Freetown, SIERRA LEONE – During the first half of 2023, Sierra Leone found itself grappling with significant roll-over and refinancing risks within its public debt portfolio, primarily attributed to a substantial share of short-term debt in the domestic debt composition, as highlighted by the Ministry of Finance.
The Ministry reported that the domestic debt portfolio is heavily weighted towards treasury bills, with a high proportion relative to treasury bonds possessing a maturity profile extending beyond one year. The roll-over and refinancing risks in the external debt portfolio, on the other hand, remain low due to the extended maturity structure of external debt.
Within the public debt landscape, key risks identified include roll-over or refinancing risks, interest rate risks, and foreign currency risks. While the public debt portfolio is primarily exposed to fixed interest rate debt instruments, mitigating interest rate risks, the short-term nature of domestic debt and frequent maturities expose it to potential high-interest rates in the market during roll-overs.
The Public Debt Management Division emphasized that foreign currency risks are non-existent in the domestic debt portfolio, given its denomination in domestic currency. However, with a substantial presence of external debt in the overall public debt, the assessment points to heightened foreign currency risks in the external debt segment.
The significant depreciation of the Leone against major loan currencies has accentuated the degree of foreign currency risks in the external debt portfolio. The increase in the external debt stock between the end of December 2022 and the end of June 2023 was largely influenced by the currency depreciation, signalling a challenging landscape.
Roll-over risks in the public debt portfolio are indicative of the average time required for the entire debt portfolio to mature or be rolled over, contingent on prevailing market dynamics, including the direction of interest rates. Interest rate risks define the variability of interest rates on the public debt portfolio, while foreign currency risks refer to the share of foreign currency debt in the debt portfolio and the impact of changes in the exchange rate on the external debt stock.
These challenges underscore the importance of strategic debt management to navigate market uncertainties and safeguard the nation’s fiscal stability. The Ministry remains vigilant in addressing these risks to ensure a resilient and sustainable financial future for Sierra Leone. ZIJ/12/2/2024