Content of Presentation

1. OVERVIEW OF LOAN MOBILIZATION AND DEBT MANAGEMENT IN WEST AFRICAbyDr. Chris O. ItsedeDirector GeneralWAIFEMBeing the text of a paper presented at the Dialogue on Post-Conflict Liberian Debt, Aid and Development, 11 – 13, September, 2006, Monrovia, Liberia, organized by the African Forum and Network on Debt and Development (AFRODAD)

2. Content of Presentation Introduction Sources of External Borrowing Success Factors for Negotiating Loan Agreements Success Factors for Effective Debt Management Institutional Arrangements for Borrowing in selected Countries Lessons Learned About WAIFEM Conclusion

3. Introduction • Weak productive base, low tax effort, low saving-investment ratio, constrain West African countries’ capacity to mobilize domestic financial resources to prosecute their development agenda. • Loan mobilization becomes inevitable as governments seek to bridge the resource gap to enable them meet the UN Millennium Development Goals (MDGs). • External borrowing comes from three main sources: • Official Development Finance, Export Credits and Private Flows • Each of these sources and options has its costs and hence debt service obligations, necessitating a proper management of the loan mobilisation process. • Debt management is the totality of the measures taken by the government to alter the stock, composition/structure and loan terms to keep the public debt at sustainable levels.

4. Sources of External Borrowing There are three major sources: Official Development Finance, Export Credits and Private Flows • Official Development Finance • Official Development Assistance (ODA) • Other Financial Development Flows (ODF) ODA - ODA is foreign aid - consists of grants and/or loans by agencies of government or multilateral organizations to promote economic development - to qualify as ODA, loans must be concessional, having a grant element of at least 25 percent or more; however, the standard grant element for ODA is 86 percent. - ODA flows are interest-free but bear a service charge of 0.75 percent ODF - Other Financial Development Flows (ODF) are loans with little or no concessionality. - ODF includes disbursements from hard windows of regional development banks as well as IBRD loans

5. Export Credits (ECs) • ECs are non-concessional loans designed to finance purchases of goods • ECs could be private or official Private ECs could be in the form of Suppliers Credits where the exporter directly extends the credits or buyers credits where the credits are conducted through commercial banks • Official ECs, are credits extended by specialized export credit agencies of governments e.g. US Export-Import Bank (EXIM), France (COFACE), UK (ECGD) etc. • The Paris Club debts are covered by these export credit agencies. The agencies charge market-related interest rate. • Private Flows • International bank loans • Bonds • The London Club debts belong in the category of private flows by international banks • Foreign direct investment (FDI) provides external finance without adding to a country’s external debt. Legislative changes allowing ownership in various sectors of an economy, in addition to other reforms, could make FDI attractive to foreign investors.

6. Success Factors for Negotiating Loan Agreements • Adequate Preparation: • Proper Policy Coordination Have the country’s negotiating policy position adequately discussed by all stakeholders prior to negotiation • Ensure enactment of relevant laws and guidelines for loan mobilisation • Ensure that loan conforms with domestic laws • Prepare adequate background information on the country’s economic performance and prospects which could boost the confidence of foreign lenders • Constitute a strong multi-disciplinary negotiation team which should include economists, financial analysts, lawyers and other relevant professionals • Build adequate loan negotiation capacity

7. Success Factors for Effective Debt Management - What is debt management? • Debt management is the totality of the measures taken by the government to alter the stock, composition/structure and terms to keep the public debt at sustainable levels • Establish proper institutional arrangement to ensure coordination of the debt management function • Enact an enabling legislation that states clearly which institution or agency that has the mandate to borrow on behalf of government • Develop a national debt strategy • Build adequate debt management capacity • Put in place appropriate computer systems and infrastructure for effective debt management

8. Institutional Arrangements for External Loan Mobilisation in Selected Countries The Gambia • The Loans Act of 1970 empowers the Secretary of State for Finance to contract/mobilize external funds subject to Parliament’s approval. Debt Management is handled by the Department of Debt Management (DDM) which is also responsible for new financing policy; Central Bank of The Gambia externalises payments. • A National Debt Strategy document prepared by WAIFEM/DRI provides guidelines for external borrowing, including quality of loans and benchmarks for sustainable debt management in The Gambia.

