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OVERVIEW OF LOAN MOBILIZATION AND DEBT OVERVIEW OF LOAN MOBILIZATION AND DEBT MANAGEMENT IN WEST AFRICAMANAGEMENT IN WEST AFRICA

byby

Dr. Chris O. ItsedeDr. Chris O. ItsedeDirector GeneralDirector General

WAIFEMWAIFEM

Being the text of a paper presented at the Dialogue on Being the text of a paper presented at the Dialogue on Post-Conflict Liberian Debt, Aid and Development, 11 – 13, Post-Conflict Liberian Debt, Aid and Development, 11 – 13,

September, 2006, Monrovia, Liberia, organized by the September, 2006, Monrovia, Liberia, organized by the African Forum and Network on Debt and Development African Forum and Network on Debt and Development

(AFRODAD)(AFRODAD)

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Content of PresentationContent of Presentation

IntroductionIntroduction

Sources of External BorrowingSources of External Borrowing

Success Factors for Negotiating Loan AgreementsSuccess Factors for Negotiating Loan Agreements

Success Factors for Effective Debt ManagementSuccess Factors for Effective Debt Management

Institutional Arrangements for Borrowing in Institutional Arrangements for Borrowing in selected Countriesselected Countries

Lessons LearnedLessons LearnedAbout WAIFEMAbout WAIFEMConclusionConclusion

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IntroductionIntroduction

- Weak productive base, low tax effort, low saving-investment Weak productive base, low tax effort, low saving-investment ratio, constrain West African countries’ capacity to mobilize ratio, constrain West African countries’ capacity to mobilize domestic financial resources to prosecute their development domestic financial resources to prosecute their development agenda.agenda.

- Loan mobilization becomes inevitable as governments seek to Loan mobilization becomes inevitable as governments seek to bridge the resource gap to enable them meet the UN Millennium bridge the resource gap to enable them meet the UN Millennium Development Goals (MDGs).Development Goals (MDGs).

- External borrowing comes from three main sources:External borrowing comes from three main sources:- Official Development Finance, Export Credits and Official Development Finance, Export Credits and

Private FlowsPrivate Flows

- Each of these sources and options has its costs and hence debt Each of these sources and options has its costs and hence debt service obligations, necessitating a proper management of the service obligations, necessitating a proper management of the loan mobilisation process.loan mobilisation process.

- Debt management is the totality of the measures taken by the Debt management is the totality of the measures taken by the government to alter the stock, composition/structure and loan government to alter the stock, composition/structure and loan terms to keep the public debt at sustainable levels. terms to keep the public debt at sustainable levels.

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Sources of External BorrowingSources of External BorrowingThere are three major sources: Official Development Finance, Export Credits and There are three major sources: Official Development Finance, Export Credits and Private FlowsPrivate Flows

Official Development FinanceOfficial Development Finance

Official Development Assistance (ODA)Official Development Assistance (ODA) Other Financial Development Flows (ODF)Other Financial Development Flows (ODF)

ODAODA

-- ODA is foreign aidODA is foreign aid-- consists of grants and/or loans by agencies of government or consists of grants and/or loans by agencies of government or multilateral multilateral organizations to promote economic developmentorganizations to promote economic development-- to qualify as ODA, loans must be concessional, having a grant to qualify as ODA, loans must be concessional, having a grant element of element of at least 25 percent or more; however, the standard grant at least 25 percent or more; however, the standard grant element for element for ODA is 86 percent.ODA is 86 percent.-- ODA flows are interest-free but bear a service charge of 0.75 percentODA flows are interest-free but bear a service charge of 0.75 percent

ODFODF

-- Other Financial Development Flows (ODF) are loans with little or no Other Financial Development Flows (ODF) are loans with little or no concessionality.concessionality.

