Public debt of Togo: an attempt to identify the explanatory factors

THE UNIVERSITY OF BIRMINGHAM

School Of Government and Society

International Development Department

Public debt of Togo: an attempt to identify the explanatory factors.

Presented by TENGUE KOKOU EDEM (student ID: 1189657)

Supervisor: Mr. Jackson Paul

Number of words: 13833

Submitted on 30^th August 2013

Program of Study:

Master of Science in Public Administration and Development 2011-2013 Academic Years

Public debt of Togo: an attempt to identify the explanatory factors.

Acknowledgement 3

Abstract 4

1 Methodology and research question & brief presentation of Togo 7

1.1 Methodology and research question 7

1.2 Brief presentation of Togo 8

2 PUBLIC DEBIT: FROM LITERATURE TO THE SITUATION IN TOGO 9

2.1 PUBLIC DEBT AND ITS EFFECTS IN LITERATURE 9

2.1.1 Introduction to public debt, sustainability or debt viability 9

2.1.2 CAUSES, CONSEQUENCES AND MOTIVES OF PUBLIC DEBT 12

2.2 DESCRIPTIVE ANALYSIS OF THE LEVEL OF PUBLIC DEBT IN TOGO 15

2.2.1 STRUCTURE OF THE DEBT AND DESCRIPTIVE STUDY OF THE EXTERNAL DEBT OF TOGO 15

2.2.2 Domestic debt 18

3 ECONOMETRIC ANALYSIS OF THE DEBT 22

3.1 EMPIRICAL AND ECONOMETRIC ANALYSES 22

3.1.1 RESULTS OF EMPIRICAL ANALYSES AND SPECIFICATION OF MODEL 22

3.1.2 Estimation and model validation 26

3.2 INTERPRETATION OF FINDINGS AND RECOMMENDATIONS OF ECONOMIC POLICIES 30

3.2.1 Interpretation of results 30

3.2.2 ECONOMIC POLICY RECOMMENDATIONS 34

Acknowledgement

I am grateful to my family my Father Djehoue , my mother Philomene , my wife Marlene and my Two children Ashley and Bradley who have suffered a lot for my long working hours coupled with studies during nights and week end . I also thank the ministry of economics and finance in Togo for their grate support in providing some data for the analysis. I also want to extend my praise to Andrea and Linda for their support trough the program and also to my supervisor Mr. Jackson for his comprehension and assistance.

1 Abstract

Togo is a formal French colony independent since 1960 .The focus of the dissertation will be the public debt of this young country with a particular emphasis on the period from 1980 to 2008 which represents a period of 29 years. During this period the amount of the foreign public debt has increased despite payments done and annulations obtained In itself the increase of the public debt it is not an issue, the real issues are its budgetary and economical consequences which invariably leads to social consequences. A high public debt is often associated with higher financing costs (due to the deterioration of the country credit rating), a trade deficit (to which economists referred to as a twin deficit), a high taxation in the country which limits the economic growth (seen from a liberal perspective) and a problem of equilibrium between generations (younger generations obliged to pay for public deficit generated by their elders).

The objective of this dissertation is to identify or more precisely to confirm some of the explaining factors of the public debt by an empirical testing of a model that assumes that foreign public debt is explained by importations, the service of the debt, the demographic growth, the rate of exchange between the CFA and the dollar.

The devaluation of the CFA francs and the effect of the suspension of international cooperation with the country are integrated to the analysis by the means of dummy variables.

If the explaining factors are retained by the econometric model, we will formulate recommendations in order to reduce the debt and its socio-economical consequences.

Introduction

Over the past two decades, the economic context of all the Heavily Indebted Poor Countries (HIPC) in general, and Togo in particular, has been marked by unprecedented debt. The debt crisis in developing countries continues to hit the headlines around the world. It is considered to be one of the factors delaying the economic development of poor countries.

The international economic environment has played a predominant role in the worsening of the crisis: fluctuation of exchange rates, decrease in raw materials prices and declining terms of trade, rising interest rates and decrease in loans facilities accompanied by concessional terms. In addition, this crisis is due to internal policies: mismanagement of public debt, misallocation of resources and lack of strict financial discipline.

