By Lawrence Williams
The management of public debt is crucial because public debt is often the largest financial liability of the government. Managing public debt effectively is absolutely necessary for reducing government’s vulnerability to economic shocks. According to experts, a well-managed public debt portfolio that is resilient to shocks enables a government to manage financial crises more effectively when they occur. By contrast, a poorly structured debt portfolio increases the likelihood of a government falling into high debt distress. This is the kind of situation Sierra Leone finds itself in, as revealed by the Audit Service Sierra Leone’s latest performance audit report on the management of public debt by the Ministry of Finance which was tabled in Parliament last week.
Development economics suggests that high debt leads to high debt service liability, and high debt service liabilities invariably become a cause of poverty, inequality and unemployment in highly indebted low-income countries such as ours because debt settlements in the face of slow economic growth do not leave enough money to finance the needed infrastructures for health, education and general welfare.
Debt generally refers to all financial claims that require payment of interest and/or principal by the debtor to the creditor within a specific timeframe. In the context of government debt management, debt is commonly defined as the sum of financial liabilities created by borrowing, credit accepted under supplier credit agreements, debt securities issued for borrowing, and payment obligations assumed under government loan guarantees. The World Bank/IMF guidelines state that debt management should encompass the main financial obligations over which the central government exercises control. These obligations typically include both marketable and non-marketable debt such as concessional financing obtained from bilateral and multilateral sources.
Objective & Scope
The audit was meant “to assess the effectiveness of the measures put in place by the Ministry of Finance (MoF) to achieve sustainable public debt. The audit focused on Public Debt Management activities relating to the legal framework, debt management strategy, debt monitoring, reporting and evaluation, and the refund of ineligible expenditure by the Public Debt Management Division (PDMD) at MoF from 1st January 2018 to 31st December 2021”. The audit did not however cover Treasury bills/bonds for the period under review.
The findings revealed significant gaps in the management of public debt by the Ministry of Finance. These range from failure to prepare an annual borrowing plan (a legal framework established under section 24 (b) of the Public Debt Management Act of 2011) that should provide strong guidance on liquidity, investment decisions and monitoring of the country’s debt situation, delays in the implementation of some loans and grant-funded projects designed under the Country Programme Portfolio due to lack of proper monitoring by the responsible ministries and other key stakeholders, failure to prepare and submit public debt reports to Parliament as required by section 21 (1) of the Public Debt Management Act to ineligible expenditures made out of loans that were not in accordance with the agreement or the applicable laws and regulations governing the use of such loans, thus resulting in a substantial loss of funds which should have been utilised to implement service delivery programmes that should have benefited the lives of citizens. This, the auditors noted, has reduced the confidence of donor partners in the disbursement of funds for the implementation of such projects.
The report states: “From a review of ineligible expenditure vouchers and supporting documents, it was disclosed that the Government of Sierra Leone made three payments of ineligible expenditures to multilateral donor partners for a total of US$2,173,767.62 and Le358,311,317.90, as a result of un-utilisation of funds, mismanagement, or non-compliance with the financial and contractual procedures in the signed loan implementation agreement. It was disclosed that there were key indicators or deliverables that were not achieved during the implementation of the loans.”
The big elephant in the room is Sierra Leone’s public debt which stood at Le30.71 trillion in December 2020. External debt accounted for Le20.05 trillion and domestic debt stood at Le10.66 trillion.
The auditors observed that allocations and grants for MDAs that were not paid during the previous year were committed and paid as domestic arrears. Furthermore, they detected incorrect reconciliation of domestic debt payments between the Public Debt Management Division (PDMD) at Finance and the Accountant General’s Department (AGD), along with incorrect posting of payment arrears, giving the impression that records of domestic arrears are inaccurate. The auditors concluded that “incorrect postings of domestic debt have resulted in the inflation of the public debt figure and therefore, the wrong public debt presented”.
“We noted that payment transactions in the arrears database are not reflective of the actual details on the payment vouchers, totalling Le284,936,400, made to suppliers. We observed that these are roll-over payment transactions processed by the Accountant General’s Department that are not qualified to be classified as domestic arrears. This was as a result of improper reconciliation of domestic debt payments between the PDMD and the AGD,” the report states.
According to the United Nations Conference on Trade and Development (UNCTAD), effective debt management is an intrinsically significant component of public financial management especially in the face of the acute global financial crisis arising from the impacts of the Covid-19 pandemic and the Russian-Ukraine war. Having comprehensive, accurate, reliable and transparent data on public debt is crucial for policy decisions and risk management within the framework of the G20 Debt Service Suspension Initiative.
The World Bank Economic Update 2022
According to the World Bank, Sierra Leone is extremely vulnerable to debt distress. In 2021, the public debt increased to $3.14 billion, with domestic debt accounting for 33 percent. In July 2021, the International Monetary Fund (IMF) made the same observation. In their report, the Bretton Woods institutions concluded that the country is at high risk of debt distress due to increased borrowing from multilateral sources to fund growing expenditures.
The Bank stated that the increase in public debt is the result of fiscal deficits, inflationary pressures, and continued depreciation of the local currency. As of 2020, the total public debt reached 76.3 percent of GDP, up from 70.9 percent in 2019. The government’s debt stock reached 76.9 percent of GDP in 2021, making it the highest in sub-Saharan Africa and the highest ever since the HIPC debt relief was granted almost two decades ago. More details coming up in subsequent articles.