The cost of doing business

The amount of external debt for Samoa is only going to get worse, if the government’s borrowing trend is to continue.

The latest Quarterly Debt Bulletin (Q.D.B.) from the Ministry of Finance put Samoa’s current debt level at 64 per cent.

The World Bank predicts that this will hit 70 per cent by next year, pushing Samoa into debt distress.

While there are many factors that play into whether or not a country goes into debt distress - irrespective of its current Gross Domestic Product (G.D.P.)-debt ratio - Samoa’s vulnerability to exogenous shocks means the government most likely will. Returning to the Q.D.B., which covers the third quarter of the 2013-2014 financial year, the M.O.F. reports that the external debts are all on fixed interest rates and mostly on highly concessional terms.

“Total external debt service for the quarter was $13.7m, increased by 47.1 per cent compared to the previous quarter and increased by 30.9 per cent compared to the corresponding quarter in 2013,” the report reads.

“The increase in debt service was mainly due to the debt service made for loans sourced from (China) Exim Bank which are due in March and September every year until maturity".

In fact, of all the repayments the government made this quarter – 64.6 per cent went to the Exim Bank, which is owned by the Chinese Government.

According to the Ministry, what the government owes the Exim Bank has increased by more than 14 per cent year-on-year.

“Chart 2.3 shows that in millions of Tala, external debt by creditors increased in March 2014 compared to March 2013, for the following creditors,” the report reads.

Now it is not as if the Government is not doing anything about addressing this level. It is, on paper at least.

For starters, the former Finance Minister, Faumuina Tiatia Liuga implemented the Medium Term Debt Strategy (M.T.D.S) 2013-2015, the main purpose of which is to set out the government debt management objectives, strategies and plans for the management of State debt.

“The main objective of State debt management, is to ensure that the financing needs of the State are always met on a timely basis and that its borrowing costs are as low as possible over the medium term, with a prudent risk,” the Strategy reads.

In part five of the report, it lists what it wants to achieve in the medium term.

“To restrict level of public debt to less than 50 per cent of G.D.P. (Gross Domestic Product) in the medium term and to reduce this ratio below 40 per cent in the longer term,” the report reads.

“To achieve this, Government will aim to maintain prudent macro- economic management, including efforts to keep inflation at a low level and to improve domestic competitiveness”.

Quite far removed by the World Bank prediction of 70 per cent, which it made in its Samoa Public Expenditure Review.

“Rapid fiscal expansion and borrowing over the past seven years have left Samoa with a large stock of debt and an elevated cost base,” the Review reads.

“With heightened fiscal needs arising from the December 2012 cyclone, concerted efforts will now be needed to bring the public finances back onto a sustainable footing.

“Samoa’s fiscal trends between F.Y. 06 and F.Y. 12 are characterised by increasing expenditure, modest revenue growth and an expanding deficit largely financed by aid inflows,” the review reads.

“As a result, the budget deficit steadily grew, peaking in F.Y. 10 at 7.5 per cent but remaining high in subsequent years.

“Deficits were financed with external borrowing, and external debt grew to reach 55 per cent of G.D.P. at end F.Y. 12.

“Substantial new fiscal commitments arose from the need to recover from Cyclone Evan, placing increased pressure on the budget, and budget deficits are likely to need to be lowered and kept around one per cent of G.D.P. in order to reduce debt to a comfortable level in the foreseeable future”.

This is something that the government has itself acknowledged. Again turning to its D.M.S.

“Debt Sustainability Rating has deteriorated to high risk of debt distress from moderate risk, within only a year of the I.M.F. (International Monetary Fund) Article 4 in April 2012,” the M.O.F. reports.

“The increased spending in response to external shocks has caused a breach of the fiscal policy goal of maintaining external debt below 50 per cent of G.D.P. in the medium term.

“Samoa’s current debt distress rating may have implication with relations with development banks such as A.D.B. (Asian Development Bank) and W.B (World Bank).

