# **4.2 Hidden debt accumulates in boom years and is revealed during busts**

This section analyzes the cyclical patterns of hidden debt accumulation and revelation. We start by documenting that hidden debt tends to accumulate during boom years and be revealed during bust years. Figure 7 presents this key result in the form of binned scatter plots, following the optimal binning approach developed by Cattaneo et al. (2024).

Panel A shows the association between hidden debt and real GDP growth _in the year that is being revised_ . The figure shows that boom year data points are subject to higher upward revisions, implying that more unreported borrowing occurs during good times. Panel B shows the association between hidden debt _revelations_ and real GDP growth. That is, we focus on those years (vintages) in which hidden debt is revealed and added to the statistics. The negative association shows that previously unreported borrowing is more likely to be revealed during economic downturns. Hidden debt accumulation is markedly procyclical.

Table 3 sheds further light on the mechanisms that underlie hidden debt revelations in bad times. Specifically, in a fixed effects panel regression, we show that IMF programs and external sovereign defaults are associated with larger revelations of previously unreported debt, even when controlling for the business cycle, and for country and vintage fixed effects. While the variables explain only a small share of the overall variation in our noisy revision data, they are associated with economically sizeable effects. Both new IMF programs and sovereign default episodes are associated with an increase in hidden debt revelations of 12 percent of the standard deviation of hidden debt revelations. This result corresponds to approximately USD 200 million in newly revealed loans during the first year of the average IMF program or while a country is experiencing a sovereign default episode.

These findings confirm existing anecdotal evidence on the repeated discovery of hidden debts during crises and point to outside monitoring as a key driver of greater debt transparency.<sup>22</sup> Both IMF programs and external sovereign defaults are times of intense external scrutiny of a country’s debt statistics. In exchange for a lending program, the IMF requires detailed access to a country’s debt statistics to assess debt sustainability and calibrate program parameters and objectives. Similarly, during a sovereign default, a country’s creditors come together to reconcile their data with the debtor’s records as part of the debt restructuring process. In this context, the sovereign’s debt records are vetted by sovereign advisors and may be subject to additional checks by international audit firms working on behalf of creditors concerned about the dilution of their claims (see the Mozambique case study in Section 2 and the next subsection).

> 22An alternative hypothesis is that governments strategically reveal hidden debts for political gain, for example after coming to power or after elections. In Appendix Section C.2, we test whether domestic political factors can explain revelations of hidden debt. We do not find any evidence that governments strategically reveal previously unreported debt or that hidden debt revelations vary systematically across the political cycle.

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