31 May 2012

Sierra Leone: Finance Ministry, Partners End Liabilities Seminar

The Public Debt Unit of the Ministry of Finance and Economic Development, in collaboration with other stakeholders in public financial management, has ended a two-day contingent liabilities workshop at the Hill Valley Hotel, Signal Hill Road in Freetown.

The workshop, which aimed at bringing together affected players to discuss the issue of 'Contingent Liability', its effects on government's fiscal profile and how it could be managed using appropriate framework, was used as a platform to discuss with local councils factor forming the criteria in determining borrowing limits per council, as mandated by the Public Debt Management Act 2011.

According to report, one of the major challenges faced by government is managing fiscal risk, which is defined as 'factors outside government's control that can cause fiscal outturn to differ from their initial forecast'.

In Sierra Leone, a major driver of fiscal risks is mainly contract obligations or liabilities of government institutions, be they MDAs or parastatals, which can manifest in mainly two categories, namely, unforeseen exogenous developments and contingent liabilities.

The report further revealed that contingent liabilities could be implicit or explicit, while the monitoring and management of implicit contingent liabilities in Sierra Leone could prove challenging due to its nature and the available instruments to manage such liabilities.

While welcoming participants to the workshop, the Deputy Director of the Economic Policy Research Unit in the Ministry of Finance, Mohamed Warritay, said the significance of monitoring contingent liability for macro-economic and financial stability has been clearly recognized both in academic and policy circles.

He observed that the East Asian crisis was caused by the triggering of a range of contingent liabilities, which put a strain on the fiscal position of the governments concerned. He added that the recent global financial crisis triggered by the subprime mortgage market in the USA also imposed fiscal burden on sovereign states to bail out financial institutions in a bid to keep economies floating, noting that these contingent liabilities, mainly in the form of government guarantees, have been used to promote both foreign and local investment in projects.

He pointed out that the crisis confirmed the need for better assessment of the potential risks that could emerge from contingent liabilities, which can form a major factor in the build-up of public debt.

Mr. Warritay informed his audience that some of the main risks to fiscal sustainability come from contingent liabilities, including publicly guaranteed debt, stating further that contingent liabilities refer to obligations that may become government liabilities whose size and timing is dependent on the occurrence of some uncertain future event outside the control of government.

Such occurrence, he went on, can include the central government having to assume the debt servicing costs should a state enterprise default on a publicly guaranteed loan. He stated that at a time of international financial crisis, it is essential to have good information and assessment of such fiscal risks, especially because the private sector and non-central government public sectors are likely to experience greater risk than normal problems with loan guarantees and new borrowing.

Warritay maintained that the sharp increase in the contingent liabilities of many countries in recent years and the change in the nature of the financial burden of the fiscal authorities has been primarily attributed to the transformation of the role of the state from a supplier of certain services (for instance, infrastructure) to facilitator, where the state extends a guarantee to the private sector for providing such services.

Touching on the importance of monitoring and managing contingent liabilities, the Deputy Director noted that decentralization of service provision is on-going in the country and the requirements to provide goods could exceed sub-national government's current income generating capacities, thus necessitating borrowed resources.

He stressed that it is for the above reason that Local Government Debt Management Strategies become vital, adding that without the above mentioned, sub-national or local government may accumulate unsustainable debt levels, which can jeopardize their capacity to provide services; and that if repeated simultaneously in many sub-national states, can compromise national debt sustainability and development.

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