“It will affect the volume and mix of loans and grants that will be made available, with lower volumes and increased ratio of grants to loans.

“This may impact on the assistance from development partners in future including the access to concessional financing from the multilateral institutions”.

Furthermore, the government notes that the financing requirements for reconstruction work after the cyclone is estimated at $393 million of which preliminary estimates that 10 per cent would be contributed by development partners.

“With estimated revenue to be lower and expenditure reprioritisation, the financing gap would need to be met and would elevate the level of the State debt should government opted to borrow more,” it says.

According to the World Bank, Samoa has generally run a well-managed budget in the face of large externals shocks such as spikes in commodity prices, and the global economic crisis.

“Nevertheless, recent borrowing has highlighted a need for more prudent debt management and in particular, for higher quality investments,” it says in its Review.

“The composition of expenditure since F.Y. 06 has been supportive of the government’s policy priorities, with two thirds of the budget funding recurrent expenditure and the remaining third being allocated to capital spending in the priority sectors.

“Expenditure growth was driven by recurrent and capital spending in similar proportions as the government increased resources to a broad range of areas including frontline service delivery personnel, post-disaster reconstruction and other construction projects”.

The Bank says that as the budget expanded, the sectoral composition of total spending remained balanced between social, economic and administrative sectors. Budget execution has also been generally strong at the aggregate level even during the peak of the post-tsunami period.

“Although grant funding buoyed much of Samoa’s growing budget, loan financing has also been growing rapidly and has been accompanied by a rising debt-to-G.D.P. ratio,” the Bank says.

“Tsunami and economic recovery related activities contributed to this trend. However, 57 per cent of loan financed expenditure between F.Y. 09 and F.Y. 12 went towards large-scale non-economic infrastructure projects such as a number of large government buildings”.

Now ideally, infrastructure development should foster economic development – the idea being that new buildings attract more businesses and people to the urban areas, which inturn boosts the economy.

However, this does not seem to be the case in Samoa, especially when we look at its infrastructure developments with the China Exim Bank.

Exim Bank loans have been provided in recent years for construction of a number of prominent public buildings, including the National Convention Centre at US$52 million, the parliamentary complex and adjacent Ministry of Justice and Courts Administration buildings at US$41 million, a National Medical Centre and Ministry of Health Headquarters at US$41 million, and a national broadband network at US$15 million.

The D.P.C. says Exim Bank loans to the Pacific have been used to fund both productive as well as less productive infrastructure, ranging from investment in roads, government communication systems, and ports, to government buildings.

“There has typically been limited economic analysis of such projects. Funding of ongoing costs related to operation and maintenance of infrastructure has also not been considered,” it says.

“This has resulted in the rapid deterioration of infrastructure.

“The controversial nature of some past loans in the Pacific highlights a key challenge for China.

“The Chinese aid programme is avowedly a political, and is often said to reflect the wishes of Pacific island governments”.

“However, government priorities are by their very nature political. Loans can become controversial as a result”.

“This was evident recently in Vanuatu, when a new government sought to modify the previous government’s request for a grant for the Pacific’s largest convention centre. Similarly in Tonga, the use of an Exim Bank loan to fund an extension of the Royal Palace resulted in considerable criticism.

“The loan had been approved by parliament for reconstruction work in Nuku’alofa”.

An article in the Asia and Pacific Policy Studies journal Chinese Assistance in the Pacific: Agency, Effectiveness and the Role of Pacific Island Governments claims China Exim bank loans are of considerably greater value than other forms of assistance in Samoa.

In response to earlier criticism of the government’s handling of the foreign debt, Prime Minister Tuilaepa Sa’ilele Malielegaoi said when paying external debts, there are two important indicators you have to look at.

They are foreign reserves and government revenue.

“Our foreign reserve balance which gravitates up to six months is very strong,” he said.

