1 Macroeconomic and Financial Management Institute of Eastern and Southern Africa An Assessment of the Use and Effectiveness of CS-DRMS for Managing Domestic Debt in the MEFMI Region A Discussion Paper Prepared as Partial Fulfilment of the Requirement for Accreditation Under the MEFMI Fellowship Programme By Lekinyi N. Mollel April, 2015
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1
Macroeconomic and F inan cial Managemen t In stitu te of Eastern and Sou thern Afr ica
An Assessment of the Use and Effectiveness of
CS-DRMS for Managing Domestic Debt in the
MEFMI Region
A Discussion Paper Prepared as Partial Fulfilment of the
Requirement for Accreditation Under the MEFMI
Fellowship Programme
By Lekinyi N. Mollel April, 2015
2
Table of Contents
TABLE OF CONTENTS ..................................................................................................................................... 2
LIST OF TABLES................................................................................................................................................ 3
LIST OF FIGURES .............................................................................................................................................. 3
2.1.2 Increased public Investments ................................................................................................................. 15
2.1.3 The Global Financial Crisis .................................................................................................................. 16
2.2 DOMESTIC DEBT DEVELOPMENTS IN THE REGION .................................................................................................. 17
2.2.1 Trend of Domestic Debt ............................................................................................................................. 17
2.2.2 Cost and Risks Analysis of Domestic Debt ........................................................................................ 18
2.3 LITERATURE REVIEW .................................................................................................................................. 19
List of Tables TABLE 1: DOMESTIC DEBT COSTS AND RISKS IN SELECTED MEFMI COUNTRIES ........................................................ 19 TABLE 2: MEFMI COUNTRIES RESPONSES ON THE FUNCTIONS AND CATEGORIES OF DOMESTIC DEBT MANAGED
USING CS-DRMS (DEC 2014) ............................................................................................................................. 35 TABLE 3: NON-MEFMI COUNTRIES RESPONSES ON THE FUNCTIONS AND CATEGORIES OF DOMESTIC DEBT MANAGED
USING CS-DRMS (DEC 2014) ............................................................................................................................. 35 TABLE 4: MEFMI COUNTRIES RESPONSES ON THE CHALLENGES, AND UNDERSTANDING AND EXPECTATIONS ON CS-
DRMS VERSION 2 ............................................................................................................................................... 36 TABLE 5: NON-MEFMI COUNTRIES RESPONSES ON THE CHALLENGES, AND UNDERSTANDING AND EXPECTATIONS ON
CS-DRMS VERSION 2 ......................................................................................................................................... 36
List of Figures
CHART 1: TREND OF GOVERNMENT STOCK OF DOMESTIC DEBT (BILLIONS OF TZS) .................... 14
CHART 2: TREND OF DOMESTIC DEBT IN KENYA (BILLIONS OF KES) ........................................... 15
CHART 3: DOMESTIC DEBT IN MEFMI POST HIPCS (PER CENT OF GDP) ..................................... 18
The assessment of the usefulness and effectiveness of CS-DRMS in managing public domestic
debt is informed by business side users’ perceptions. The major source of data for analysis is based
on primary data collected using structured questionnaire (see Appendix 1) and author’s personal
experience during the apprenticeship. The questionnaires were sent to CS-DRMS sites within
MEFMI region, that is, in the eight countries using the system namely; Botswana, Lesotho, Kenya,
Malawi, Mozambique, Namibia, Swaziland and Tanzania. All targeted offices responded by
completing the questionnaires without undue delays. Information was collected on the situation as
at end of December 2014 and in most cases based on CS-DRMS Version 1.3. For comparison
purposes, data was also collected from seven non-MEFMI member states namely; Antigua,
Guyana, India, Jamaica, Nigeria, Sri Lanka and Tonga. Responses from these non-MEFMI
countries were collected through their officials who participated in the Training of Trainers
Workshop organized by COMSEC in London from 12th to 23rd January 2015. The perception of
COMSEC, the system developers, was also solicited through Mr. Vikas Pandey, a system
development specialist.
The questionnaire had three major parts, structured to answer the questions that pertain to the
objectives of the assessment. The first section covered by questions one through four collected
information on the extent to which CS-DRMS is used to manage public domestic debt. This
identified debt management offices using the system to manage public domestic debt, and the
functions and categories of domestic debt that are managed using CS-DRMS.
