Treasury Bills – or to finance the budget deficit, a considerable proportion is borrowed to achieve the socio-economic objectives of the country. This relates to the implementation of projects in various economic sectors (health, education, energy, roads and transport etc.). Developing and emerging countries have traditionally relied on external borrowing (from multilateral, biliateral) to do so, although this is changing given the increased popularity of Eurobond issuance and Public Private Partnerships.


Debt managers do get involved in monitoring disbursements on loans. For instance, disbursement data is required to update debt recording and management systems so that these are able to work out loan balances and forecast debt service accurately. In some countries, the Debt Office may also be responsible for submitting claims for reimbursements. In practice, disbursement monitoring can be quite a challenge due to the need to comply to creditor-specific practices as well as disbursement methods (via special accounts; based on reimbursements; direct to suppliers etc.). There can also be considerable delays in obtaining disbursement data although the development of online systems – such as the World Bank’s Client Connection – has greatly improved matters in this area.


The utilization of borrowed funds affects the cost and risk of borrowing in several ways:


First, slow utilisation directly affects the cost of borrowing through the payment of commitment fees[2]. The longer the disbursement period (or the slower disbusrsements are), the higher the cost of the loan. We have seen extreme cases whereby loans contracted were not disbursed for several years. This can happen for various reasons including the inability of the borrower to fulfill conditions preceeding effectiveness.


Secondly, slow utilisation is inevitably linked to delays in project implementation which, in turn, increases the risk of cost overrun and the need for loan enhancement; and


Thirdly, certain creditors will not consider new requests for funding unless a minimum utilisation rate has been achieved on their current outstanding portfolio. This can restrict the availability of additional funding from existing creditors and may result in countries having to fund new loans from more expensive (commercial) sources.


To what extent then should debt managers be concerned with the monitoring in loan utilization? We are certainly not advocating that debt managers should follow up on utilization project by project. This is the role of the implementing agency and of project managers. But we definetely see a role for debt management offices in analyzing utilisation at the macro level – e.g. by economic sectors –  pointing out bottlenecks and cases of low utilization rates. We believe that the debt management office is well placed to undertake such analysis.


Of course, one could take the analysis of utilisation further in two ways:


  • By focussing beyond the disbursement period (which is defined as the time from which a loan is signed right through to final disbursement). For example, one could consider the time from which a decision is taken to resort to borrowing to fund a particular project till the time the project actually becomes operational. After all, deciding to resort to borrowing to finance a project  – when perhaps other options are available – will ultimately impact on the debt burden and its costs


  • By adopting a Results Based Management approach which would include systematic evaluations of projects funded by borrowed resources, including  a value for money audit. After all, countries ought to  evaluate and draw lessons about how effectively borrowed resources have been used and if the objectives initially set out were met. Such an analysis could be performed by the Supreme Audit Institution (SAI) of the country or a special unit tasked with this function. Creditors also undertake their own evaluations and it would be interesting to compare notes.




The extent to which debt management offices should be concerned with utilisation is likely to be a controversial issue. Many observers will argue that utilisation is not the concern of debt managers and that the latter should exclusively focus on managing the cost and risk trade off of the debt protfolio. However, as we have argued above, utilisation does impact directly and indirectly on both costs and risks of borrowing. Trying to achieving the optimum cost-risk trade off but not questioning if borrowed funds are being used effectively would be a contradiction.


Debt Management Offices are well placed to review utilisation but this analysis should be kept at the macro-level. It may also require additional resources to ensure that this additional task is not performed at the detriment of the core functions of debt management.


Beyond this issue, Governments would gain from looking at the utilization of borrowed funds more closely and ensure that amximum benefits are derived from borrowed funds.


[1] The document can be downloaded from our Library page.

[2] Commitment fees are charged on the undisbursed amount of a loan. The slower the utilisation of the loan, the larger will be the amount of commitment fees paid.