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Speeches & Transcripts February 23, 2020

Domestic Capital Markets & Debt Transparency and Sustainability

Developing Domestic Capital Markets

  • A well-functioning and liquid domestic capital market provides a stable source of funding during normal times and provides a buffer during times of crisis. Importantly, meeting the additional financing needs required to fulfill the Sustainable Development Goals by 2030 will require sustained financing flows backed by public and private capital, making this agenda more important for Emerging Market Economies than ever before.
  • While the importance of capital markets is undeniable, not all countries are in a position to develop deep and liquid private markets as many lack key basic preconditions. Requisite preconditions include robust macroeconomic conditions, an appropriate level of financial sector development and/or institutional environment.
  • The World Bank Group launched the WB-IFC Joint Capital Markets Initiative (J-CAP) in 2017 to accelerate progress in developing capital markets in priority countries. Six priority countries and one sub-region have been targeted in the first phase: Bangladesh, Indonesia, Kenya, Morocco, Peru, Vietnam, and the WAEMU region and implementation has begun with early successes.
  • Additionally, the World Bank Group has also developed new frameworks to enhance efforts to strengthen Local Currency Bond Markets (LCBMs) in emerging markets.
    • For sovereigns, the World Bank and IMF have developed a new framework that identifies priority actions for each of six ‘building blocks’ to improve the functioning of government debt markets. The building blocks are: money markets, primary markets, investor base, secondary markets, financial market infrastructure, and legal and regulatory system.
    • For corporates, new Bank guidance that highlights how financing for small and medium enterprise can be scaled also fills an important knowledge gap.

Debt Transparency and Sustainability

With the world facing relatively slow growth, we think increased debt and investment transparency is urgent to increase investment flows and make debt and investment more productive.   To this end, I would like to invite everyone’s comments and suggestions on the following recommendations: 

  1. Eliminating the use of contracts with excessive confidentiality clauses.  Where these exist, we are encouraging borrowers to request relief from the clause in order to proceed with transparent data reporting.
  2. Limiting the use of collateralized transactions and improving their disclosure. Not all collateralized borrowing is bad, as discussed in our recent joint WB-IMF paper on key considerations for collateralized transactions. But creditors and borrowers need to establish sound institutions and legal processes to promote desirable development outcomes. In particular, collateralized transactions and debt-equivalent instruments should be fully disclosed.
  3. Avoiding creditors’ violation of legal requirements of other creditors, such as negative pledge clauses. When contract terms are breached, it can cause substantial delays in IMF programs and new funding. We invite the G20 to take a strong stand against violations of the contractual terms of multilateral creditors including the World Bank.
  4. Asking official lenders to publish templates of their loan contracts.  I invite the G20 to endorse this suggestion. 
  5. Promoting better disclosure of State-Owned Enterprise (SOE) debt. SOE debt needs to be understood more thoroughly and, in many cases, taken into account in debt sustainability analyses as sovereign debt. We are compiling an SOE debt database. Currently, the SOE database includes more than 9,000 loans owed by 900 SOEs in 94 countries and is growing steadily.
  6. The Bank is updating our non-concessional borrowing policy (NCBP).  The goal is to avoid the moral hazard that occurs if a country receives grants and uses the debt space to borrow on non-concessional terms. IDA19 creates a framework for addressing this problem through the Sustainable Development Financing Policy (SDFP). It aims to provide the right incentives to make debt transparent and sustainable.
  7. We are also piloting debt transparency reforms in several countries in order to advance such reforms and draw lessons for other countries.
  8. Investing in capacity development. As our recent joint WB-IMF paper on public debt definitions and reporting in low-income countries shows, while international statistical standards for public sector debt statistics are sound, there is significant room for better compilation, reporting, and dissemination of public sector debt data. Capacity development, as provided through the joint Bank-Fund Debt Management Facility, will remain critical in this regard.
  9. Promoting timely and comprehensive debt restructuring with fair burden-sharing across creditors. An inclusive creditor forum is necessary to ensure that debt restructuring efforts are comprehensive and coordinated.

We strongly believe that the G20 provides an excellent platform to make progress on this very important issue. We look forward to your suggestions on our lines of work and your support.