whereas, the domestic debt will have matured substantially, with a range of 0‐60 percent of the original debt still outstanding after three years. In total, after three years, 63‐85 percent of the original debt is still outstanding. This measure, together with indicators such as average time to maturity, indicates the length of time it takes to transform the existing debt portfolio. The fact that it takes longer to transform a portfolio can be advantageous as it means that the portfolio is subject to lower refinancing risk. On the other hand, if the existing debt is risky, for example if it is heavily foreign currency denominated, then it also implies the country will have to live with this risk for an extended period. In the absence of swaps, changing the debt composition will only be achieved marginally over time, as existing debt matures and new debt is contracted to finance the budget deficit.

**Table 4: Percentage of Current External and Domestic Debt Still Outstanding After Three‐Year Period – MTDS Countries**

|**Country:**|**A**|**B**|**C**|**D**|**E**|
|---|---|---|---|---|---|
|External|99%|91%|82%|96%|84%|
|Domestic|39%|54%|0%|59%|44%|

Source: Author’s calculations, sample of MTDS countries The implication of this analysis, in an environment of increasing deficits and infrastructure investment needs that will raise the new financing requirement, is that debt structures can quickly evolve and unless a prudent debt management strategy is in place, it can quickly deteriorate and become more risky. In this regard, as countries increasingly evaluate non‐concessional sources of financing including the option of issuance in the international capital market, the importance of assessing the risk consequence of such borrowing on the overall portfolio becomes more acute.

# **c. Non‐Concessional Borrowing**

Many LICs have as a goal to reduce ‘donor dependence’, as donor financing can be volatile and unpredictable, and the use of funds is often tied to specific project‐related expenditures. There are also high transaction costs of doing business with multilateral institutions. But moving instead to the international capital markets also adds to financing volatility, while increasing the cost. Turning to such non‐concessional sources also does not address exchange rate and refinancing risks, and is subject to international credit cycles. Moving to domestic financing has merit in that it eliminates exchange rate risk, although it can add to refinancing risk and increases interest cost. For some small and low income economies, there just simply may not be the investor base to support a viable government bond market. Therefore close coordination of the MTDS work and work on financial sector development has been useful in making a more realistic assessment of the options for domestic financing.

From one perspective, given the large social and infrastructure needs in many countries, additional inflows can be a welcome development, particularly where domestic resources are insufficient. Access to new sources of financing can also improve the scope for actively managing risk in the public debt portfolio, for example by offering greater scope to change the currency exposure of the portfolio so it is more tailored to the country’s export revenue streams. However, the diversification of financing sources is likely to be achieved at the expense of higher debt servicing costs, and potentially increased refinancing and interest rate risks. Greater foreign investor interest also increases the scope for domestic debt to play a more active role in the portfolio since increased availability of resources in domestic currency can facilitate the extension of the tenor of domestic debt.

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