-- ODF includes disbursements from hard windows of regional ODF includes disbursements from hard windows of regional development development banks as well as IBRD loansbanks as well as IBRD loans

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• Export Credits (ECs)Export Credits (ECs)

- ECs are non-concessional loans designed to finance purchases of goodsECs are non-concessional loans designed to finance purchases of goods

- ECs could be private or official ECs could be private or official

Private ECs could be in the form of Private ECs could be in the form of Suppliers CreditsSuppliers Credits where the exporter directly where the exporter directly extends the credits or extends the credits or buyers creditsbuyers credits where the credits are conducted through where the credits are conducted through commercial bankscommercial banks

- Official ECs, are credits extended by specialized export credit agencies of Official ECs, are credits extended by specialized export credit agencies of governments e.g. US Export-Import Bank (EXIM), France (COFACE), UK (ECGD) etc.governments e.g. US Export-Import Bank (EXIM), France (COFACE), UK (ECGD) etc.

- The Paris Club debts are covered by these export credit agencies. The agencies The Paris Club debts are covered by these export credit agencies. The agencies charge market-related interest rate.charge market-related interest rate.

• Private FlowsPrivate Flows

- International bank loansInternational bank loans

- BondsBonds

- The London Club debts belong in the category of private flows by international The London Club debts belong in the category of private flows by international banksbanks

- Foreign direct investment (FDI) provides external finance without adding to a Foreign direct investment (FDI) provides external finance without adding to a country’s external debt. Legislative changes allowing ownership in various sectors country’s external debt. Legislative changes allowing ownership in various sectors of an economy, in addition to other reforms, could make FDI attractive to foreign of an economy, in addition to other reforms, could make FDI attractive to foreign investors.investors.

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Success Factors for Negotiating Loan Success Factors for Negotiating Loan AgreementsAgreements

Adequate Preparation:Adequate Preparation:

Proper Policy CoordinationProper Policy Coordination

Have the country’s negotiating policy position adequately discussed by all Have the country’s negotiating policy position adequately discussed by all stakeholders prior to negotiationstakeholders prior to negotiation

Ensure enactment of relevant laws and guidelines for loan mobilisationEnsure enactment of relevant laws and guidelines for loan mobilisation

Ensure that loan conforms with domestic lawsEnsure that loan conforms with domestic laws

Prepare adequate background information on the country’s economic Prepare adequate background information on the country’s economic performance and prospects which could boost the confidence of foreign performance and prospects which could boost the confidence of foreign lenderslenders

Constitute a strong multi-disciplinary negotiation team which should Constitute a strong multi-disciplinary negotiation team which should include economists, financial analysts, lawyers and other relevant include economists, financial analysts, lawyers and other relevant professionals professionals

Build adequate loan negotiation capacityBuild adequate loan negotiation capacity

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- What is debt management?- What is debt management?

- Debt management is the totality of the measures taken by the Debt management is the totality of the measures taken by the government to alter the stock, composition/structure and terms to government to alter the stock, composition/structure and terms to keep the public debt at sustainable levelskeep the public debt at sustainable levels

- Establish proper institutional arrangement to ensure coordination of Establish proper institutional arrangement to ensure coordination of the debt management functionthe debt management function

- Enact an enabling legislation that states clearly which institution or Enact an enabling legislation that states clearly which institution or agency that has the mandate to borrow on behalf of governmentagency that has the mandate to borrow on behalf of government

- Develop a national debt strategyDevelop a national debt strategy

- Build adequate debt management capacityBuild adequate debt management capacity

- Put in place appropriate computer systems and infrastructure for Put in place appropriate computer systems and infrastructure for effective debt management effective debt management

Success Factors for Effective Debt Success Factors for Effective Debt ManagementManagement

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Institutional Arrangements for External Loan Mobilisation Institutional Arrangements for External Loan Mobilisation in Selected Countriesin Selected Countries

The GambiaThe Gambia

- The Loans Act of 1970 empowers the Secretary of The Loans Act of 1970 empowers the Secretary of State for Finance to contract/mobilize external funds State for Finance to contract/mobilize external funds subject to Parliament’s approval. Debt Management subject to Parliament’s approval. Debt Management is handled by the Department of Debt Management is handled by the Department of Debt Management (DDM) which is also responsible for new financing (DDM) which is also responsible for new financing policy; Central Bank of The Gambia externalises policy; Central Bank of The Gambia externalises payments.payments.

