Sovereign credit guarantees and government on-lending can catalyse private sector investment and fulfil specific policy objectives. However, Contingent Liabilities arising from guarantees and on-lending pose a potential risk for national budget and debt. Contingent liabilities arising from Public Private Partnerships (PPPs), Social Security funds, banks, primary dealers (PDs), natural disasters and judgement debt may also require regular monitoring.
Government intends to plug vulnerabilities in its public finance including monitoring risks from government exposure to State-Owned Enterprises (SOEs).
The current Debt Sustainability Analysis incorporates on-lent and guaranteed debt of the SOEs, and the determination of borrowing limits takes into account new financing by SOEs.
Prudent risk management can help identify and mitigate these risks. It is therefore a requirement under the Public Financial Management (PFM) Law to carry out Credit risk assessment on beneficiary institutions seeking government support in the form of on-lending and guarantees. The public debt component of the PFM law covers a wide range of financial instruments, including financial derivatives designed to purposely meet our economic circumstance as a lower middle income country.
Government has demonstrated strong commitment by taking remarkable steps towards improving public debt management in the country, and the development of the Credit Risk Assessment Framework (CRAF) is meeting this key commitment. The CRAF is the first working model for assessing credit risk of SOEs in Sub-Saharan Africa, and it will be updated from time to time, to reflect changes in the willingness and capacity of SOEs to honour their debt obligations.