Gov’t, IMF Wrong on Debt Assessment

Gov’t, IMF Wrong on Debt Assessment

Dear editors,

The International Monetary Fund (IMF) issued a statement on October 3, 2014. In its statement, one of its recommendations to government is to consolidate the debts of state-owned enterprises (SOE) with government debts.

The government refusal of IMF recommendation is commendable as the suggestion of IMF has no legs to stand on accounting, economic and legal grounds. If the IMF advice is applied, the debt sustainability figures become meaningless.

The establishment proclamations of SOEs make clear that SOEs are limited liability entities set up for profits. Their liabilities are settled by their income.

Upon default on debts, any claims by creditors are limited to their assets. There are no circumstances that the government would assume the debts of these entities upon default except guaranteed debts. Adding hundreds of billions of Birr debts of state banks, as they are SOEs, on public debts would make the government debt statistics even worst.

I differ with the government as well as IMF in regard to guaranteed debts. I cannot see any accounting rationale for inclusion of debts guaranteed by the state in debt sustainability statistics. Guaranteed debts are taken by SOEs primarily by the backing of their resources. The government is a guarantor that if the SOEs fail to pay their debts, the state steps in.

Guarantee is a contingent liability not an actual liability to the state. An explanatory foot notes regarding the size and nature of guarantees are sufficient in debt sustainability report.

The actual liabilities are reflected in the financial reports of the borrower SOEs. The current practice is double accounting of the same debt. The debts are shown on the financial reports of the SOEs as well as on government debt sustainability statistics.

Contingent liabilities become actual liabilities to state and are included in debt statistics provided that there are convincing evidences that there is a probability that guaranteed SOEs would default on their debts and the amount that would be filled by the state is appropriately determined. Annual assessment of the financial health of guaranteed SOEs would help to determine whether contingent liabilities are becoming actual liabilities.

Abdulmenan Mohammed Hamza

abham2010@yahoo.co.uk