The World Bank produces a bi-monthly journal called “Fiscal Consolidation Review,” which carries an overview of world economic and financial developments for the previous month. The Journal also contains a bimonteenth annual report, “Macroeconomic Series: Summary and Reviews,” which can be downloaded free from the website of the World Bank. The current paper in this series, “Fiscal Consolidation Review: Financial Strategies and Debt Restructuring Recommendations,” by Mohsin S. Khan, Noumani S. El-Dorami, and Youssef A. El-Khoury, is the fifth in the series. This article provides an assessment of the journal's three main topics, which are plans for economic growth, measures to increase productivity, and methods for reducing poverty.
The first topic addresses the need for financial development. The authors point out that although developing countries have a variety of sources of revenue, many of these sources are inefficient. The lack of efficient systems of fiscal management leads to under-utilization and low levels of economic activity. The authors recommend measures to restructure the existing debt structures, increase the productivity of labor and capital, and reduce poverty through public spending, investment, and loans. They suggest that the planned restructuring should be able to provide the desired results (generally higher economic growth) at minimal cost.
The second topic is how to restructure current debt relationships. The authors recommend two approaches to restructuring debt: (a) debt consolidation, in which a single debt instrument is used to refinance existing private and public financial instruments, or (b) debt settlement, in which a third party replaces the existing private and public financial instruments with relatively equal ones in circulation. Both of these financial restructuring projects can provide large benefits for a debtor's financial outlook.
Financial development and economic growth are also concerned with the creation of a financial system that can serve as a tool for achieving development. Debt restructuring and settlement projects allow the process of economic development to begin before total debt reaches a level which is unenable. The formation of a national credit structure is an important step toward this goal. The success of such a credit structure depends on its ability to effectively serve the dual purposes of allowing easy access to credit by non-state lenders and insuring that only state-owned or state-approved financial institutions participate in the financing of state-sponsored development projects. In addition, development banks can serve as intermediaries to facilitate and insure access to credit by providing preferential rates to certain businesses and projects over others. Such banks can also provide support for specific projects such as education and healthcare.
The third topic is how to handle the financing of development projects. The provision of credit quality monitoring services by financial institutions is necessary to ensure the quality of local and international debt instruments. The provision of this service is not enough however; institutions should be encouraged to monitor and record developments in the financial markets in an effort to provide accurate and timely information to both management and board members. By doing so, they can more effectively evaluate the risks associated with financing projects and the methods available to mitigate them.
The fourth topic is the identification of appropriate risk-related metrics. The primary objective of financial institutions in a developing country is to serve the needs of borrowers by providing the widest possible range of financial products and interest rates. Developed countries therefore have a number of different financial institutions with differing perspectives regarding the risk management of their portfolios. While some lenders focus primarily on asset allocation and the creation of a stable foreign exchange market for local currencies, others have longer-term investment strategies that include the diversification of portfolios in order to mitigate against fluctuations in stock and bond prices. Ultimately, it is up to the financial institutions to determine what type of risk management is most appropriate for their portfolio.
Finally, the fifth topic is the improvement of overall financial performance. This includes identifying where development efforts are falling short of expectations and are working to improve these shortcomings. For instance, there could be a dearth of solid collateral in some instances or poor credit quality in a number of financial products being offered. Financial institutions should work to ensure that these issues are identified early and that steps are taken to make changes. At the same time, development banks should be encouraged to consider expansion of services and offerings in areas where growth is lacking.
The sixth and final topic is the promotion of financial services innovation. To be effective, financial institutions need to be able to think innovatively about solutions to emerging problems in the financial markets. For instance, development banks should consider ways in which to improve the efficiency with which they deliver financial products and enhance the effectiveness with which they market these products to customers. They should also be receptive to new technological developments and to the introduction of new products and processes. In addition, financial institutions should embrace technological improvements that can provide them with a competitive edge over competitors and improve their ability to serve customers.
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