Background
Despite existing debt relief initiatives and favourable conditions on world financial markets, debt instruments remain an important source of finance for developing countries. Active public debt management is an important tool for ensuring that countries maintain sustainable levels of debt in pursuit of their broader development objectives.
Without good debt management, debt crises can undermine a country's economic objectives in terms of exchange rate, trade financing, the investment climate, creditworthiness and external competitiveness.
Debt management alone cannot lead to a virtuous circle in which external borrowing increases export capacity which, in turn, generates the resources necessary for repaying the debt. However, a good public debt management strategy can reduce currency and maturity mismatches and thus can help to mitigate the potential risks associated with external and domestic shocks. Effective debt management can also help strike the appropriate balance between external and domestic debt in a medium-term debt strategy.
Although debt financing remains a central mechanism for mobilizing resources for public and private investment in developing countries, debt sustainability remains a challenge for a number of both low-income and middle-income countries.
In these countries, appropriate debt management may not be sufficient for achieving major development goals while maintaining a sustainable level of public debt. Borrowing therefore needs to be complemented with grants and other forms of aid.
This highlights the importance of fostering greater coherence and coordination in the global aid and financial architecture.