Though Samoa has debts of around $960 million, Tuilaepa says the government is only paying a small fraction annually because the country has been borrowing on soft terms.

“Our debt service ratio is therefore quite manageable. So there is nothing to be worried about”.

This is all well and good, but according to the I.M.F. foreign reserves are really only taken into account when dealing with the payability of short-term external-debt.

“In recent years, there has been increasing interest in comparing the level of reserves to a measure of external debt, in particular to short-term external debt by remaining maturity,” says the I.M.F.

“A measure comparing reserves and short-term external debt is useful to gauge risks associated with adverse developments in international capital markets.

Short-term debt by remaining maturity provides a measure of all debt repayments to non-residents over the coming year and, as such, constitutes a useful measure of how quickly a country would be forced to adjust if it were cut off from external borrowing”.

“So, that is what I have been trying to explain to the Opposition, time and again. It is not the total sum of the debts that is important, it is what you are required to pay each year. And your ability to pay them”.

“Nearly all our external loans are at soft terms. Not only are we given very low interest rates – between one and two percent – but the duration of payment is over 20 years. Some other loans only require us to pay the interest for the first 5 to 10 years”.

The question remains – just what exactly is Samoa’s ability to pay off the amassed loans.

The D.M.S. predicts that the total debt servicing for this financial year is $38.5 million tala.

The Budget delivered by Tuilaepa had a deficit almost twice this figure at $69,127,613 which was covered by soft term financing totalling -$73,613,155 from New Zealand, which ironically left the Government with a Cash Surplus after

Borrowing of $4,485,542.

Of this debt servicing on the loans (please note that these repayments are not just to the exim bank, it is just that the D.M.S. only offers a lump sum in its table) the government has paid anywhere between 20 and 35 per cent interest over the past eight years.

A clearer example was offered up by the Tamil Guardian and can be found in Sri Lanka – who will have to repay China $4.9 billion for $2.96 billion dollars worth of loans.

At the time of press a similar example for Samoa could not be found.

However, there is a policy contained in Samoa’s D.M.S. as another objective the government wishes to achieve, which is to minimise the cost of public debt is by only taking out loans with a grant component.

“By limiting approval for external loans to those with at least 35 per cent grant component and restricting loans to support projects with a minimum positive economic return sufficient to cover the interest and repayment costs,” according to the D.M.S.

It seems unlikely that the Exim Bank would offer Samoa these terms with the D.P.C. reporting that Previous debt forgiveness has involved interest-free loans provided by the Chinese Ministry of Commerce, not concessional loans offered by China Exim bank.

Most recently the government has again put to paper yet another attempt to curb the debt issue – this time in the form of an amendment to the Public Finance Management Act.

Currently before the House, the amendment has inserted a new part XI, to provide for the objective of debt management.

“Provisions for a debt management strategy and the inclusions of the debt management strategy in the annual report from Treasury that is to be laid before the Legislative Assembly,” the Bill’s explanatory note reads.

Lip service and paper pushing are all well and good – but how does it stack up in practice?

If recent media reports are to be believed, not well – the government is again looking to China for another loan.

It is looking to Samoa’s largest creditor to fund a revamp of Apia Park so we can host the All Blacks.

According to Radio New Zealand International, the Government is hoping China will help pay for the renovations.

According to the media outlet, the Shanghi Construction Group will be the company contracted to do the work.

The D.P.C. notes that contractors have been known to approach Pacific ministers with assurances that they could arrange China Exim bank financing, despite construction funded by such loans needing to proceed to tender.

So, the issue of the legal tendering processes aside, the government is continuing to borrow money in spite of current predictions.

Whether this loan will have a grant component at this stage is unclear.

Bloomberg has reported the Nigerian Aviation Minister Stella Oduah saying calling China Exim Bank loans “almost free money”.

She was responding to a loan that the Bank had provided her sector, which had a two per cent interest rate and a 22 year repayment period.

The problem here is it is not free money, it is a loan.