Active Liability Management Act: Not a conduit for CB to increase debt stock

By P. Samarasiri

I read several official comments made by the Central Bank (CB) that it has an additional space of borrowing of Rs. 310 b under the Active Liability Management Act (LMA) (certified on 28 March) in addition to the annual borrowing limit approved by the Parliament. This was cited as one of reasons to show the ability to repay the maturing debt by raising new debt.

This is a gross violation of ALMA as the borrowing limit under the ALMA is only for the purpose of active liability management under the ALMA, as outlined below, and not for further borrowing above the annual borrowing limit to repay maturing debt. 

1.The objective of the ALMA is to manage public debt to ensure that the financing needs and payment obligations of the Government are met at the lowest possible cost over the medium to long term consistent with a prudent degree of risk. Economists and debt mangers know what the active liability management is. It mainly covers action to reprofile/restructure the existing debt stock including buy-back and switching of existing debt in order to ease the existing debt burden, i.e., interest rates, currency mix, maturity profile and bunching. This will help restructure and reprofile the debt stock on better terms as and when the opportunity arises in debt markets, both local and international.

2.Active liability management can be carried under the existing borrowing limit of the government. However, additional borrowing limit is to facilitate when the exiting borrowing limit is not adequate to grab the opportunities in the debt market. Accordingly, the additional borrowing limit permitted under the ALMA is an amount not exceeding 10% of the outstanding debt stock as at end of the last year. This the additional space of Rs. 310 b referred to by the CB. However, this should be approved by the Parliament and moneys should be used only for the purposes of refinancing and pre-financing of public debts in achieving the objective of the Act.

3.Further, the CB cannot decide on borrowings. The Minister with approval of the Cabinet of Ministers should decide on matters pertaining to and incidental to the refinancing and pre-financing of debts including the amount of money to be raised by a loan, the mode of raising such loan and the manner in which such payment obligations of the Government are settled as he may deem fit including the buying-back of existing debt and switching existing debt with new debt.

4.If the CB uses ALMA borrowing limit to borrow further to meet funding requirements of the government above the normal borrowing limit, the debt stock will be annually compounded by 10% of the debt stock. This is not active liability management. This is nothing but raising the debt stock wilfully and passively. The CB has not informed the public whether it actually has commenced active liability management under the ALMA and how Rs. 310 bn falls under it.

The proposal for active liability management came up at a meeting of the Minister of Finance in November 2016. Although Registered Stock and Securities Ordinance also contains provisions to carry on active liability management actions, it was decided to have a special legal framework, given the need for significant judgements based on current and future trends of the money and debt market to reprofile the debt stock. I drafted the concept paper and Cabinet Paper and the draft bill was prepared by the Ministry of Finance in early 2017. Nothing was meant to borrow for repayment of maturing debt when the normal borrowing limit is not adequate.

However, if the CB interprets provisions or words of the ALMA on solo basis without due regard to the objective and purposes of the ALMA and recognised practice of active liability management and further raises already alarming debt stock by 10% annually, an appeal to the Supreme Court is the only option available with the public to benefit from the ALMA to ease the debt burden and improve the debt discipline of the Government. 

(The writer is a recently retired public servant who served in various capacities for nearly 35 years including as a Deputy Governor of the CB.)