Tuesday, September 26, 2023

Prudent public debt management essential for long term debt sustainability

Between 1970 and 2000, the African continent, the African continent received US$540 billion in loans and paid back some $550 billion in principal and interest. But at the end of this period, the countries still owed $295 billion.  Currently a lot of countries are embattled in public debt in excess of 50 of these countries’ gross domestic product (GDP).

The huge amount of debt under discussion goes to highlight the great extent to which public debt has become a serious necessary national liability that deserves of the highest standards of management. Although such prudent management will not by itself guarantee against future debt crises, which are often beyond government control, it can reduce a country’s financial vulnerability to external and internal shocks.

It may be appropriate at this juncture to define what public debt really is. Public debt, sometimes referred to as government debt, represents the total outstanding debt (bonds and other securities) of a country’s central government. It is often expressed as a ratio of GDP.

Public debt can be raised both externally and internally. The external debt is the debt owed to lenders outside the country and internal debt represents the government’s obligations to domestic lenders. Public debt is an important source of resources for a government to finance public spending and fill holes in the budget. Public debt as a percentage of GDP is usually used as an indicator of the ability of a government to meet its future obligations.  

In terms of public debt, Botswana counts among some of the countries who have so far managed their public debt ratio to GDP to acceptably low levels vis-à-vis other countries whose ratios have ballooned beyond 50% of their GDPs.

According to Focus Economics, Botswana’s public debt ratio to GDP stood at 23.2 % in 2015, reduced to 21.3% in 2016, dropped further to 18.1% in 2017. The debt ratio however rose marginally to 18.9% in 2018 while it dropped again slightly to 18.7% in 2019 and to 20.34% in 2020, below the legal threshold of 40%.

Answering a question parliament this week, Finance and Economic Development minister Dr Thapelo Matsheka told parliament that Botswana has not defaulted on any of its debt obligations both domestic and international, rendering it secure from foreclosures or any repossession by creditors. Currently some Africans are understood to be trapped in what is known as debt trap as a result of high debt servicing with the consequent deprivation of the resources needed to secure long-term economic development and build-up strong social and infrastructures.

Dr Matsheka informed parliament that as at July 2020, total public debt and guarantees amounted to P39.28 billion comprising P30.61 billion in government debt, of which P15.52 billion is external and P15.09 billion being domestic debt. Publicly guaranteed debt amounts to P8.67 billion comprising of P6.9 billion in externally guaranteed debt and P1.76 billion being domestic guaranteed debt.

The minister further explained that the government currently does not have an overdraft facility as part of its debt portfolio. The total public debt to GDP ratio as at July 2020 stood at 20.34%, of this amount, external debt to GDP ratio is 11.49% while domestic is 8.85 %.

Botswana is credited with being one of the few countries that have maintained public debt at low and sustainable levels. Prior to the global financial crisis in 2008, the country’s public debt

Economists and financial experts agree that proper debt management should ensure that a government’s financing needs and payment obligations are met at the lowest possible cost over the medium to long term, and that debt is assumed with a prudent degree of risk. The challenges governments face differ from country to country according to their levels of development.

In some cases, access to concessional borrowing – low interest loans with long pay back periods – and debt restructuring take priority. In other cases, access to capital markets is more important. But in all cases, governments must have the ability to manage debt effectively.

In an Africa Research Institute 2015 article authored by Paul Adams titled “Africa Debt Rising”, it is acknowledged that the global investor yield has enabled many Africa countries to tap into international bond markets for the first time.

“While the Eurobond issues are often depicted as evidence of the current economic resurgence, they should also encourage close scrutiny of public management and debt sustainability. Against a backdrop of falling commodity prices and the US dollar’s strength and forecasts for higher global interest rates, this highlights the pitfalls of rising debt levels in Africa and underscores measures and mitigating risk”, argues Adams.

According to the article, Africa needs to spend $360 billion on infrastructure by 2020 as per African Development bank estimates.

A 2008 United Nations Conference on Trade and Development (UNCTAD) discussion paper on “Domestic and External Public Debt in Developing Countries” suggests that the dichotomy between external and domestic debt does not make much sense in a world characterized by open capital accounts and that, although the recent switch to domestic borrowing has important positive implications for debt management, policymakers should not be too complacent.

The choice of the optimal debt structure involves important trade-offs and, as weakness with the current system are often identified after a financial crisis, starts to unravel, policymakers  should be aware of possible new vulnerabilities. Hence, crisis prevention requires detailed and prompt information on debt structure. Yet, most research and analysis focuses on external borrowing and prompt and detailed information on the level and composition of the domestic debt is often not available to policymakers and analysts.

This situation is made even worse by the fact that standard debt sustainability analyses of public debt use a definition of “external” debt which does not reflect what it supposed to measure.

The paper further argues that donors can play a major role in helping developing countries to improve their capacity to record and disseminate information on the structure of total debt. The creation of the Programme on Debt Management and Financial Analysis Systems (DMFAS) in UNCTAD and the Debt Management Programme of the Commonwealth Secretariat were important steps in this direction, but more resources and continuous support is needed. It is also encouraging that the IMF is implementing technical cooperation pilot programmes aimed at improving the collection of debt statistics in several countries.

It is also expressed categorically that better data are necessary because debt sustainability analysis should focus on total debt and study the implication of debt structure. IMF reported in 2006 that about two thirds of recent joint IMF/WB debt sustainability analyses discuss vulnerabilities linked total debt and IMF stated that debt sustainability analysis in both low and middle income countries should always include a module on total public debt.

In another 2009 consultation draft paper by the Chartered Institute of Public Finance and Accountancy (CIPFA), the institute believes that using public money well can make a significant improvement to the lives of people everywhere. In the international context it can change the lives of very poor people. Public Financial Management (PFM) is a driving the performance of public services across the world through the effective and efficient use of public money.

It is widely understood that sound PFM is fundamental to achieving development objectives and reducing poverty. It enables aid funds to be managed and spent efficiently and with integrity and it helps give donors necessary confidence against their own fiduciary risk.

PFM is a lever to broader country development, to raising revenues effectively, planning and executing budget decisions reliably and transparently, and to building trust for donors and investors. The recognition that development should be led by countries if it is to have lasting transformative impact requires greater international reliance on country PFM systems.

CIPFA defines PFM as a “public financial management is the system by which the financial aspects of the public services’ business are directed, controlled and influenced, to support the delivery of the sector’s goals”.

The institution also recognizes that development should be led by countries if it is to have lasting transformative impact that implies greater international reliance on country PFM systems.

“Effective financial management of public resources is essential to achieve the objectives of development programmes. It also promotes accountability within developing countries and provides donors with assurance on the use of their public funds. Good financial management systems in partner countries are required to all forms of aid, but are particularly important for budget support, where donor funds are allocated to fiancé specific expenditures”, emphasizes CIPFA.

The World Bank also agrees that “a good PFM reform plan shows that interventions in processes interact to achieve final goals” and describes PFM in terms of its components parts: “For countries, financial management refers to the budgeting, accounting, internal control, funds flow, financial reporting, and auditing arrangements by which they receive funds, allocate them and record their use”.  


Read this week's paper