In late-September 2018, I appealed to Sub-Saharan African (SSA) states to find credible and sustainable alternatives to sovereign guarantees, which are used indiscriminately to support almost all public sector and quasi-fiscal loans, both commercial and non-commercial projects, and
crystalise immediately as public debt .
These conditions for guaranteed loans, notably their inclusion on
Criticisms: SSA Debt Sustainability Analysis (DSA)
Most sovereign guarantees have no real value except to provide a comfortable cushion against risk for lenders. SSA is probably the only region where a country’s DSA is “grossed-up” absolutely and not calculated within the acceptable“contingent liability” that is used in other regions
• Debt service (reserve) accounts: where state asset
• Sinking funds (SF) and sovereign wealth funds (SWF): resource-rich and MIC states (e.g., Ghana, Nigeria
• Loans for refinancing: SSA states are borrowing long-term funds to refinance existing debt to
The final example
Needless to say the DSA ignores all the “asset” accounts underlying these loans, resulting in triple DSA jeopardy: setting aside (a) a solid World Bank/IDA-backed guarantee; and (b) a verifiable “cash” (asset) against the loan (liability) accounts and balances; while (c) “double-counting” as debt, both the 2015 Sovereign Bond and existing short-term debt they were to replace.
Alternative structures to sovereign guarantees
Despite these setbacks, SSA’s MIC-states must persist in creating these market-friendly debt service structures that work in advanced and emerging economies. They should also push for “offsets”, based on “contingent liability” DSA mechanisms, as an equitable move that will require enormous fiscal discipline on the part of SSA states.
• Improved interest payment in Budgets: SSA states inefficiently spend substantial amounts on short-term loans, mainly Treasury Bills, to finance capital budgets. The outcome is high domestic borrowing costs which they can reduce by strategic use of long or medium-term debt instruments.
• Deficit and borrowing: MIC-Africa must not view tactical loan policies as secondary to revenue
• Debt management structures: Against this background, MIC-Africa must set up Debt Management Offices to improve oversight of borrowing, debt service, and debt stock obligations under
• Debt service accounts: MIC and resource-rich SSA states must create “escrows” (i.e., debt service accounts) from the revenue flows from commercial projects—to complement SFs and SWF flows that leverage the capital markets for funds. These debt service accounts must be set aside from general budget flows for recurrent expenditures.
• Public Accounts: The coding and classification for loans and debt service accounts must be properly defined in Charts of Accounts (COA) and public accounts frameworks, including IFAC’s IPSAS and IMF’s GFS rules and nomenclature.
• Contingent liabilities: The ultimate fiscal goal
These enhancements will necessitate the setting up of sound treasury management practices and development of domestic capital markets, including the gradual shifting of medium-term bond issuances to domestic and external stock exchanges or capital markets.
SSA consistency will pay — examples that work
A notable exception to “grossing-up
The Board does not repatriate the debt service component of the revenues from crop sales overseas. The probability of default is
As noted, the confidence of finance houses has enhanced the facility’s competitiveness at about
Conclusion—inclusion in structural reforms
While the need for improved debt management mechanisms has become key, at a point in 2015, as crude oil prices fell precipitously, there was pressure on Ghana to “sweep” the Sinking Fund to reduce the Budget deficit under an IMF ECF Programme. It persisted in keeping the SF account and this has yielded dividend since, from 2014 to 2016, Ghana used about US$500 million of SF flows to redeem a large part of the US$750 million
The debt management methods must form part of best practice and
A very important reform move is for MIC-Africa to shift from cash-based methods to IPSAS (semi) accrual accounting rules that
The writer is a former Minister of Finance