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

4 Introduction to public debt, sustainability or debt viability

4.1.1.1 Notions of debt and debt sustainability

4.1.1.1.1 Notions of debt

Debt means any commitment represented by a financial instrument or any other legal equivalent^4(*).

Public debt is the debt incurred by a State with individuals, banks, companies and States. External public debt and domestic public debt are all public debts.

External debt of a State represents all loans incurred by the public powers/authorities of a country with creditors (private, public, bilateral or multilateral) external or non residents. It can be public or private, bilateral or multilateral; it can also be commercial.

Gross external debt is equal to the amount, at a given date, of the actual and unconditional current outstanding commitments involving the obligation for the debtor to make one or payments to repay the major part and/or repay interests at one or several times in the future and that are owed to non residents by residents of an economy^5(*).

According to the World Bank, the external public debt is any debt payable in foreign currencies to foreign creditors whose initial or extended maturity date exceeds one year, and is either incurred directly by a public organization of the borrowing country, or is guaranteed by the State.

The domestic debt of a country is all the commitments made by the State to stakeholders residing in the country and expressed in local currency.

The ·domestic public debt· means debt instruments issued by public authorities (Central government, regional and local authorities and public enterprises).^6(*)

The debt service includes all payments made in settlement of a particular liability notably of the principal, interests and late payment charges.

In addition, debt repayment depends on the level of interest rates and exchange rates, since a significant portion of the outstanding debt is quoted in dollars, and at variable rates.

Concerted loans are loans that are granted against the will of the lender.

Outstanding debt is part of a current loan that has effectively been released.

The stock of the debt provides a useful and rapid measure of the future charge of the debt related to the existing debt.

Debt interest means the main charge to pay on a loan, which is calculated on the disbursed and non reimbursed part of the capital, for penalty obviously.

Grant element (or element of concession) is the «subsidy/grant» component of the loans granted to development assistance organizations. According to the classification of the IMF and World Bank, a loan is concessional if it comes with a grant element of at least 35%.

Public debt means all assistance requested by a Government from partners (bilateral, multilateral, financial institutions, financial markets, etc.) to fund development activities that have not been supported by the national budget.

4.1.1.1.2 Concept of debt sustainability or viability

The external debt of a country is viable or sustainable in the medium and long term if the Country is able to meet all its current and future liabilities on foreign debt without resorting to an exceptional funding (IMF, 2001).

The analysis of the foreign debt sustainability is carried out through: export related debt, ratio of GDP related debt, the ratio of the NPV of debt to budget revenue and the debt service to exports ratio.

When the debt is accrued at a rate faster than the ability to pay, in such a way that at a certain moment the Country will not be able to cope with the debt service^7(*), the burden of the external public debt can be described as non-viable.

The debt sustainability is the ability of a debtor Country to fully meet its current and future external liabilities without resorting to rescheduling or accumulation of arrears.

According to RAFFINOT (1998), if the following conditions are not met, difficulties in meeting liabilities become highly probable:

- debt outstanding / GDP; this ratio must inferior to 50%.It is an indicator of liquidity,

- the ratio (debt service/exports of goods and services non factors of production) should be inferior to 20%, and

- the ratio (debt outstanding/exports) must be inferior to 150%. It is an indicator of solvency.

* ⁴ DEDLOCk C. and al, External/ Foreign debt of developing countries : Unlimited renegotiation, 2001, P.9

* ⁵ IMF : Foreign debt statistics Guide,2003,P .20

* ⁶ KAMARA Mama Pierre and N4DIAYE Pierre, Debt Management Curriculum, COFEB ,2009

* ⁷ Development funding Office, United Nations economic and social matters department, strategic considerations in the management of public debt for sustainable development / document of orientations for multi-stakeholder dialogue, October 2004, p.3