9. Institutional Arrangements for External Loan Mobilisation in Selected Countries [Cont’d] Ghana • The Loans Act, 1970, as amended, vests the Ministry of Finance (MOF) with the authority to contract loans for the public sector. • External debt management is undertaken jointly by the External Resources Mobilization (ERM) Division of the MOF, the Accountant General’s Office and the Research Dept. of the Bank of Ghana. • The Aid and Debt Management Unit (ADMU) and the Multi-Donor Budget Support (MDBSU) units of the ERM are particularly charged with responsibility of analyzing aid inflows and coordination with donors.

10. Institutional Arrangements for External Loan Mobilisation in Selected Countries (cont’d) Sierra Leone • The 1991 Constitution and the Loans Amendment Act of 1992 vest the responsibility for contracting loans in the Minister of Finance. • The Ministry of Finance plays the lead role in putting in place policies governing loan contracting, loan negotiations, renegotiations, loan restructuring, loan disbursement and amortization.

11. Institutional Arrangements for External Loan Mobilisation in Selected Countries (cont’d) Nigeria • Nigeria has an autonomous Debt Management Office (DMO) which contracts and negotiates loans on behalf of the Federal Government. It also manages both external and domestic debt. • The Federal Minister of Finance is the sole signatory of public debt; Central Bank of Nigeria (CBN) which externalizes payments and the Office of Accountant General of the Federation (OAGF) which authorizes payments by issuing mandates. • The Federal Government (DMO) provides the general guidelines for external borrowing in Nigeria.

12. Lessons Learned • Countries that did not have enabling legislation for loan mobilisation and debt management experienced difficulties in managing those functions • Legislative lacuna resulted in indiscriminate borrowing in some countries • Countries need to thoroughly understand creditor and donor practices to avoid needless delays and undue costs in project execution • Improper composition of negotiating teams resulted in contracting loans with onerous terms which subsequently burdened the borrowing countries with high debt service A multi-disciplinary team which includes lawyers, economists, financial analysts and accountants is recommended for effective loan negotiation

13. Lessons Learned (cont’d) • Importance of debt recording soft ware which enables a borrowing country to know exactly how much it owes, who it owes and how to manage it • There is need to have guidelines for borrowing. This is necessary to avoid indiscriminate borrowing, loans of poor quality and unnecessary build-up of external debt. • Inevitability of policy co-ordination in negotiation process to avoid poorly funded projects and build-up in contingent liabilities (through inadequate coordination of fiscal, monetary and sub-national government authorities).

14. Lessons Learned (cont’d) • Need for capacity building in debt management The weak or low capacity in many areas of debt management has inhibited effective debt management in many developing countries. These included capacity to handle the legal aspects of debt management, such as negotiation and re-negotiation, loan agreement, arbitration and dispute resolution, conduct of debt strategy analysis, debt recording and risk analysis. WAIFEM’s training and capacity building interventions have brought about substantial improvements in the debt management function in most of its constituent member countries Trained staff get poached by other institutions with more enhanced remuneration packages than what obtains in the public sector.

15. About WAIFEM • The West African Institute for Financial and Economic Management (WAIFEM) was established in 1996 by the central banks of The Gambia, Ghana, Liberia, Nigeria and Sierra Leone. • Mandate: build capacity for improved economic and financial management in the countries; research and consultancy. • Three areas of core competences: debt, financial sector and macroeconomic management • Target audience includes core economic ministries, central banks, debt management units, relevant committees in the national parliaments and private sector • Current medium term programme has a sub-programme to fast track capacity building for Liberia during 2006-2009. • Capacity gap assessment of Liberia by WAIFEM and partners in progress.

16. Conclusion Every country requires an appropriate framework for loan mobilisation and debt management coordination anchored on an enabling law Craft a national borrowing policy which should specify the sources and degree of concessionality of loans, among others • Develop a national debt strategy which should be up-dated periodically • Constitute a competent multi-disciplinary negotiating team to negotiate quality loans • Build adequate debt management capacity (leverage WAIFEM training and capacity building interventions).