# 1. Introduction

There are serious concerns about debt transparency in low-income countries (LIDCs)<sup>1</sup> given the current context of rising public debt levels, the emerging role of non-traditional lenders, the increased borrowing by non-central government entities and the frequent use of complex debt instruments. The Debt Service Suspension Initiative (DSSI) introduced by the G20 countries in 2020 to aid LIDCs coping with the fiscal impact of COVID-19, has further highlighted the importance of debt transparency.

Debt transparency, defined as the availability of comprehensive, detailed, timely, and consistent public sector debt data (WB, IMF 2020c), is key to allow (i) policy makers to make informed decisions; (ii) creditors and rating agencies to fully understand borrowers’ debt sustainability; and (iii) citizens to hold their governments accountable.

Improvements in accountability within debt management practices are strongly enhanced by investments in debt data transparency; this helps bring about substantial long-term benefits, and ultimately reduces the cost of external borrowing (Kubota and Zeufack 2020). Conversely, low levels of debt data disclosure may lead to debt mispricing and/or significant fiscal and debt roll-over risks (WB 2020). Despite this, governments, especially those with limited dependence on market financing and weak governance, may have short-term incentives to under-report. Recent studies have focused on trying to quantify “hidden debt” (Horn, Reinhart, and Trebesch 2019; WB, IMF 2020a).

Current research on key factors that may influence countries’ level of transparency is limited. As yet, few studies have tried to explain why “notwithstanding decades of multilateral effort, the goal of making information about public debt accessible and intelligible to the public, remains elusive” (Gelpern 2018). Another gap in the literature concerns divergences across debt statistics sources; even though the existence of different instrument and sectoral coverage in public debt statistics is well documented (Dippelsman et al, 2012; Seiferling, 2020), there is no quantification of the magnitude of mismatches across sources nor any analysis of their implications.

This paper contributes to the existing literature in at least four different ways. First, it provides a methodology to estimate debt transparency and assess LIDCs’ performance. Second, it identifies and measures the factors that increase mis- or under-reporting. Third, it qualifies direct and indirect reporting (i.e., data disclosed by authorities’ following national standards, as opposed to data disclosed by external agencies following their standards) and explains how their interactions result in a data collection and dissemination network that is not fully conducive to debt transparency. Finally, it presents policy recommendations to systematically enhance debt transparency.

The paper is structured as follows. Section 2 portrays current disclosure practices under direct reporting and provides evidence on the role of factors that can either foster or deter debt transparency. Section 3 focuses on indirect reporting. Section 4 zooms into the issue of discrepancies between direct and indirect sources. Section 5 explains the implications of the existing data disclosure framework and provides policy recommendations. Section 6 concludes.

> 1 LIDCs are defined as countries eligible for support from International Development Association (IDA): <u>http://ida.worldbank.org/about/borrowing-countries.</u>