What is the Public Debt Crisis?
Global public debt has reached crisis proportions. This was the subject of the Democratic Reset: Transparency and Accountability Lessons to Break the Debt Crisis Cycle session hosted by the National Democratic Institute, the Open Government Partnership, and the Chandler Foundation.
The public debt crisis refers to the current situation where many governments’ debt levels have become unsustainable, causing economic and financial instability. This debt distress could potentially trigger a wider financial crisis which is why governments around the world are looking to implement a range of measures, such as reducing government spending and increasing tax revenue. However, the process of addressing a public debt crisis is challenging and requires significant political and economic reforms to address the underlying causes of the crisis.
There is, however, a new narrative on what can be done to address this crisis – improved transparency.
How Can Transparency Help the Public Debt Crisis?
Transparency is a critical factor in reducing debt distress, improving credit ratings, reducing corruption, and increasing trust for debt restructuring. Indeed, it is a foundational building block for sustainable development.
When governments and organizations are transparent about their finances, creditors are more likely to have confidence in their ability to pay back their debts, which can lead to higher credit ratings and lower borrowing costs. Transparency also helps to prevent corruption by making it more difficult for officials to hide illicit activities. This in turn builds trust with creditors, who are more likely to agree to debt restructuring plans that are transparent and well-organized.
Government transparency on the amount of debt it has and what that debt is being used for is equally important. Citizens have the right to know the detail of their country’s financial situation and to press for change if Public Financial Management (PFM) isn’t working.
Why is Debt Transparency Important?
- Opaque debt props up corrupt governments
- Debt transparency improves trust in government
- Transparency and accountability lowers cost of debt
According to Sanjay Pradhan, CEO of the Open Government Partnership, public fiscal transparency has been very effective, but debt transparency lags. This sentiment was shared by Rosarie Tucci from USAID who publish an annual Debt Transparency Monitor which highlights how little information stakeholders have about borrowing decisions.
“Inadequate debt transparency not only presents risks to fiscal sustainability. It also deprives parliaments
USAID
and the public of full information on the executive’s financial dealings, at the expense of democratic
accountability. Furthermore, opaque debt deals can buoy corrupt or authoritarian regimes and even
imperil a country’s economic sovereignty. Timely, accurate, and comprehensive debt reporting, on the
other hand, promotes democratic checks and balances and can help ensure that democracy delivers for
all of society.”
How Bad is the Public Debt Problem?
According to Tim Hanstad, CEO of the Chandler Foundation, the lack of debt transparency has resulted in debt distress with 25 low-income countries spending more on debt servicing than on education, health, and social protection combined.
What are the Affects of High Government Public Debt?
How Can Government Oversight Enable Debt Transparency?
Dickson Omondi, Regional Director of the National Democratic Institute, suggested that Development Finance Institutions and Parliaments have an important role in encouraging transparency. A view supported by the Hon. Gladys Ganda, Malawi’s DPP Member of Parliament for Nsanje Lalanje who believes that Parliamentary oversight on debt sustainability is critical. She further stated that legal reforms could prevent unnecessary debt but that MPs need resources, time and skills to understand, debate and scrutinize debt transparency.
How do Integrated Financial Information Management Systems Support Debt Transparency?
Many governments deploy public finance functions, like debt management, separately – in silos. This results in limited visibility of the total debt position for decision-makers during budget formulation and execution. Not having an integrated systems also means that debt levels are not visible on transparency portals for audit and oversight.
However, Integrated Financial Information Management Systems such as the FreeBalance Accountability Suite™ automate government fiscal transparency.
Transparency Opportunity
Governments can improve debt transparency by integrating budget and debt planning with budget and debt actuals which would provide a single source of the truth. Not only would this this improve trust in government but it would improve oversight – including on the purpose of taking on debt, with forecasts on fiscal effects.
Conclusion
Debt transparency and accountability lag behind other public finance domains. It’s high time to use information systems to enable sustainable futures.
For more information on how FreeBalance can help promote debt transparency in your country, please get in touch.