specific analytical purposes.<sup>1</sup> Available data on domestic public debt are therefore quite heterogeneous in terms of the criteria to distinguish domestic and external debt, the definition of public sector, the type of government liabilities covered, and the treatment of certain financial arrangements (e.g., on-lending operations, IMF lending to central banks under a sovereign guarantee, liabilities issued in regional capital markets). Furthermore, to the best of our knowledge, no data set provides information on the structure of domestic public debt.

Domestic public debt started increasing in LICs from the mid-1990s, in coincidence with an upsurge in financial liberalization (Presbitero, 2012b). Subsequently, in the wake of the debt relief initiatives and the recent global financial crisis, the level and composition of public debt in LICs have changed, sparking the attention of IFIs and the academic community.<sup>2</sup> In policy-oriented discussions on government borrowing and public debt management in LICs, a common presumption is that domestic financing is more expensive and riskier than external financing, thus making foreign debt preferable to domestic debt. Supporting this view, Christensen (2005) analyses the structure of public debt in 27 Sub-Saharan African countries and finds that domestic debt represents a significant burden to the budget in terms of interest payments, notwithstanding having a relatively small size. In addition, the author shows that the short-term maturity of domestic government debt is a source of rollover risk and macroeconomic instability, and documents the existence of crowding out effects on private-sector borrowing.

LICs benefiting from debt relief initiatives have attracted special attention of policy makers and researchers because of the expectations that these initiatives would help poor countries to stabilize the economy, strengthen public finances, free budget resources to finance the provision of social services and infrastructure, and implement structural reforms. In their study on debt relief and HIPCs, Arnone and Presbitero (2010) analyze the evolution and costs of domestic government debt using a World Bank data set covering 79 developing countries in 1970-2003. They provide evidence that both the stock of domestic public debt and the associated interest payments rose in HIPCs after receiving relief. Presbitero (2012b) shows that, in fact, the reliance on internal financing has partially offset the reduction in external debt granted by multilateral and bilateral debt relief initiatives. Arnone and Presbitero (2010) argue that such trends might put forward risks to sustainable economic development and thus jeopardize the objective of spurting growth that motivated granting debt relief in the first place. Furthermore, they suggest that the objectives of creating a stable macroeconomic environment and developing local financial markets have not been reached yet. This should be a concern because the experience of EMs since the early 2000s suggests that macroeconomic stability and financial deepening are necessary for domestic public debt not to represent yet another factor of vulnerability (Borensztein, Levy-Yeyati, and Panizza, 2006). In this regard, Presbitero (2012b) shows that only countries with sound policies and institutions exhibit a pattern of rising domestic public debt and upbeat macroeconomic performance in terms of greater capital accumulation, stronger output growth, and faster financial develop-

> 1 These sources include the IMF’s Monetary Survey, Staff Reports, and Article IV Reports; the World Bank’s World Development Indicators and Global Development Finance database; and, if available, the websites of LICs’ central banks and ministries of finance.

> 2 In February 2012, the IMF’s and IDA’s Board drew attention to the fiscal vulnerabilities stemming from an increasing public debt in LICs, and recommended the development of benchmarks (thresholds) for total public debt in order to strengthen the LIC DSF and inform policy dialogue with country authorities (IMF-IDA, 2012).

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