The second section, covered mainly by question five, collected information on the challenges faced
by domestic debt managers using CS-DRMS. The challenges are mainly those related to system
features and/or skills of debt managers in using the system. Information collected in this section
was meant to assist future revisions of CS-DRMS and in designing informed interventions to the
specific countries.
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Question six that forms part three was mainly meant to collect information on users’ understanding
of the latest version of CS-DRMS (version 2.0), and expectations of the countries in addressing
the challenges identified in the preceding part of the questionnaire.
The subsequent section of this paper analyses the findings based on the three major sections of the
questionnaire. Both quantitative and qualitative analysis of the collected will be employed to
facilitate full extraction and use of information for sound interpretation and analysis. Thus, the
findings is in form of narration, charts, figures and tables.
4. Findings and Analysis
The findings discussed in this section are based on the responses from a total of 13 CS-DRMS user
countries, including eight from the MEFMI region. All the targeted offices responded by
completing the questionnaires. The findings are structured first on the extent to which CS-DRMS
is used to manage domestic debt highlighting the functions and categories of debt managed. The
second section discusses the challenges faced by CS-DRMS users and the last part exposes the
user expectations on the latest version.
4.1 The Extent to Which CS-DRMS is used
In foremost, the assessment was whether the responding office is managing domestic debt using
CS-DRMS and then the functions and categories of public domestic debt managed in the office
using the system.
4.1.1 Management of Public Domestic Debt
The findings showed that all eight CS-DRMS user countries9 in the MEFMI region are involved
in managing domestic debt as an integral part of the total sovereign debt. All countries use CS-
DRMS for managing certain functions and categories of domestic debt. However, out of the seven
9 The assessment involved debt management offices/units in the Ministries of Finance, except in Tanzania where the
response was received from the Bank of Tanzania.
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non-MEFMI member states included in the survey, two countries are not managing domestic
debt10. Alongside using CS-DRMS for managing domestic debt, all offices reported maintenance
of parallel records, mainly in Microsoft-excel, due to reasons to be discussed in the next sections
of this assessment.
4.1.2 Functions of Domestic Debt Performed Using CS-DRMS
In analyzing the extent to which CS-DRMS is used to manage public domestic debt, ten key
functions of domestic debt management were listed each assigned equal weight. Each respondent
had to indicate the functions applicable to his or her office. The assessed functions are: (1)
Auctions, (2) Secondary trading, (3) recording of debt instruments, (4) analysis of costs and risks
of new domestic debt borrowing, (5) analysis of costs and risks of the existing domestic debt
portfolio, (6) analysis of domestic debt in relation to other categories of debt – mainly external and
total, (7) analysis of domestic debt in relation to macroeconomic variables, (8) forecasting
domestic debt payments, (9) generation of statistical and analytical domestic debt reports, and (10)
any others.
In general, the findings indicate that CS-DRMS is adequately used in recording domestic debt and
forecasting debt service payments as well generating statistical and analytical reports. The system
is used in recording domestic debt in all countries in the MEFMI region and in five out of the seven
non-MEFMI countries. The system is also used to forecast debt service payments and in generation
of statistical and analytical domestic debt reports. About half of the MEFMI countries use CS-
DRMS to forecast debt service payments as compared to about 71 percent of non-MEFMI
countries. The findings further indicate that about 63 percent of CS-DRMS users in the region
generate domestic debt statistical reports using the system. The findings are not different from
those of Mr Vikas11 that CSDRMS is capable of keeping track of the stock of domestic debt of the
country as well as projecting on the debt service payments.
10 Respondents from Sri Lanka and India indicated, domestic debt is solely managed by their central banks using in-
house developed systems that are based on Microsoft-excel. 11 Mr Pandey (respondent to the questionnaire) is system developer at COMSEC, with his area of speciality being on
domestic
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However, limited use of the system in conducting auctions of domestic debt instruments was
reported, whereas only one and two MEFMI and non-MEFMI countries, respectively responded
as using the system for auctions. This support the fact the information on the holding patterns of
the securities is not up to date as CS-DRMS does not incorporate ‘Depository’ functions and
therefore cannot record the details of the movements of securities among investors in a secondary
market trade. The findings further correspond to the OECD (2014) work which showed that, 16
out of 29 reviewed countries in Africa, have the auctions undertaken by the central banks. The
explanation is that central banks have necessary staff with capital markets expertize to conduct
auctions, managing tap sales, and interacting with financial market investors. The use of
government securities for both monetary and financing purposes gives central banks the upper
hand.