- A National Debt Strategy document prepared by A National Debt Strategy document prepared by WAIFEM/DRI provides guidelines for external WAIFEM/DRI provides guidelines for external borrowing, including quality of loans and borrowing, including quality of loans and benchmarks for sustainable debt management in benchmarks for sustainable debt management in The Gambia.The Gambia.

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Institutional Arrangements for External Loan Institutional Arrangements for External Loan Mobilisation in Selected Countries [Cont’d]Mobilisation in Selected Countries [Cont’d]

GhanaGhana

- The Loans Act, 1970, as amended, vests the Ministry of The Loans Act, 1970, as amended, vests the Ministry of Finance (MOF) with the authority to contract loans for Finance (MOF) with the authority to contract loans for the public sector.the public sector.

- External debt management is undertaken jointly by the External debt management is undertaken jointly by the External Resources Mobilization (ERM) Division of the External Resources Mobilization (ERM) Division of the MOF, the Accountant General’s Office and the Research MOF, the Accountant General’s Office and the Research Dept. of the Bank of Ghana.Dept. of the Bank of Ghana.

- The Aid and Debt Management Unit (ADMU) and the The Aid and Debt Management Unit (ADMU) and the Multi-Donor Budget Support (MDBSU) units of the ERM Multi-Donor Budget Support (MDBSU) units of the ERM are particularly charged with responsibility of analyzing are particularly charged with responsibility of analyzing aid inflows and coordination with donors.aid inflows and coordination with donors.

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Institutional Arrangements for External Loan Institutional Arrangements for External Loan Mobilisation in Selected Countries (cont’d)Mobilisation in Selected Countries (cont’d)

Sierra LeoneSierra Leone

The 1991 Constitution and the Loans Amendment The 1991 Constitution and the Loans Amendment Act of 1992 vest the responsibility for contracting Act of 1992 vest the responsibility for contracting loans in the Minister of Finance. loans in the Minister of Finance.

The Ministry of Finance plays the lead role in putting The Ministry of Finance plays the lead role in putting in place policies governing loan contracting, loan in place policies governing loan contracting, loan negotiations, renegotiations, loan restructuring, loan negotiations, renegotiations, loan restructuring, loan disbursement and amortization.disbursement and amortization.

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Institutional Arrangements for External Loan Institutional Arrangements for External Loan Mobilisation in Selected Countries (cont’d)Mobilisation in Selected Countries (cont’d)

NigeriaNigeria

Nigeria has an autonomous Debt Management Office (DMO) Nigeria has an autonomous Debt Management Office (DMO) which contracts and negotiates loans on behalf of the which contracts and negotiates loans on behalf of the Federal Government. It also manages both external and Federal Government. It also manages both external and domestic debt. domestic debt.

The Federal Minister of Finance is the sole signatory of The Federal Minister of Finance is the sole signatory of public debt; Central Bank of Nigeria (CBN) which public debt; Central Bank of Nigeria (CBN) which externalizes payments and the Office of Accountant externalizes payments and the Office of Accountant General of the Federation (OAGF) which authorizes General of the Federation (OAGF) which authorizes payments by issuing mandates.payments by issuing mandates.

The Federal Government (DMO) provides the general The Federal Government (DMO) provides the general guidelines for external borrowing in Nigeria.guidelines for external borrowing in Nigeria.

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Lessons LearnedLessons Learned Countries that did not have enabling legislation for loan Countries that did not have enabling legislation for loan

mobilisation and debt management experienced difficulties in mobilisation and debt management experienced difficulties in managing those functionsmanaging those functions

Legislative lacuna resulted in indiscriminate borrowing in some Legislative lacuna resulted in indiscriminate borrowing in some countriescountries

Countries need to thoroughly understand creditor and donor Countries need to thoroughly understand creditor and donor practices to avoid needless delays and undue costs in project practices to avoid needless delays and undue costs in project executionexecution

Improper composition of negotiating teams resulted in Improper composition of negotiating teams resulted in contracting loans with onerous terms which subsequently contracting loans with onerous terms which subsequently burdened the borrowing countries with high debt serviceburdened the borrowing countries with high debt service

