In particular the public debt, not the nation's full
indebtedness, which takes many forms; treasury bills, notes, bonds, development
loans, calls on Government guarantees and letters of comfort, etc., group by
local and external lenders, presently stands at argumentatively 75% of Gross
Domestic Product (GDP) and is growing, and currently requires debt servicing
14-15% of the total annual budgeted expenditure.
With 41% of this expenditure already budgeted for direct
personnel cost and statutory boards, and another 41% to transfers and
subsidies, that leaves only 3-4% for development; attract investment, create
jobs, expand industrial sites, roads, bridges, infrastructure maintenance,
etc., and much less if more borrowing is done.
Some issues, however, needs the attention
of the owners, taxpayers and shareholders, the general public, noting that,
this is public debt.
Many loan accounts come to the end of their natural term
leaving residual amounts, which has not or cannot be cleared, but the current
estimates must always cater and be able to fully repay those owing. This so
called dead money amounts to only 0.02% of the public debt, a small amount but
if left unchecked, errors and typos in the estimates have already caused a more
than 1% additional showing in debt servicing charges, less funds for
development.
Similarly, placement errors as simple as entering principal
repayments as interest charged causes more additional increases in debt
servicing expenses but of more importance, it leaves that account open to
further future charges and duplications on revised and current estimates. Yet,
other liability accounts, paid in full, remain open past the due date, sitting
on the books, inflating the numbers and contributing negatively to key
financial ratios.
The public is familiar with and knows about many aspects of
borrowing; principal repayments are controllable and easy to predict, via
periodic installments or fully refunded at its due date. It is the interest
charges that present a challenge to forecasters, being compounded at an agreed
schedule, creating interest on interest as capitalized interest or paying out
interest as periodic distributions.
Many combinations of debt instruments; notes, debentures,
bonds are issued with designer mechanisms to offset and control such interest
issues. The sinking fund is one such tool, borrowing with a portion remaining
with the lender as deposit investment funds, earning its own interest and
hence, contributing to or paying a part of the bond’s interest, is standard
practice in low risk situations once properly managed.
Local or international investors, lenders and others are
often put off or discourage by floating rate bonds in the debt portfolio, where
interest is tied above or below an easily manipulated benchmark average, which
usually indicates weak financial forecasting. In other words, the state of
affairs is not strong enough to negotiate a low fixed rate over a long term.
Such investment, from insurance, pension and mutual funds,
are concerned on seeing audited figures with numerous or large amounts in
accounting adjustments, covering up errors or corruption. Funds Managers, with
resources which can be put to work anywhere in the world, do not respond well
to revised and current budget documents, the nation's prospectus, loaded with
arithmetic or other errors.
Projecting ahead requires contingencies, but unlike in the construction
sector where a small percentage is used to hedge against uncertainties, in the
financial sector 2-3 times in reserves is considered a high risk position as
penalties, fines and late payment fees, lawsuits, legal fees and settlements,
can easily erode all gains. Further Borrowings must therefore be matched by
greater or at the very least, equal Investments.
The ultimate
message is before any additional borrowings the income, revenue or earnings
component must be clear, attainable and measurable for the general public to
see.
Rationale
T.A.J & Associates Company Limited uses this occasion to comment on topics that have been covered, both academically and by the mainstream media, to add its opinion and point out investment opportunity, not to invoke any social action.