The findings correspond to the COMSEC views that in most countries, the domestic debt is
managed in their respective central banks. The Central Banks have their own systems for recording
domestic debt and these systems have more functionalities not available in CS-DRMS, mainly the
depository functions and links to payment system for debt servicing. In efforts to address this,
COMSEC also provides assistance to CS-DRMS user in upload the data in respect of outstanding
and historical domestic debt instruments, and setting up an electronic link with Central Bank’s
systems for upload of data in respect of new domestic debt issuances.
Reponses also showed that most of the analytical features of CS-DRMS are not used. As expected
none of the assessed countries is using the system to conduct secondary market trading. This is
mainly due to the fact that secondary market trading ideally takes place outside of debt
management offices. Chart 4 shows the countries and the key functions of domestic debt
management managed using CS-DRMS.
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Chart 4: Key Functions of Domestic Debt Management (December 2014)
Note: * a = Auctions, b = Secondary trading, c = recording of debt instruments, d = analysis of costs and risks of new domestic
debt borrowing, e = analysis of costs and risks of the existing domestic debt portfolio, f = analysis of domestic debt in relation to
other categories of debt, g = analysis of domestic debt in relation to macroeconomic variables, h = forecasting domestic debt
payments, i = generation of statistical and analytical domestic debt reports, and j = Others. Source: Author compilation
Among the explanations for the limited use of the CS-DRMS to manage domestic debt is the
fragmented debt management offices. Even in countries where debt is managed in one unit, the
segregation of duties is not according to Front, Middle and Back office, but according to domestic
and external debt. Experience shows in most debt management offices, CS-DRMS database is
installed in the external debt units. Thus, the back office functions of domestic debt are separated
from those of external debt. As such, domestic debt managers resort to excel spreadsheets as an
easy way to record domestic debt. This is the fact even in cases where CS-DRMS has adequate
features to perform such functions.
4.1.3 Instruments Managed Using CS-DRMS
For comparison purposes, a list of instruments were listed for the respondents to indicate those
managed in their countries using CS-DRMS. The instruments assessed were (1) Treasury bonds
notes, (2) Treasury bills, (3) Central Bank advances, (4) debt loans/instruments, (5) undated
1
0
8
3 3 3 3
4
5
0
2
0
5
0
2
1
2
5
3
00
1
2
3
4
5
6
7
8
9
a b c d e f g h i j
MEFMI Non-MEFMI
Nu
mb
ero
f co
un
trri
es
Key Functions*
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loans/instruments, (6) suppliers credits and/or arrears, (7) future or arrears of pension obligations,
(8) embedded options and/or derivatives, and (9) others to capture any other instruments not listed
from 1 to 8.
The findings show that all CS-DRMS user countries in the MEFMI region use the system to record
Treasury bills and bonds (Chart 5). The situation is, however, different in the non-MEFMI
countries where only four (about 57 per cent) use CS-DRSMS to record the instruments. This
corresponds to views of COMSEC that the Domestic Debt module in CS-DRMS allows for
recording of most types of securities commonly issued by the Government (e.g. T-Bills and various
types of Bonds). The system allows the users to record these instruments in 3-layer architecture:
Instrument – properties of the instrument; Tranche – Issuance details; and Bids – Successful
bidders. The system developers are, however, undertaking continuous enhancement of the
functionalities to cater to various different types of instruments which the countries issue in their
domestic market. Some of the major enhancements made recently are: handling amortised bonds;
bonds with capitalised interest; annuity bonds with varying interest rates; and re-opening of bonds.
It was also found that half of MEFMI countries record the dated loans/loans in the system as
compared to three outside the region. However, only one country in each group is has reported
recording undated instruments in the system and no country is capturing suppliers’ credits, pension
obligations or embedded options. Two countries from the region namely Lesotho and
Mozambique, reported to be using the system to record domestic guarantees. Lesotho records loans
from commercial banks to members of the Parliament although repayments are done through direct
deductions from their wages, Mozambique records building leases.
