Confronting a hidden burden during COVID-19: lack of debt transparency in government budgets
by Chris Lane, former IMF representative to the United Nations & Sally Torbert, Program Officer, IBP— Jul 08, 2020
Rapid progress toward greater debt transparency in government budgets is sorely needed.
Before the COVID-19 crisis, developing countries were borrowing at historic levels, with shifts toward riskier debt. A lack of transparency and fragmented systems for managing and reporting on government debt has left many lower-income countries over-indebted and ill-prepared to finance necessary pandemic containment and mitigation measures.
We see this challenge in Zambia, which increased non-concessional debt to finance infrastructure projects and expand civil servant pay. Yet, not all loans were reported and publicly disclosed, even as half of Zambia’s tax revenues went to finance debt service payments. As the pandemic hit, the price of copper – Zambia’s main export – collapsed, along with the country’s currency, putting even more strain on debt repayment and potentially limiting access to additional financing to bolster spending during the emergency and response period.
Other developing countries hope to avoid a similar fate as Zambia. As part of the global response, many least-developed countries are being granted temporary debt relief to help focus public spending on addressing the pandemic rather than on debt-service payments. Yet, for debt relief to be effective, governments must be held to account for how they use these funds – not just by their creditors, but also by their citizens.
The challenge for accountability – both before and after this crisis – is that most citizens have minimal access to critical information about government budget decisions, including those on government debt. The most recent assessment of fiscal transparency practices in 117 countries by the Open Budget Survey (OBS), finds that only 31 met the OBS benchmark for budget transparency and score 61 or higher out of a total possible score of 100.
Importantly, the OBS also finds critical disclosure weaknesses in countries with a higher risk of debt distress. Comparing the latest OBS transparency scores with the IMF and World Bank’s debt sustainability analysis (DSA) ratings from the end of 2019, which are available for lower income countries eligible for highly concessional financing, the 13 OBS-assessed countries that are rated as high risk, or in debt distress have an average budget transparency score of 28 (out of 100). In comparison, the 11 countries that are rated as low risk have an average score of 40.
As part of its overall measure of budget transparency, the OBS asks specific questions about the disclosure of debt information in budget documents released throughout each fiscal year. These questions assess government practices against international standards and are scored on a scale of 0 to 100 based on how well a country adheres to good practice. Several questions also ask about the reporting on fiscal risks that is central to understanding whether other government liabilities can lead to higher debt levels or are counter-balanced by government assets.
A clear pattern emerges: the higher the risk of debt distress for a country, the lower the scoring on debt transparency and fiscal risks. Fiscal risk reporting is a general weakness for developing countries, and not even one country at high risk of debt distress, or in debt distress, presents information on quasi-fiscal activities or the long-term sustainability of their finances.
The lack of transparency in these countries is telling. Far too few governments have been informing their citizens and opening public debate on whether new debt is wise or wasteful. Far too many governments have now entered this pandemic and global economic slowdown with debt burdens that hinder their response.
International efforts pushing for greater debt transparency are gaining momentum. Prior to this crisis, the World Bank and IMF agreed to support countries in improving how they record, monitor and report on their debt for the databases managed by these institutions. During the crisis response, countries participating in the G-20 Debt Service Suspension Initiative (DSSI), have now committed to disclosing all public sector financial commitments, including debt, by September 1, 2020, and to use the resources gained through debt relief toward social, health, and economic spending. These international reporting systems, however, only disclose debt that has already been incurred and bypass the primary accountability system for a country’s public finance decisions: the government’s budget.
Faster progress toward greater debt transparency in government budgets is needed. Going forward, international and national actors should unite around a common agenda to ensure full transparency on public debt:
- In every country, oversight actors including civil society, legislatures, and supreme audit institutions, should call on their governments to improve disclosure practices and public engagement on debt decisions during budget discussions.
- International organizations providing emergency lending, debt relief, and technical assistance for debt management, should support governments in strengthening debt reporting in national budgets.
- External creditors should commit to disclosing all loans in a public registry of loan and debt data, as proposed by the Jubilee Debt Campaign.