mestic debt, level of public sector, liabilities included) and it recollects up-to-date information on domestic debt composition (instruments, maturity structure and investor base). In particular, we have been able to build two balanced panels covering the period 1996-2011: one with data on domestic debt stock series for 21 countries, and the other including data also on domestic debt structure for 15 countries. In this way, we have been able to analyze the evolution of internal financing in poor countries in the last 15 years with a certain granularity, as not has been done so far.

The descriptive analysis of the stock and structure of domestic public debt in LICs highlights some interesting patterns and identifies marked differences in the evolution and composition of government liabilities across countries, especially between HIPCs and non-HIPCs. First, domestic debt increased from 12.3 percent of GDP in 1996 to 16.2 percent of GDP in 2011, almost reaching the size of external debt. However, we do not find evidence that LICs uniformly substituted domestic debt for external debt. Second, the debt burden on domestic debt is higher that on external debt but it has decreased over time, consistently with lower borrowing costs due to financial deepening. Third, we find that LICs have been able to increase the share of long-term instruments over time. Maturity lengthening went together with a reduction in borrowing costs. This correlation is at odds with the common perception that LICs are unable to issue long-term liabilities at a reasonable interest rate, and it suggests that some LICs are reaping the benefits of developing domestic financial markets. Fourth, there is evidence of an increase in the share of securities in government debt, especially for non-HIPCs. However, Central Bank advances, still important for many HIPCs, increased in response to the global financial crisis. Finally, a source of concern is the concentrated investor base, mainly dominated by commercial banks and the Central Bank, which may crowd out lending to the private sector and undermine financial stability.

Our preliminary descriptive analysis provides some useful insights on the macroeconomic effects of domestic borrowing in LICs. However, we believe that further research is required and our data set could provide a useful source to better inspect the tradeoffs that governments in poor countries have to face when choosing how to finance public spending. One natural way to exploit this data set is to see how the size of domestic debt is correlated with the characteristics of the economy (e.g., financial development, institutional framework, access to international capital markets) and how the increase in domestic debt affects public debt sustainability in LICs. Ongoing research work at the World Bank addresses these issues. Second, we think that a relevant issue to explore is the extent to which increasing domestic debt affects bank lending to the private sector and possibly crowds out investment. At the aggregate level, better data could help to identify the correlations between capital flows to developing countries, pointing out possible sources of vulnerability.

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