Principles for Debt Transparency: A Few Steps Forward, a Few Questions Linger

When the G20 ministers of finance and central bank governors meet in early June, adoption of the Principles for Debt Transparency recently promulgated by the Institute of International Finance (IIF) will be on the agenda. The result of over 18 months of discussions among IIF members (mostly international banks), the Principles come as an industrywide reaction to various loans made to developing countries that were both nontransparent and put macroeconomic stability at risk. While long in the making, this self-policing initiative is welcome, absent a binding international regulatory framework to police miscreant lenders. But it will require much more effort by the international financial community for the Principles to do the job—in many ways, the Principles are only a start.

It is widely recognized that private sector financing of projects in developing countries will be critical for meeting the 2030 Sustainable Development Goals, and that much of this financing will come from abroad. To ensure that investments are indeed effective and sustainable, public sector financial transactions in developing countries must be transparent. The rising levels of debt in low-income countries lend more urgency to the need for a full and transparent accounting of public sector borrowing. The Principles aim to bring about that transparency.

What are the salient features of the Principles? 

• They are voluntary. Banks and other financial institutions can choose to adhere to them (or not) and countries can choose whether to do business only with adherents (or not).

• For now, they apply only to transactions with low-income countries, those deemed eligible for low-interest loans from the IMF, so-called PRGT-eligible countries.

• All transactions that commit the public sector directly (e.g., loans) or indirectly (e.g., guarantees) are covered, with a wide definition of the public sector, including state-owned enterprises.

• The details of the loan are to be published: who is involved (borrower, lender, guarantor, agent); what are the terms (ranking, amount, currency, interest rate); what the loan is for; and how it is governed (governing law, immunities, dispute resolution, collateral).

• The information is to be made available 60 to 120 days after the date at which the funds first move.

• There will be an annual review of the application of the Principles.

A couple of obvious limitations naturally raise questions:

• Why voluntary? There is no international regulatory body or framework to govern private lending to sovereigns; voluntary with the blessing of the G20 is the best that can be done—see more below.

• Why just PRGT-eligible countries? The IIF decided to start with a set of countries that “are more likely to encounter problems with repayment of market-rate financing and ultimately debt sustainability.” The idea is to expand to more countries after experience in implementation is gained, but nothing prevents banks from voluntarily applying the Principles to other countries. It’s unclear that the assertion of a larger likelihood of debt distress is correct and the existence of principles applying to PRGT-eligible countries alone may be a disincentive to lend to them. So, an early expansion to other developing countries would be desirable.

And there is a bit of devil in the details, which may hinder the transparency effort:

• The interest rate on each transaction is to be reported in a range (e.g., 1–3 percent, 5– 8 percent, etc.), which will make calculations of the financial impact of the loan imprecise, especially for large loans.

• The reporting period based on when funds first move, rather than when the loan is signed could obfuscate the size of public sector commitments (often more important than actual borrowing).

• This could be compounded by the two- to four-month delay in reporting, which is for unspecified “anti-trust considerations.”

None of these is a fatal flaw—they will just make the job of civil society, journalists, and analysts a bit more difficult, with conclusions somewhat imprecise and tardy.

What is of more concern is how these Principles will be implemented. 

• First and foremost, the agency that will collect and disseminate these data is left unspecified and is given a year to implement the Principles, once it is named. It will be critical that the reporting host have a strong reputation for transparent, accurate, and timely reporting. The obvious candidate for reporting host would be the International Monetary Fund (IMF), with a good alternative being the World Bank. But to make this happen, the shareholders of either institution will need to support its involvement and be sure it has the long-term resources to make the initiative endure. An alternative would be to establish a free-standing organization to monitor and enforce, such as those for the Extractive Industries Transparency Initiative or the Santiago Principles. Whatever organization takes this on should consult with journalists, think tanks, nongovernmental organizations, and other members of civil society as it designs the templates and website to ensure accessibility to a wide variety of interested parties.

• Peer pressure, both among financial institutions and developing countries, will be critical to ensuring that these voluntary Principles in fact become normative in global financial markets. To this end, a list of the institutions and countries who adopt the Principles in whole or in part should be regularly published. Transparency about transparency commitments is best practice and the “name and shame” strategy will prove effective in driving the Principles to being de facto operating principles. For countries, the IMF should make adherence to the Principles part of its regular Article IV reporting, keeping a public list of those countries that agree to borrow only from signatory lenders.

• Regular review of the implementation of the Principles will be critical to their effectiveness. Such a review should include the IIF and its members, relevant international financial institutions, developing countries, and civil society. It could be led by independent parties, such as think tanks or academics, and should be established with funding for at least five years of implementation. The annual review should signal clearly when to enlarge the number of countries covered by the Principles.

But the most important question is whether these Principles, had they been in force, would have stopped the infamous Mozambique loan. Probably, as the prospect of having the terms and conditions of the loan publicly available may have given pause to lenders and borrowers alike. But it will take much more than the Principles alone to stop questionable lending. The international financial community will have to make an enduring commitment to transparency. The first steps will be taken at the June meeting of the G20 ministers of finance and governors of central banks. They can show their commitment to the long road to transparency by:

• Fully endorsing the Principles put forward by the IIF

• Committing to using their voting power at the IMF (or the World Bank) to mandate that the institution becomes the repository of the data, giving them the legal and budgetary support needed for this function to endure

• Committing to a regular, inclusive, and transparent review of the Principles by an independent body, in consultation with key players

• Urging that the Principles be applied to other developing countries as soon as possible

This will give some teeth to a promising, but as yet untested commitment by leading financial institutions to commit to responsible lending to developing countries.

Thanks to Masood Ahmed, Vijaya Ramachadran, Nancy Lee, Asad Sami, and Fiona Robertson (ONE-UK) for insightful comments.