International Develop-ment Association (IDA) countries have been relying increasingly on their domestic markets to meet their borrowing needs. This trend is welcome. Well-functioning and liquid domestic debt markets provide a stable source of funding during normal times and a buffer during times of crisis. However, authorities do not always comply with the highest standards of transparency when issuing their debt securities. This may affect investors' confidence and ultimately increase the cost of borrowing.
Among the tools that the World Bank is putting forward to shape the debt transparency agenda, a new interactive heat map tracks the transparency of domestic government securities issuances in IDA countries. The heat map tracks things like the predictability of annual borrowing plans and the publication of primary and secondary market transactions. These factors may seem niche, but they are absolutely critical to building transparent debt markets. Our Note for Developing Local Currency Bond Markets, produced jointly with the International Monetary Fund (IMF), explores these indicators further. The heat map assesses IDA countries' performance against them.
The note was prepared under a project undertaken with the support of grants from the Financial Sector Reform and Strengthening Initiative, (FIRST). The aim of the project was to deliver a report that provides emerging market and developing economies with guidance and a roadmap in developing their local currency bond markets (LCBMs). This note will also inform technical assistance missions in advising authorities on the formulation of policies to deepen LCBMs. The guidance note discusses commonly faced challenges and bottlenecks in the journey to efficient and deep LCBMs. In particular, the guidance note explores how to overcome difficulties in implementing some existing best practices. Experience points to the interdependent nature of the required development actions and the need for supportive actions outside the narrow field of LCBM agents. The challenges discussed and accompanying policy guidance draw from the IMF and World Bank's extensive technical assistance (TA) provision in this area, cross-country experience in LCBM development, and results from a recent survey of country authorities. The guidance note intends to be a resource for a wide range of stakeholders interested in government bond market development.
Meanwhile, the heat map assessment is based on information publicly available on national authorities' websites. We provide these direct links to primary sources for each indicator on the heat map so users can see what we see and learn more about the practices of different countries. The first assessment conducted in October 2020 shows significant room for improvement in most of the 74 IDA countries. Some important findings are discussed here.
While no country achieves a green score for every indicator, 12 of 74 (16.0 per cent) countries do not comply with minimum standards in any of the indicators. Primary market indicators show mixed results: 33 per cent of IDA countries do not regularly use market-based issuance mechanisms, while an auction calendar is not developed or followed in 41 per cent. Secondary market transparency is the indicator with the lowest level of compliance: more than half of the 74 IDA countries fail to meet the minimum standards. Countries in regional markets where issuing and reporting rules are clearly specified and enforced, such as in the WAEMU, show significantly higher standards overall.
The assessment will be updated on an annual basis. We are looking forward to seeing the heat map shift to green!
The piece is excerpted from the World Bank Blogs.