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Chart 5: Instruments Managed Using CS-DRMS (end of December 2014)
Source: Author compilation
4.2 Challenges in Using CS-DRMS for Managing Domestic Debt
From the preceding section, the findings show that the MEFMI and Non-MEFMI CS-DRMS user
countries use only 42.5 and 30 per cent of the system, respectively as per the areas covered by the
assessment, that is, the instruments and key functions of domestic debt management. The
questionnaire also collected information on the challenges faced by users in using the system to
manage public domestic debt. The responses indicated both skills and inadequate features of the
system as the main challenges (Chart 6). Three-quarters of the MEFMI’s CS-DRMS user countries
reported the two challenges. However, only two (29 per cent) of non-MEFMI countries attributed
these as challenges.
The findings further shows that one country, outside the MEFMI region, reported absence of the
domestic debt module in their database as a challenge. Inability to interface CS-DRMS with other
accounting systems was also reported by one country in the region. Nevertheless, all respondents
highlighted inadequate reporting features of the system as challenges in utilizing the system
effectively. Consequently, all the assessed countries are maintaining parallel domestic debt
databases and/or records in different formats, particularly for reporting purposes.
8 8
0
4
1
0 0 0
2
4 4
-
3
1
- - - -0
1
2
3
4
5
6
7
8
9
MEFMI non-MEFMI
Num
ber o
f cou
ntrie
s
28
Chart 6: Challenges in Using CS-DRMS for Managing Domestic Debt
Source: Author compilation
8.3 Users’ Expectations on CS-DRMS Version 2.0
Although it was beyond the key objective of the assessment, the information on the latest version
of the CS-DRMS (Version 2) was collected to evaluate users’ understanding of the enhancements
made in the system as well as their expectations. All respondents indicated their awareness of the
CS-DRMS Version 2.012. By the time of assessment, three countries13, including two from the
MEFMI region, had already installed the version, upgraded their debt databases accordingly and
had preliminary in-house training.
The findings indicate that 75 per cent of CS-DRMS users in region believe that the inadequacies
of CS-DRMS Version 1.3 have been addressed in Version 2.0. Most of the respondents highlighted
the following enhancements as important in addressing their concerns:
12 It is worth noting that, all of the respondents had at least introductory formal training of CS-DRMS Version 2.
MEFMI had already conducted a regional workshop in Nairobi Kenya and respondents from Non-MEFMI countries
were in fact experts in the system, as they were attending a training of trainers and some of them were involved in
testing the system prior to its release. 13 These are Namibia and Mozambique in the MEFMI region and Tonga
-
6 6
1 1
2 2
1
-
1
2
3
4
5
6
7
Installation of CS-
DRMS
Training on CS-
DRMS
Ehancing CS-
DRMS features
Others
MEFMI
Non-MEFMI
Num
ber
of C
ount
ries
Challenges
29
i. new and enhanced reporting features including introduction of dashboard, debt data query
and aggregate report wizard;
ii. advanced filtering features;
iii. consolidation of debt databases (external and domestic), enhanced features of domestic
debt module;
iv. features for partial redemption of debt instruments; and
v. introduction of the lending module as an integral of the database
In general, the assessed offices have higher expectations that CS-DRMS Version 2.0 will enhance
the use of the system in managing domestic debt (Chart 7). Most of these expectations are built on
the highlighted enhancements above.
Chart 7: Expectations on CS-DRMS Version 2.0
Source: Author compilation
Some respondents have, however, indicated areas that would need further enhancements to
facilitate effective use of the system in managing public domestic debt. These include interfacing
features with other systems, particularly the accounting software in the Integrated Financial
Management System (IFMIS) as well as auction systems used in central banks. Interfacing with
these systems could smoothen automatic processing of transactions during settlement as well as
uploading of auctions results.
8
2
6 6
7 7
1 1 1
5
-
1
2
3
4
5
6
7
8
9
Awareness of
CS-DRMS
v.2.0
Database
upgraded
Adequacy of
the features
for domestic
debt
How Expectation on
in relation to
the challenges
MEFMI Non-MEFMI
Num
ber
of co
untr
ies
30
5. Conclusion and Recommendations
5.1 Conclusion
The role played by domestic sources in financing government budgetary deficits is increasingly
becoming significant in recent years, partly due to the shrinking traditional sources of finance,
internal economic reforms that facilitated emergence of domestic markets, and economic
liberalization that created private market investors, all coupled with increased public investments
aimed at attaining millennium developments goals. Consequently, domestic debt increased to an
average of about 15 per cent of GDP in early 2010s in the region from around 10 per cent in mid-
2000s. Apart from the rising magnitude and ratio domestic debt relative to total debt and GDP, the
costs and risk of the existing debt portfolios also rose on average due to high interest rates and
relatively shorter maturities inherent with domestic borrowings.
