Unlike similar Network Engagements held before, this time CABRI collaborated with other key organisations pioneering the public debt and development work such as the African Forum and Network of Debt and Development (AFRODAD), Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI), Development Reimagined (UK), Commonwealth Secretariat (UK) and AfriCatalyst to host the 8^th network engagement meeting with public debt managers on 03 October 2023.

CABRI welcomed 24 African countries and representatives from the United Kingdom to the 8^th network engagement meeting of public debt managers in Africa. United Nations Economic Commission for Africa (UNECA) competently facilitated the network engagement discussions based on the theme of hidden, undisclosed, unreported and/or underreported debt in Africa. CABRI is grateful for the African Peer Review Mechanism (APRM) to have also competently facilitated the previous (7^th) network engagement discussions in which two countries: Benin and Sierra Leone shared their country experiences on managing and/or reducing government refinancing risk through implementing debt exchanges, buybacks and other innovative liability management operations.

Notwithstanding the fact that even well managed public debt carry long-term intergenerational welfare and resource implications, meaning that debt contracted by the current generation within the constraints and conditions prevailing today to maintain current consumption or a certain standard of living, will inevitably impact on the resources at the disposal of future generations provided most unit(s) of debt incurred today are channeled towards human and/or infrastructure capital spending in such a way as to leave the future generation - in relative terms, least burdened by previous generations debt.

In practice efforts to reduce interest payments on government debt across time and generations will need to be matched by perhaps increasing efforts to grow the revenue even faster if the future generation is to inherit sustainable debt (if any debt) at all. There are well documented cases of hidden, undisclosed, unreported or under reported debt as the presentation demonstrates.

However, in the hope of being academically forgiven or indemnified for a slight contradiction to Dornbusch and Draghi (1989)[1], CABRI held the network engagement discussions around this theme not to throw a negative spotlight on any particular African country (despite evidence of such countries being there), but to seek to find out (and hopefully share lessons on) how this possibly impacts the good work of public debt practitioners and managers and what questions do they need to raise with their budget counterparts and other policy makers to ensure that long-term public debt management make a meaningful contribution to long-term sustainable development.

1. Presentation

Dr Yungong Theophilus Yong from AFRODAD gave insightful presentation structured in 5 parts:

1.1. Definition of hidden debts/liabilities

• Hidden debt elicit few questions about public debt: how much are we owing?; how much has been paid?; how much is left to be paid?

• What are the terms of the borrowing and are they favourable?; what did we do with the borrowed money?; who authorised the borrowing and did the borrowing adhere to the principles of law and constitutionalism?

Lack of clear answers to these and many other questions evoke the issues of hidden debt related to “transparency and accountability”. It is important to note that debt and liabilities not explicitly stated on government’s balance sheet, are unknown or contracted and therefore, held secretly – and this become part of “hidden debt”.

1.2. Hidden debts in Africa: Known cases

• Of all regions, Africa seem to hold the highest “upper decile of hidden debt” – compared to other regions
• But the pervasive problem of hidden debt is not peculiar to African countries as common data gaps do exist for all income groups although narrower for Advanced Economies compared to Emerging Economies and Less Developed Countries
• The World Bank Debt Reporting Heatmap (2022) show increasing unavailability of data for recently contracted loans, which pushes down the proportion of the optimal category

1.3. Factors and Instruments of Hidden Debts

• While pervasive corruption, weak political will and institutions for transparency and accountability as well as political competition remains underlying factors behind “intentional” hidden debt, debt hidden “unintentionally” is characterised by:

- Increasing complexity of debt instruments and lack of capacity to adequately capture and record indebtedness

- Complex lending terms that require greater expertise beyond just cashing in loans

- Complex borrowing and lending instruments and terms using collatelization in resource-backed loans and private public partnerships

- Forms of SOE financing outside regular public debt reporting

- Weak institutional capacity for dealing with debt and weak transparency and accountability mechanisms

- Efforts to expand the coverage of public debt data in Africa and in low-income countries to include SOE debt have in several cases identified sizable amounts of public and publicly guaranteed debt not captured previously in the form of hidden debt, which saw an increase from 5 percent over the past two decades to about 20 percent based on available information.

- In some cases, central bank debt contracted for government are often under reported.

- There are also extreme cases where Central banks often issue debt and carry out foreign currency swaps to facilitate government financing, rather than to implement monetary policy or manage liquidity or foreign exchange reserves as expected.

1.4. Why hidden Debts/Liabilities are an issue?

• Hidden debts create a climate of suspicion and mistrust which can lead to adverse political and institutional consequences
• As efficient debt restructuring requires full disclosure from all creditors and debtors, hidden debts hampers orderly debt restructuring and undermines transparency required in dealing with indebtedness
• Hidden debt connotes negatives implications, such as:

- Economic damage as hidden debts are used for wrongful purposes

- Being a source of economic shock and lead to stagnation

- Poor credit ratings and inability to access capital markets

1.5. Recommendations for Debt Contraction and Disclosure

• Following Africa’s past experiences with heavy indebtedness, AFRODAD adopted an African Borrowing Charter, which recommends against unsafe public debt contraction and accumulation, stemming risks of deterioration in fiscal positions of African states
• Recommend public debt management based on the rule of law and constitutionalism supported by debt strategy for long-term debt sustainability
• Encourage disclosure and publication of debt data including disclosing and publishing terms and condition of all financing agreements
• Support transparency agenda through data dissemination, capacity building and lending policies to assist with sovereign debt restructuring
• Policy conditionalities to lend only if countries share comprehensive information about their debt stock and debt terms with all creditors regardless of whether countries are already in arrears or seeking to avoid arrears.

