Sierra Leone needs a debt management strategy that discourages non-concessional borrowing and arrears build-up, according to the country’s Economic Update published by the World Bank. This according to the report is due to the recent spike in public debt, which it says is vital to modernize debt management and heighten transparency by prioritizing arrears clearance, as this would ease the burden on the Government budget. To clear the large stock of domestic arrears, the biggest burden on budget implementation, Government the bank says needs a medium term arrears clearance plan that has an explicit resource envelope, a procedure for prioritizing claims, and mechanisms for repaying or rescheduling claims.
“The authorities should make public both the strategy and the principles for arrears clearance. To avoid future buildup of arrears, Government should adhere strictly to the terms of its 2018‒22 PFM strategy, such as making quarterly budget allocations based on revenue performance, improving fiduciary management in MDAs by deploying budget officers and internal audit staff; using IFMIS to reinforce commitment controls, improving cash and debt management; and enhancing oversight of SOEs and local councils to minimize contingent liabilities.”
Its Debt Management Unit it says also needs greater capacity for recording and reporting debt and regularly publishing debt statistics. Sustaining the fiscal consolidation program should improve the domestic primary balance and slow accumulation. The authorities they advised further can explore non-debt creating financing models such as public-private partnerships, supported by sound analysis of the fiscal risks. “Rebalancing the mix of expensive and short-maturity domestic debt is critical for reducing the fiscal pressures associated with debt service obligations.”
“First, the recently verified stock of domestic arrears weighs heavily on public finances and could complicate fiscal consolidation. Domestic payment arrears total Le 3.3 trillion (8.7 percent of GDP), of which 90 percent were accrued in 2016 and 2017. The arrears consist chiefly of bills unpaid by ministries, departments and agencies in the road, security and energy sectors, and unpaid Ministry of Finance (MoF) checks. Since April 2018 another Le 461 billion in unpaid MoF checks has accrued. Clearing this much in arrears when fiscal space is very limited is the biggest challenge to the Government’s budget and heightens the risk of fiscal slippage because of pressure from creditors.”
Secondly, COVID-19 has disrupted the fiscal consolidation program by mobilizing less revenue and preventing debt reduction through smaller fiscal deficits and a shift to primary surpluses. The resulting increase in deficit financing could further crowd out private sector investments. Spending pressures could be heightened by health sector-related interventions, the high arrears and wage bill, and the Government’s flagship free education program.
“The baseline assumes that the Government will adhere to its planned medium-term fiscal consolidation targets in 2021–22. However, unexpectedly large deficits could bet a major downside risk to the outlook because higher government borrowing would crowd out credit to the private sector, adversely impacting private sector investment. With interest payments on domestic debt already high, the rising debt service cost could impose additional fiscal pressures.”
By Zainab Iyamide Joaque