A multi-disciplinary team which includes lawyers, A multi-disciplinary team which includes lawyers, economists, financial analysts and accountants iseconomists, financial analysts and accountants is recommended for effective loan negotiationrecommended for effective loan negotiation

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Lessons Learned (cont’d)Lessons Learned (cont’d)

Importance of debt recording soft ware which Importance of debt recording soft ware which enables a borrowing country to know exactly how enables a borrowing country to know exactly how much it owes, who it owes and how to manage itmuch it owes, who it owes and how to manage it

There is need to have guidelines for borrowing. There is need to have guidelines for borrowing. This is necessary to avoid indiscriminate This is necessary to avoid indiscriminate borrowing, loans of poor quality and unnecessary borrowing, loans of poor quality and unnecessary build-up of external debt.build-up of external debt.

Inevitability of policy co-ordination in negotiation Inevitability of policy co-ordination in negotiation process to avoid poorly funded projects and build-process to avoid poorly funded projects and build-up in contingent liabilities (through inadequate up in contingent liabilities (through inadequate coordination of fiscal, monetary and sub-national coordination of fiscal, monetary and sub-national government authorities).government authorities).

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Lessons Learned (cont’d)Lessons Learned (cont’d)

Need for capacity building in debt managementNeed for capacity building in debt management

The weak or low capacity in many areas of debt management has The weak or low capacity in many areas of debt management has inhibited effective debt management in many developing countries. inhibited effective debt management in many developing countries.

These included capacity to handle the legal aspects of debt These included capacity to handle the legal aspects of debt management, such as negotiation and re-negotiation, loan management, such as negotiation and re-negotiation, loan agreement, arbitration and dispute resolution, conduct of debt agreement, arbitration and dispute resolution, conduct of debt strategy analysis, debt recording and risk analysis.strategy analysis, debt recording and risk analysis.

WAIFEM’s training and capacity building interventions have brought WAIFEM’s training and capacity building interventions have brought about substantial improvements in the debt management function about substantial improvements in the debt management function in most of its constituent member countriesin most of its constituent member countries

Trained staff get poached by other institutions with more enhanced Trained staff get poached by other institutions with more enhanced remuneration packages than what obtains in the public sector.remuneration packages than what obtains in the public sector.

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About WAIFEMAbout WAIFEM The West African Institute for Financial and Economic The West African Institute for Financial and Economic

Management (WAIFEM) was established in 1996 by the Management (WAIFEM) was established in 1996 by the central banks of The Gambia, Ghana, Liberia, Nigeria and central banks of The Gambia, Ghana, Liberia, Nigeria and Sierra Leone.Sierra Leone.

Mandate: build capacity for improved economic and Mandate: build capacity for improved economic and financial management in the countries; research and financial management in the countries; research and consultancy.consultancy.

Three areas of core competences: debt, financial sector and Three areas of core competences: debt, financial sector and macroeconomic managementmacroeconomic management

Target audience includes core economic ministries, central Target audience includes core economic ministries, central banks, debt management units, relevant committees in the banks, debt management units, relevant committees in the national parliaments and private sectornational parliaments and private sector

Current medium term programme has a sub-programme to Current medium term programme has a sub-programme to fast track capacity building for Liberia during 2006-2009.fast track capacity building for Liberia during 2006-2009.

Capacity gap assessment of Liberia by WAIFEM and Capacity gap assessment of Liberia by WAIFEM and partners in progress.partners in progress.

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ConclusionConclusion

Every country requires an appropriate framework for loan Every country requires an appropriate framework for loan mobilisation and debt management coordination anchored mobilisation and debt management coordination anchored on an enabling lawon an enabling law

Craft a national borrowing policy which should specify the Craft a national borrowing policy which should specify the sources and degree of concessionality of loans, among sources and degree of concessionality of loans, among othersothers

Develop a national debt strategy which should be up-dated Develop a national debt strategy which should be up-dated periodicallyperiodically

Constitute a competent multi-disciplinary negotiating team Constitute a competent multi-disciplinary negotiating team to negotiate quality loansto negotiate quality loans

Build adequate debt management capacity (leverage Build adequate debt management capacity (leverage WAIFEM training and capacity building interventions).WAIFEM training and capacity building interventions).