These developments, therefore, require sound and active management in order to minimize costs
and vulnerability to risks. To this effect, robust computer based debt management systems remain
key. It is against this background that the Commonwealth Secretariat and UNCTAD developed
CS-DRMS and DMFAS, respectively. Although these systems were initially developed to respond
to external debt crises in 1980s, the developers have been enhancing the systems to accommodate
developments in domestic debt managements.
In assessing the use and effectiveness of CS-DRMS Version 1.3 in managing public domestic debt
in 15 countries including eight in the MEFMI region, it was found that most of the debt offices are
only using the system at minimum level and in fact parallel databases and records are maintained.
Most of the countries are only using the system for recording and producing limited reports on
debt service forecasts for treasury bills and bonds. Other categories and functions of domestic debt
management are not managed using CS-DRMS. The limited use of the system emanates from both
inadequate user technical know-how and system capabilities.
Among the assessed debt management offices, inadequate technical skills on CS-DRMS, was cited
as among the main challenges towards the effective use of the system for managing public
31
domestic debt. Most respondents indicated that the use of the system can be enhanced through
organizing regional and in-country training events on CS-DRMS targeting only domestic debt
management rather than combining it with external debt.
Concerning the effectiveness of the system, the findings showed that CS-DRMS Version 1.3 has
deficiencies in managing public domestic debt. Particularly, the reporting features of the version
were identified as a major challenge. This finding is founded by the fact that CS-DRMS was
originally developed to address external debt management functions. In as such CS-DRMS has no
features necessary to be used as a central depository system (CDS), a key function of domestic
debt management. It was also noted that domestic debt issuance (auctions) in most countries is
undertaken by central banks. The central banks, already had tailor made systems for domestic debt
issuance that also provides central depository roles. This, is partly attributable to fragmented
institutional arrangement in debt management.
It was also observed from the responses that most of the users have high expectations on CS-
DRMS version 2.0 released towards end of 2014 which was yet to be adopted in most of countries
at the time of assessment. Users believe that, the wider adoption the version and adequate training,
will enhance the use of the system in managing public domestic debt.
The consequence of all these is that domestic debt is not managed optimally and is characterized
by duplication of resources. Some functions for example the issuance is performed using the
auction systems at central banks while recording is done partly in CS-DRMS (for Treasury bills
and bonds) and others in Microsoft spreadsheets, which lacks the key analytical functions of public
debt management.
5.2 Recommendations
From the findings discussed in the preceding sections, it is clear that the use of CS-DRMS in
managing domestic debt is limited. Skills and system adequacies have been cited as reasons. This
is happening despite the remarkable investments in developing CS-DRMS and procurement of the
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necessary software and hardware by the users. Thus, to benefit from the investments through
effective use of CS-DRMS for managing domestic debt, the following are recommended:
(i) Organizing regional training events, specifically on the use of CS-DRMS in managing
domestic debt. Experience has shown that external debt management always dominates
whenever a training is organized combining both external and domestic debt.
(ii) Intensification of in-country interventions on the use of CS-DRMS for managing domestic
debt is crucial. The countries’ specific findings included as Annex I, should be a basis for
designing and executing country interventions. The findings indicate to a lesser extent the
requirements of each country.
(iii) Comsec, the developers of CS-DRMS, need to take cognizant of the fact that domestic
borrowing is becoming significant in bridging revenue-expenditure gap in most developing
countries, which create a need for active management using a sound computer based debt
management system. Although, CS-DRMS Version 2.0 has addressed some of the
challenges of Version 1.3, there is still a need for deliberate acceleration of research and
development towards further enhancement of the domestic debt module of CS-DRMS to
respond to emerging issues in the financial markets.
(iv) Country reforms toward consolidation of debt management functions along the sound
functional segregation of duties, including consolidation of debt databases, helps to
enhance the use of CS-DRMS in managing domestic debt as an integral of public debt.
This can be enhanced by combining domestic and external debt management and
organizing the debt office along the Front, Middle and Back office functional units. Thus,
bringing domestic and external debt back office functions together, for instance facilitate
team work and adoption of single system (CS-DRMS) for recording and reporting public
debt in totality.
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