2. Questions to frame the discussions

Despite decades if not centuries of debt management research and practice from a broader macroeconomic and public financial management policy perspectives:

1. Why are there still problems of hidden, undisclosed, unreported or even under-reported debt and what impact is this having on debt transparency and accountability?
2. of government loans, securities and guarantees, which category of these liabilities is prone to being undisclosed, hidden or under-reported and what might be the reason?
3. Is hidden/undisclosed debt a question of lack of debt management capacity or lack of harmonisation of public debt reporting globally, and if the latter is the case how is this extra debt reporting burden impacting on debt management offices?
4. What are institutions such as IMF, World Bank and others in Africa currently doing (or need to do differently) to enhance transparency in borrowing operations and public debt reporting?
5. How should debt practitioners manage the political pressures regarding hidden/undisclosed/unreported and/or under-reported debt and what can be done to ensure credibility of debt data?

3. Panelist Discussion (facilitated by Ms Sonia Essobmadje, CFA – UN Economic Commission for Africa)

Ms Hannah Ryder, CEO of Development Reimagined in her response affirmed Dr Yungong’s presentation and indicated that corruption and lack of transparency are not African specific challenges per se. In her further remarks, she indicated that:

• Most African economies are often small to raise the funding requirements necessary to finance development and for that reason, these countries look externally for funding
• However, whether debt is hidden or not hidden – the question remains what is debt signed for?
• Are the debt terms the best terms that can be achieved?
• The biggest challenge with debt is about what debt is used for – current spending or infrastructure spending?
• The other question is who needs to know what – as transparency frameworks are not for creditors but for debtors/Issuers
• Borrowing centres need to work together to achieve better outcomes.

Mr Mac Banda, Acting Head of Debt Management Unit at the Commonwealth Secretariat responded to Dr Yungong’s presentation and to the facilitator’s question by stating that in terms of Sustainable Development Goals (SDGs), most countries fear that they may not meet the targets and debt is an issue. Recent stats shows that debt has doubled to 60% of GDP and in some cases over 100% since 2013 and the challenges can be summarised as follows:

• Lack of comprehensive debt coverage limited to central government debt only

- It might sound simple to ask the question what is debt – but often you see a lot of instruments (not standardised) coming up in the reporting.

- So, the definition of debt instrument is not standardised.

• Four features of debt data quality need to be satisfied and these include:

- Comprehensiveness, 

- Timeliness; 

- Accuracy, and

- Frequency

• Way forward:

- Need to strengthen the legal framework especially with new financial instruments to ensure debt reporting is transparent.

- Ensure that systems are in place and for this countries can leverage on information technology to capture transactions.

Mr Jacob Mkandawire, Director of Debt Management Programme at MEFMI in responding to political pressures indicated that debt managers are in a delicate function which is part of the political economy of the Ministry of Finance:

• Once you have strengthened the institutional and legal framework – it becomes manageable to deal with debt issues
• Provisions must also be made clear what are the consequences of not abiding by the law and that might be the only way to help debt managers to push back
• If the legal framework is not strong – hidden debt consequences may not arise
• But article 8 of the IMF indicates that there are consequences and if we know such intention to hide debt exist, then there is a need to strengthen the consequence framework
• Way forward:

- In performing validation of debt databases – that’s where it is possible to see some undisclosed figures.

- If it is strategic to hide debt, then the work of debt managers unfortunately becomes difficult, therefore whether hidden debt is intended or not intended is also an important test.

On the question of what the IMF, World Bank and other African institutions can do to support debt managers, speakers shared few ideas:

• These institutions can provide more concessional financing and do not have to go into complex instruments
• A better structure for Debt Sustainability Analysis that looks at both Assets and Liabilities, which debt managers can report on – and this is what African countries can do independently
• Since African countries are members of the IMF and WB, they can leverage on standardising frameworks for debt instruments
• The peer comparison conducted by these institutions have been very useful
• They have resources and comparative advantage to leverage on
• The IMF and WB must separate politics from economics when it comes to their lending policies
• There must be an open discussion to find the middle ground on challenges faced by African countries.

NB: Sister organisations operating in the debt space can work together to assist countries to report debt data of high quality.

In reflecting and concurring on the panellist discussions – Dr Yungong concluded that:

• Weak accountability mechanisms in Africa do not generate the trust that is essential to deal with the debt burden
• Governments need to strengthen their institutional and legal frameworks.

Additional comments from public debt managers include the following:

• Sustainability of debt is not all about debt, it also includes GDP growth and that touches on the importance of investment in infrastructure
• As African countries do not want to default or keep defaulting with the IMF, there is a shift from traditional (multilateral) creditors to bilateral creditors such as China
• Time is certainly too short to discuss the theme of hidden, undisclosed, unreported and/or under-reported debt in length – CABRI should consider taking the discussions further on to a 2-3 day policy dialogue
• While there is still value in words such as transparency, credibility and reliability, which helps to reduce the borrowing costs – the biggest pool of funds for any country will come from developing your local debt capital markets because concessional loans will not always be enough

For enquiries, please email Jim Matsemela on jim.matsemela@cabri-sbo.org.

[1] “It is the identity of the debtor, and not the nature of the instrument, that is feared by the market”, quoted from Public Debt Management: Theory and History