Financial Secretary Worried about Sierra Leone's 2 Billion US Dollars Debt!
By the Ranger (31/10/18)
To both the national and international creditors, Sierra Leone is reportedly owing close to 2 billion UD dollars in debts.
Clearly, interest and capital repayments on such a huge debt has direct bearing on the government’s ability to adequately provide the social goods and services that the population needs to live better lives as envisioned in the New Direction manifesto.
The New Direction’s promises call for substantial financial resources at a time when the global development finance landscape is changing from official development assistance and the coverage of remaining financing needs through external debt, to a framework with greater emphasis on the mobilisation of domestic resources.
In response to this changing financial climate, the Economic Development in Africa Report 2016 examined some key policy issues that underlie Africa’s domestic and external debts.
It also provides policy guidance on the delicate balance required between financing development alternatives and overall debt sustainability that concerns policymakers, analysts and multilateral financial institutions. Debt is the most troubling development headache that the Ernest Koroma presidency bequeathed this poor nation.
What happened during the Koroma era was that new sources of external finances without the imposition of condition, explain how Sierra Leone’s debt mounted alarmingly under the former APC government.
The size and rate of growth of Salone’s external debt has implications for sustainability; given how much was also carelessly borrowed for infrastructure from local contractors and suppliers.
Domestic debt and debt markets have witnessed significant developments. It is therefore necessary for this SLPP government to closely monitor evolving debt characteristics and take pre-emptive actions to avoid potential debt distress.
Until recently, the literature on borrowing and debt dynamics had largely overlooked the role domestic debt could play in financing development and focused almost exclusively on external debt.
In the Koroma years, the country looked increasingly to domestic sources. In the future, domestic borrowing is likely to play an increasingly significant role as sustained growth performance boosts national savings and broadens the scope for financing development with domestic resources.
It will also be important for government to find ways of productively utilizing additional liquidity in domestic financial institutions.
However, with domestic debt playing an increasingly important role, the country will face new risks as the numbers of creditors and debt instruments continue to expand. Owing to its size and swift growth, the consideration of domestic debt will become important in assessing public debt sustainability.
Other concerns with regard to domestic debt accumulation include the following: the expansion of public sector borrowing in domestic markets may crowd out private sector investments.
Additionally, financial liberalization has resulted in increased domestic real interest rates. As a result, there are concerns that domestic borrowing may induce elements of macroeconomic instability and that the high interest burden may absorb a significant portion of government revenues, crowding out pro-poor and growth-enhancing spending.
This has significant implications for women and children, who often bear the brunt of major reductions in social expenditure. Despite a long history of high fiscal deficits and a growing need for developmental and structural investments, Sierra Leone’s bond markets have largely remained underdeveloped, mainly due to credibility issues.
Emphasis is on implementing the New Direction within the framework of the new SDGs. Clearly, Sierra Leone’s current public budgetary resources are inadequate to address this need.
IMF, World Bank, EU, DFID and other development partners will need to share the burden. Thus, external assistance, whether concessional debt or grants, must continue to play a key role in financing poverty reduction, the Sustainable Development Goals and growth enhancing programmes in the foreseeable future.
Development challenges have also evolved, with the donor community paying increasing attention (and thus devoting increasing resources) to issues such as climate change and disaster prevention, which did not feature prominently in the development agenda a decade ago.
As Sierra Leone remains wholly commodity dependent, external debt sustainability is also subject to the boom and bust cycles of international commodity markets and the associated fiscal squeeze countries experience when expected revenues fall. The current collapse in iron ore price provides evidence of this.
The apparent end of the upward phase of the commodity price super cycle has translated into lower revenues for government. In short, Sierra Leone needs to be less dependent on volatile commodity markets.
Fifth, the global economic outlook remains gloomy, as fiscal austerity underpins the deceleration in growth in the euro-zone, and China is shifting to a growth strategy that implies lower but more sustainable growth rates and a rebalancing of economic activity away from investment and manufacturing towards consumption and services.
Manufacturing activity and trade also remain weak globally, reflecting not only developments in China, but also subdued global demand and investment more broadly, which could have a negative effect on Africa’s development prospects.
Against this backdrop, government must critically assess its capacity to tackle its significant development challenges in light of its development finance requirements.
This entails a redoubling of efforts to harness potential and innovative sources of finance, including those that may come from the private sector, such as through public–private partnerships, while also tackling rising levels of debt.
The SLPP government of President Julius Maada Bio and its partners will also need to revisit existing debt sustainability frameworks. Debt sustainability is critical for Sierra Leone as it seeks to implement the Addis Ababa Action Agenda, achieve the Sustainable Development Goals and sustainably transform the country.
At this juncture, Sierra Leone's Financial Secretary Sahr Jusu Saffa is right to get concern about the exorbitant debts and it now remains to be seen if this problem would be nipped in the bud as soon as possible.