April 25, 2024

Hidden Debt Hurts Economies. Better Disclosure Laws Can Help Ease the Pain.

If efforts to address record global public debt are to leave no stone
unturned, then weak disclosure laws warrant deep scrutiny. Hidden debt is
borrowing for which a government is liable, but which is not disclosed to
its citizens or to other creditors. And while this debt—by its nature—is
often kept off the official government balance-sheet, it is very real,
reaching $1 trillion globally by

some estimates

While these undisclosed obligations are not large when compared to
global public debt topping

, they pose a growing threat to low-income countries, already
highly in debt with annual refinancing needs that have

 in recent years. The problem is even more pressing amid higher interest
rates and weaker economic growth. Accountability, too, is imperiled without
accurate information about the extent of borrowing, which heightens the risk
of corruption.

These potentially dire consequences can be avoided by strengthening domestic
legal frameworks. Our new paper,

The Legal Foundations of Public Debt Transparency: Aligning the Law with
Good Practices
, presents findings from a survey of 60 countries that examined
vulnerabilities and loopholes in national laws that hinder transparency.

Building on a July 2023

, our new research shows that fewer than half the countries surveyed have
laws that require debt management and fiscal reports, while less than a
quarter require disclosure of loan-level information—key legal features for
facilitating transparency. We also identify four noteworthy vulnerabilities
in domestic laws that enable debt to be hidden: a narrow definition of
public debt, inadequate legal requirements for disclosure, confidentiality
clauses in public debt contracts, and ineffective oversight.


In many countries, a narrow definition of public debt, in one or in multiple
laws, permits some forms of sovereign debt to escape oversight. We recommend
that the definition of public debt be broad and comprehensive, meaning that
it should capture arrears, derivatives and swaps, suppliers’ credit, and
assumptions of guarantees as well as loans and securities. The definition
should also cover extra budgetary funds, public trust funds (pension funds,
for example), and special purpose vehicles.

A good example is found in Ecuador, which pursued legal reform in 2020 to
ensure that short-term financing instruments—such as securities or treasury
paper with terms of less than one year—were included in

debt calculations and statistics
. Other good examples include the legal definitions used in Ghana, Jamaica,
Rwanda, Thailand and Vietnam, all of which encompass multiple types of debt

Defining public debt 


Second, across the globe, legal requirements for debt disclosure are
inadequate. A strong legal basis is crucial to signal that there is a clear
requirement to report debt data in a manner that is both timely and relevant
for policy analysis, transparency and accountability. Strong reporting laws
are found in in Benin, Kenya and Rwanda, which define both public debt
reporting requirements and the timeframes for these reports.


Confidentiality in public debt contracts directly hinders transparency.
Across the globe, few laws regulate (and limit) the confidentiality of
public debt, which hands policymakers

wide discretion
 to label such contracts confidential for national security or other reasons.
This is exacerbated by the fact that current debt-related international
standards and guidelines provide limited guidance on how to tackle
confidentiality issues.

We recommend that the law tightly define exceptions to disclosure and the
scope of confidentiality agreements. Legislative oversight and other
safeguard mechanisms such as administrative or judicial remedies should also
be spelled out in the applicable legal provisions. Laws in Japan, Moldova
and Poland are among the few that authorize legislative or parliamentary
oversight of confidential information.

Disclosing public debt


The disclosure of public debt may also be inhibited where there is
ineffective oversight governance by legislatures and supreme audit
institutions (national government audit institutions), which are all
important guarantors of accountability. Legislative bodies must be able to
monitor and scrutinize public debt on behalf of the people, and they need to
have staff able to read and grasp highly technical reports.

Several legislatures have a committee system—such as committees on the
budget and public accounts—which allows for specialization among
legislators. An example is in the United States, where the Treasury
Secretary is required by law to send the annual public debt report not to
Congress as a whole, but to two specific committees—House Ways and Means and
Senate Finance. We also recommend that laws provide supreme audit
institutions with the authority and the necessary powers to monitor and
audit government debt and debt operations.

IMF role

Debt transparency not only benefits countries directly, but it is also
essential for the work of the IMF. Hidden and otherwise opaque forms of debt
make it more difficult for the Fund to fulfill its core mandate in a number
of ways. For example, collateralized loans, novel and complex forms of
financing, and confidentiality agreements make it difficult for the IMF to
accurately assess a country’s debt and help bring its economy back on track.

Thus, the Fund works to bring the benefits of debt transparency to countries
directly through technical assistance and also addresses the issue in our
program engagements.

Well-designed laws make it harder to hide debt. But there are not enough of
these laws on the books, despite their demonstrated benefits. Given the
critical importance of getting transparency right, countries and their
international partners must push for reforms to improve domestic legal
frameworks, which in turn benefits both borrowers, legitimate creditors, and
the system more broadly. Turning stones has never been more important.

Kika Alex-Okoh contributed to this blog.

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