public debt – PSA Parliaments

By Franklin De Vrieze.

On the occasion of the International Day of Parliamentarism (30 June), this article highlights the challenging task for many parliaments around the globe in ensuring accountability for the rapidly increasing public debt of their nation. It analyses questions of debt transparency, legislative and oversight practices on public debt and the challenge of executive dominance.

Today’s debt crisis

The world is facing a new debt crisis. Twenty-five of the poorest countries spend more on debt repayments than on education, health, and social policy combined. Sixty percent of low- and middle-income countries are highly debt vulnerable. In its latest International Debt Report, the World Bank revealed the sharpest rise in global borrowing costs in four decades.

The origins of this dire situation are both historical and more recent. They include global power dynamics, international and regional barriers to trade and infrastructure development, national political histories and governance decisions around economic development, and the policies of multi-lateral lending institutions and the role of credit agencies. More recently, public debt of many countries has exacerbated by the COVID-19 crisis, Russia’s invasion of Ukraine, and the environmental and climate emergency – and their economic and financial impacts – as well as sometimes dubious national borrowing decisions.

Breaking out of the current debt crisis and avoiding future ones will require a fundamental shift in oversight and accountability for the way that governments borrow and manage debt. In this context, there is increasing recognition of the unique roles for parliament in the governance of public debt.

Why parliaments need to get involved

In its submission to the UK House of Common’s International Development Committee’s inquiry, Westminster Foundation for Democracy (WFD) suggested that there are six incentives as to why parliaments can play a more active role with regards to public debt: 1) It serves as a catalyst for greater debt transparency. 2) It helps to establish and implement a stronger legal framework on public debt management. 3) It strengthens oversight over government policies and spending. 4) It protects the national interest in emergency contexts and highlights the gendered effects of public debt. 5) It unearths the risks of State-Owned Enterprises becoming a major cause of debt accumulation and debt crises. 6) It contributes to delivering the requirements of successful Nature-for-Debt swaps, hence contributing to action on climate change mitigation and adaptation, and to climate change finance accountability.

Parliaments, as representatives of people’s interests, as well as lawmakers and agents of accountability, are critical fiscal policy institutions responsible for approving the annual budget and overseeing the government’s execution of its approved programme. Meanwhile, debt managers are responsible for ensuring the government’s financing needs are met at the lowest cost over the medium-to-long term, consistent with an acceptable level of risk, and other objectives such as supporting domestic debt market development.

How parliaments can get involved

How can parliaments play a meaningful role in public debt oversight?

Firstly, setting a legal framework for public debt management ensures that parliament provides strategic direction to borrowing decisions and clearly specifies the roles and responsibilities for the institutions involved in debt management. While most countries in the world have a financial administration act, public debt can also be regulated by more specific legislation.

Secondly, the budget cycle provides the main structure for financial decision-making in parliament, and there are opportunities to scrutinize public debt and public debt management throughout the four stages of the budget cycle: formulation, approval, execution and audit/oversight.

Thirdly, parliaments can incorporate debt management into their regular law-making and budgeting responsibilities in various ways, such as: reviewing and endorsing the Debt Management Strategy and monitoring ongoing implementation; reviewing and ratifying external loan and guarantee agreements in a timely manner; drawing on debt management compliance/ performance audit reports prepared by the Supreme Audit Institution to check the effectiveness of regulatory and systems arrangements; maintaining one or more permanent parliamentary oversight committees with overall responsibility for budget and debt management scrutiny.

Worldwide, parliaments fulfil their debt management roles to varying extents, as MPs often struggle to understand the availability and completeness of debt statistics and other debt management documents. Hence, some parliaments decided to create a dedicated Committee on public debt, bringing together those MPs with strongest knowledge and interest in the topic, as is the case in Kenya and Nigeria. Many parliaments lack staff with the specializedknowledge and skills to support stronger oversight of public debt. Hence, some parliaments have established a Parliamentary Budget Office (for instance in Kenya and Sierra Leone), which provides members with specialized analysis on fiscal and budget issues, including issues of public debt.

Transparency as precondition for parliamentary debt oversight

Transparency is one of the major anchors of debt sustainability, ensuring that all stakeholders, including policymakers, creditors and investors, can take optimal decisions on a country’s debt obligations, based on fully disclosed, reliable and timely information. The issue of debt transparency became more prominent following the discovery of hidden debts in some debtor countries (for instance in Mozambique). It’s the main preconditions for parliamentary involvement in public debt oversight.

There are clear advantages to greater debt transparency as it gives credibility to government policies and helps ensure debt and fiscal sustainability. It supports democratic systems and reduces the opportunity for corruption. However, some national governments might not be ready to provide timely, comprehensive, accurate, accessible, and intelligible debt data, policies and operations to their national parliament or the public at large. Parliament often only gets partial access to the relevant data, thus limiting their ability to exercise oversight on public debt.

Executive dominance

In addition, oversight of public debt largely depends on oversight of the political choices underpinning the proposed investment projects which are funded by new loans. However, parliamentary oversight of these political choices often faces the challenge of executive dominance. In some countries, it means that, for instance, the President might request MPs to adopt proposals, vote for proposed investment projects, or increase the debt ceiling while the MPs know that this is not a sound policy. I learned that, in those circumstances, MPs may sometimes feel that they have no choice but to approve requests by the executive, as their position in parliament or within their party – and in extremely worrying cases their personal security and the safety of their family – can depend on it.

This means that debt transparency is not sufficient. Based on a political economy analysis, there is need for a corruption and patronage lens to fiscal and debt policy. When the national budget is inflated by imprudent projects requiring large loans, it is indebting the country for generations to come. In these circumstances, public debt can be called “budgeted corruption”.

