Taking the Political Economy of Borrowing Seriously: Constraints on Parliamentary Oversight of Public Debt Management

Developing country government borrowings are primarily a function of the financing requirements that emerge from annual budgets. If fiscal policies determine annual borrowing needs in the first place, how can parliamentary oversight mechanisms improve debt outcomes? Any answer to this question must take seriously the relationship between fiscal policy – and specifically the political interests that determine fiscal policy – and annual government borrowings. In other words, the political economy of how and why governments borrow each year must be accounted for in policy recommendations regarding oversight of government debt. This paper outlines a political economy framework for thinking through how the annual fiscal policymaking process gives rise to political constraints on annual borrowing decisions, and thus debt composition and levels over time. The fact that debt outcomes depend in large part on policymakers’ fiscal preferences and political interests is a complex issue that oversight efforts must address if they are to be effective. Difficult but important questions arise about political time horizons, political incentives, time-inconsistency problems, and institutional independence for those interested in promoting institutional oversight of debt via parliamentary entities. Annual borrowing strategies are devised by Debt Management Offices (DMOs) to avoid political conflict, since borrowing plans that would yield immediate fiscal or other policy adjustments are unlikely to be ratified by parliament. Medium-Term Debt Strategies, Debt Sustainability Analyses, and internal benchmarks can be used as points of reference if and when DMOs or other entities lobby fiscal policymakers to adjust their fiscal policies in the name of debt sustainability, but any such adjustments depend on the political will of policymakers themselves rather than any enforcement capacity of other actors. While DMOs may gain some forms of institutional independence, the effect of politically-determined fiscal policy and other macroeconomic preferences on DMO borrowing strategies – and thus subsequent effects on debt levels and composition – remains unavoidable. In short, parliamentary oversight of debt in developing countries requires parliamentary accountability for the effect of fiscal and other macroeconomic policy preferences on debt in the first place. To make these points the paper (1) illustrates how annual borrowings are a component of the annual fiscal policymaking process and thus a function of fiscal policy preferences and related political constraints then (2) considers the challenges and obstacles these political realities create for efforts to identify feasible and effective parliamentary oversight mechanisms in government debt.