# **3. Domestic Public Debt in LICs: A New Data Set**

The Government Finance Statistics Manual (GFSM) prepared by the IMF (IMF, 2001) defines debt as “ _all liabilities that require payments of interest and/or principal by the debtor to the creditor at a date or dates in the future. Thus, all liabilities in the GFS system are debt except for shares and other equity and financial derivatives_ ”. The definition of domestic debt, as opposed to external debt, is not unique and three criteria are common in practice. On a creditor residency basis, debt is domestic if owed to residents.<sup>5</sup> This criterion is widely used in the compilation of statistical information on government debt by official agencies following the GFSM (IMF, 2001), and is relevant to study international risk sharing and resource transfers between residents and non-residents. On a currency basis, debt is domestic if denominated in local currency. This definition enables the analysis of currency mismatch and vulnerabilities associated with the currency composition of the public debt portfolio. Finally, on a jurisdiction basis, debt is domestic if issued in local financial markets and subjected to the jurisdiction of a local court. This definition helps recognizing the implications of debt restructuring procedures.<sup>6</sup> Defining unambiguously domestic versus external debt is crucial, since the debt definition affects the identification of vulnerabilities and the conclusions drawn from empirical studies (Panizza, 2008).

Other dimensions are also relevant to characterize the public-sector domestic debt, most notably the definition of public sector (i.e., Central Government, General Government, or Public Sector)<sup>7</sup> and the type of financial liabilities included in the debt statistics (i.e., market versus nonmarketable instruments). In LICs, the Central Government debt is typically better recorded and thus most studies focus on it.<sup>8</sup> Similarly, marketable debt instruments are usually better reported than other government liabilities. Information on domestic debts instrumented through loans, securities<sup>9</sup> , and other accounts payable (e.g., Central Bank advances) is relatively more accessible and transparent than on insurance technical reserves and financial derivatives.<sup>10</sup> 5 The concept of residence in the GFSM (IMF, 2001) is not based on nationality or legal criteria, but on economic interest: an institutional unit is said to be a resident unit of a certain country when it has a center of economic interest in the territory of that country. A similar concept of residence is used in the 1993 United Nations System of National Account, the Fifth Edition of the IMF Balance of Payment Manual, and in the IMF Monetary and Financial Statistics.

6 According to Sturzenegger and Zettelmeyer (2006), sovereign bonds come with an array of contractual features, e.g., covenants, commitments to undertake (or not) certain actions over lifetime of the bond, remedies in the event that contractual obligations are breached, and procedures for modifying the contract. Contractual clauses often differ according to the law under which the sovereign bonds fall and hence they have different implications for the scope and term of debt restructurings.

7 In the GFSM (IMF, 2001), the General Government consists of all the governments units as well as the non-market non-for-profit institutions controlled and financed by government units. The General Government can be classified in: (i) Central Government, whose authority extends over the entire territory of the country; (ii) State Government, whose authority extends over the largest geographic area into which a country may be divided for political or administrative purposes; and (iii) Local Government, whose authority is restricted to the smallest geographic areas distinguished for political or administrative purposes. The Public Sector includes the General Government, the Public Corporations controlled by government units that engage in financial and non-financial activities, and the Central Bank.

8 However, this implies that for countries that are highly decentralized with subnational governments that do borrow, or for countries that have large state-owned enterprises that issue debt, the central government debt is likely to underestimate the public-sector liabilities.

9 According to the Handbook of Securities Statistics (BIS, European Central Bank, IMF, 2009), a security is a negotiable financial instrument whose legal ownership is transferable from one owner to another by delivery or endorse8