Civil society

Therefore, in addition to more rigorous oversight by parliaments, civil society also needs a more robust role. CSOs and academics, with expertise in fiscal and debt policies, can play a complementary monitoring role, reinforcing parliamentary scrutiny. The role of the Institute for Public Finance in Kenya is a commendable example.

Unsustainable and opaque debt is a democratic deficit. It undermines the social contract which underpins a democratic system of governance. That is why Westminster Foundation for Democracy (WFD) advocates for debt transparency, more rigorous debt accountability to parliaments and robust civil society monitoring.

About the author

Franklin De Vrieze is the Head of Practice Accountability at Westminster Foundation for Democracy.

Always be prepared for the next crisis. It seems that public debt spiraling out of control is on track to becoming the next global crisis.

Did you know that twenty-five of the poorest countries currently spend more on debt repayments than on education, health and social policy combined? Sixty percent of low- and middle-income developing countries are highly debt vulnerable. Public debt is currently at the highest level globally in over fifty years and triple its 2008 level. National economies might collapse, as we have seen recently in Sri Lanka.

The origins of this situation are, among others, the COVID-19 crisis and its economic and financial impact, and debt management practices which might not have been very prudent.

But it is not all doom and gloom. There are ways to conduct public debt management in a responsible and accountable way. While public debt has traditionally been managed by the Ministry of Finance and executive agencies, there is increasing recognition of the unique roles for parliament in the governance of public debt. The role of parliaments is to ask questions, to scrutinize, to provide quality assurance of the process, and to ask what the priorities are. Parliaments are increasingly taking on this challenge, as we have seen in – for instance – Kenya, Zambia, Georgia, the Maldives, and the Caribbean.

In its submission to the UK House of Common’s International Development Committee’s inquiry, Westminster Foundation for Democracy (WFD) suggested that the UK’s international development policies can be strengthened by including a public debt accountability lens through an enhanced role for parliaments in oversight of public debt. There are six incentives as to why national parliaments in partner countries can play a more active legislative and oversight role with regards to public debt:

It serves as a catalyst for greater debt transparency.
It helps to establish and implement a stronger legal framework on public debt management.
It strengthens oversight over government policies and spending.
It protects the national interest in emergency contexts and highlights the gendered effects of public debt.
It unearths the risks of State-Owned Enterprises becoming a major cause of debt accumulation and debt crises.
It contributes to deliver the requirements of successful Nature-for-Debt swaps, hence contributing to action on climate change mitigation and adaptation, for which these countries are otherwise receiving insufficient multilateral support, and to climate change finance accountability.

These six arguments for parliamentary involvement in public debt management should incentivise the UK and others making parliamentary oversight on public debt management one of the criteria for their debt relief schemes. Strengthening the governance and domestic accountability in debt relief schemes will contribute to prudent debt management and more sustainable economies.

However, based on our interaction with a range of parliaments globally, there are three main challenges. Firstly, parliaments might struggle with the technical nature of public debt questions. MPs and parliamentary staff might feel weary and intimidated about the complexity of the subject matter. Secondly, parliaments often do not have access to the relevant data to exercise oversight on public debt as the documentation is not shared by the executive. Fortypercent of low-income developing countries have never published public debt data or have not updated information in the past couple of years, and lenders such as China apply strict nondisclosure clauses. So, there is a need to bridge the information disconnect between the executive and the legislature. Thirdly, private sector lending has increased sharply in recent years, accounting for nearly 20% of loans to east and southern Africa. Often sold on to other private companies, including hedge funds and vulture funds, private lending is notoriously opaque as revealed by scandals in countries ranging from Mozambique to Malaysia.

To assist parliaments in facing these challenges, WFD is rolling out targeted support to parliaments through pilot assessments in public debt oversight, tailor-made learning and knowledge building, and parliamentary assistance programmes. Together with the National Democratic Institute (NDI), WFD recently published four new policy briefs. The briefs explain that, while most countries do have a financial administration act, far fewer countries have specific public debt legislation in place. Setting a legal framework for public debt management is one of parliament’s key tasks. The briefs outline best practices in the implementation and monitoring of a legal debt framework and the ratification of loan agreements. Beyond parliament’s legislative role, the briefs also cover parliament’s oversight role of public debt, and oversight over public debt in emergency contexts. The way how public debt was managed during the COVID-19 crisis has informed the brief on emergency context, though it is applicable to other potential future emergencies as well.

In addition, WFD developed a baseline assessment methodology on parliaments and public debt oversight and an e-course for parliamentarians, parliamentary staff, civil society and those engaged in public financial management. The e-course explores the concepts, mechanisms and risks which impact public debt management, and brings together expert contributors, country examples and interactive exercises.

In conclusion, it is worth mentioning that parliament’s capacity to oversee public debt management is very much linked to the depth of parliamentary scrutiny throughout the budget cycle, the resources available to committees, parliament’s oversight practices in general, and its ability to work collaboratively with civil society to enhance the political space to upscale transparency.

Solid and accountable public debt management is not only the task of the government borrowing money. It is also a responsibility of the lenders — lending countries and lending international institutions — to ensure due diligence of the viability of the economic projects and of the rationale underpinning borrowing requests. Hence, the current initiative of revitalizing the UNCTAD principles on the promotion of sovereign lending and borrowing cannot be timelier and will hopefully contribute to avoiding a next global crisis of public debt spiraling out of control.

Franklin De Vrieze,
Head of Practice Accountability, Westminster Foundation for Democracy.