After the Second World War, Europe was rebuilt thanks to the «Marshall Plan^1(*)». Inspired by this example, in the second decade of 1970, countries got indebted in order to cope with a desire for intensive investment to achieve high growth rates of GDP. This is the hope that the economic growth that started would create the necessary resources for the repayment of loans. Such was not the case, for it has rather led to a circle of indebtedness. This was supported by both internal factors (debt mismanagement and allocation of resources, lack of a sound financial discipline) and external factors (fluctuation of exchange rates, decline in commodity prices, deterioration of terms of trade, devaluation ...).

This environment has led the country to unbearable deficits and low growth rates.

In 1981 the global recession occurred and oil prices declined. On August 12, 1982, Mexico notified its creditors that its central bank had depleted its reserves and it could no longer honor the scheduled payments on the foreign debt. Then, after Mexico, Countries such as Argentina and Brazil took over. This was the beginning of the debt crisis. The solutions to enable to get out of the crisis include: concerted lending, debt relief, debt rescheduling, Structural Adjustment Programs, (SAPs) and the Brady Plan. Countries whose debt was rescheduled used to borrow from the IMF and would give their agreement on stabilization programs inspired by the latter.

A year earlier, the implementation in progress of the SAPs in the 80s was conducted notably with the support of the World Bank (WB) and the International Monetary Fund (IMF).

In the mid 1990s, mechanisms for debt relief (the Brady Plan^2(*) and option menus combining debt reduction and refunding), and all measures to reduce borrowing requirements were not sufficient to reduce indebtedness to a bearable level. In 1996, the Breton Woods Institutions (IMF and WB) launched a joint initiative for the HIPC in order to propose a sustainable solution to the debt problems of poor countries.

Togo did not escape that debt crisis. Thus, as at 31 December 1978, the external outstanding debt amounted to 179 billion FCFA of which 22 billion of arrears of repayment. The debt has trended upward despite repayments, discounts and cancellations obtained. It went from 213.4 billion in 1980 to 349.4 billion FCFA in 1993 that is an increase in real terms of 61% (Debt Directorate, 2008).

In 1994, following the devaluation of the CFA franc in January, the outstanding debt went from simple to double.

Compared to export revenues, pre rescheduling service gives a ratio of 44.2%, while after-rescheduling service is 27%, whereas the threshold allowed is 20%. In this proportion, the debt service is a heavy burden for the Togolese economy.

Since 1984, significant budget adjustment efforts, the results of Structural adjustment Programs (SAPs) initiated by the IMF and the World Bank have yielded positive growth rates reaching 4.1% in 1989. Also, from 1979 to 2008, has Togo benefitted from eleven visits to Paris^3(*) Club. The outstanding public debt of Togo is estimated at 1 106.384 billion CFA Francs as at December 31, 2008.

Despite its exports, the Country will face a difficult economic and financial situation. From the period 1994 to 2008, the ratio of external debt to GDP and public debt to GDP moved from 116.38% to 46.89% and from 123.78 to 79.19% exceeding the tolerable limits (50%). This is due to the birth, next to the foreign debt, of a domestic debt increasing since 1990 due to the sociopolitical and economic environment.

If there is agreement that the search for an appropriate solution to the debt issue necessarily requires knowledge of the factors that influence it, then it is worthwhile to consider the explanatory causes of Togo's debt. This raises a number of questions: How is the public debt of Togo and key ratios? What are the causes of the increase in public debt in Togo? Is there a better strategy to manage government debt?

Hence the interest in the topic: «Public debt in Togo: an attempt to identify explanatory factors»

The overall objective of the research is to identify factors explaining the evolution of public debt in Togo.

More specifically it will be

· describe the evolution of the public debt of Togo;

· analyze the cause of the evolutions;

· identify explanatory factors that reduce or encourage public debt of Togo

· Propose solutions to reduce public debt.

To achieve the objective of our study, we hypnotized that there is a positive correlation between the debts ratio and economic performance indicators such as foreign debt service, the ratio of imports / GDP and population growth.

Thus, this dissertation will consist of two technical (2) parts. The first part will be devoted to debt in literature, then we will proceed with the inventory in Togo; the second past will deal with the results of empirical analyses of public debt, estimation and interpretation of an econometric model. These two technical parts will be preceded by a description of the methodology and a brief presentation of Togo as a country to enable the readers to have a precise idea of the geographic and social context of the country.

* ¹ Marshall Plan is a comprehensive program of financial aid offered by the U.S. for rebuilding the allied countries. This program leads to a substantial contribution of capital in the form of loans to the latter

* ² see Appendix 1

* ³ Source : Debt Directorate