‘Separate loans for self-financing projects from public debt’

BY: Emmanuel Bruce
Seth Terkper
Seth Terkper

A former Minister of Finance, Mr Seth Terkper has said loans that are meant for self-financing projects should not have a sovereign guarantee and should not be added to the public debt.

He said the conditions for guaranteed loans, notably its inclusion on gross basis as pure public debt in sub-Saharan Africa’s debt sustainability analysis (DSA) retarded the continent’s development and progress.

He has ,therefore, urged countries in SSA to find credible and sustainable alternatives to sovereign guarantees which are used indiscriminately to support almost all public sector and quasi-fiscal loans.

“SSA finance ministers, especially those now with middle income country status—who are losing concessional loans and grants—must work harder on alternative financial and fiscal regimes to replace sovereign guarantees,” he stated.

He said SSA was probably the only region where a country’s debt sustainability analysis was grossed-up absolutely and not calculated within acceptable contingent liability frameworks.

He noted that the approach ignored loan and repayment terms, conditions and structures that should minimise the risk of non-payment or default.

Specific examples

Mr Terkper cited specific examples which included Ghana’s full commodity backed China Development Bank (CDB) gas infrastructure facility.

He said the loan was repaid through debt service reserve and debt service accounts that were fed by ring-fenced crude oil and gas flows.

“A second debt service account, fed substantially from cocoa sales, underlies a China EXIM Bank loan for Ghana’s second (Bui) dam.

Thirdly, the Ministry of Finance uses a Sinking Fund (SF) under the Petroleum Revenue Management Act (PRMA) passed by Parliament to exchange or redeem Ghana’s Sovereign Bonds under a buy-back secondary market plan, he explained.

He said the debt sustainability analyses ,however, ignored the asset accounts as the country suffered a debt crisis by not offsetting a verifiable cash balance against the loans; and extremely double-counting both the 2015 Sovereign Bond and the existing short-term debt they were to replace.

Alternative to sovereign guarantees

The former Finance Minister urged middle income countries in SSA to persist in prioritising debt service through structures that work in advanced and emerging economies—and push for both offsets and contingent liability approaches in the regions debt sustainability analyses.

While this move would be fair, he said it would require fiscal discipline on the part of SSA states.

“It is necessary to stop viewing borrowing and debt management as secondary to revenue mobilisation and expenditure plans that only forcefully reduce budget deficits.

 First, it leads to poor debt management plans and, makes the loan element of fiscal programs subservient to SSA central bank short-term open market operations (OMO),”he noted.

Against this background, he said middle income countries must set up debt management offices to manage their borrowing, as well as debt service under recognised domestic and foreign capital market- techniques.

Middle income countries and resource-rich SSA states must create Sinking funds (SF), sovereign wealth funds (SWF)and debt service accounts to leverage capital markets to finance commercial projects, augmenting these sovereign flows with revenue flows from the projects,” he pointed out.

“They must separate these accounts from general budget flows, notably those for recurrent expenditures,” he added.

He also called for the coding and classification for loans and debt service accounts to be properly defined in Charts of Accounts (COA) and public accounts frameworks.