By Frank Sainworla, Jr. fsainworla@yahoo.com
It’s becoming clear that the path the CDC government has chosen to get over half a billion United States dollars loan from a private company in Singapore with “Sovereign Guarantee” has some future potential risks to the state.
The Central Bank of Liberia (CBL) will issue the Sovereign Guarantee.
But nothing has been heard from the government about the implications of the Sovereign Guarantee, which experts say has lots of disadvantages. It could even threaten a broke borrower country’s sovereignty as compared with the non-concessional loan arrangement.
The Loan Financing Agreement between the Liberian government and the Eton Finance PVT Limited of Singapore is currently before the Legislature for ratification in the amount of US$536, 400,000.00 of County Capitals Road project and the construction of mini-football stadiums and a vocational training center.
This non-concessional loan arrangement is at the heart the President George Weah government’s “Pro-poor” agenda in terms of infrastructure and they have gone all-out to say how good the deal is in transforming Liberia.
On Tuesday, May 22, 2018, Public Works Minister Mobutu Nyenpan, speaking with the local Joy FM Liberia radio, warned that “Holy Ghost fire” would strike anyone who try to crush the Eton loan agreement that is being debated in the Legislature.
According to the Five Hundred and Thirty Six Million Four Hundred US dollars loan financing agreement, the loan shall be ”for a period payable for a period in fifteen (15) years by level payment with a seven (7) year interest and principal free grace period.”
Disadvantages of Sovereign Guarantee?
Sovereign Guarantee is said to allow the sponsors of a project to guarantee the obligations of a special purpose project company in lieu of incurring direct obligations. It is also said to be a guarantee by the government that all obligations will be satisfied when and if the primary obliger goes into.
As for Concessional loans, they are said to be granted to low-income countries at a concessional interest rate through the Poverty Reduction and Growth Facility (PRGF) while non–concessional loans are provided with a market-based interest rate through five mechanisms: the Stand-By Arrangements (SBA); Extended Fund Facility ( EFF) and some experts say there are chances for eventual debt waiver.
In a paper prepared for the UN and other international bodies on SOVEREIGN FINANCIAL GUARANTEES, Tomas Magnusson, Director and General Counsel The Swedish National Debt Office spoke of some high risk associated with Sovereign Guarantee.
“When borrowing abroad the State should expect strong pressure from the lenders to restrict its sovereignty during the term of the loan, such as not to withdraw from certain international organisations, not to secure other claims or not to take any other measure that from the lenders’ point of view might have an adverse effect on the State’s credit status.”
Magnusson also said: The State may also be required to waive certain of its right to immunity and to disclose information about its economic and financial position. The usual sanction for a breach of contract is for the lender to demand immediate and full repayment of the loan. Where cross acceleration clauses exist, the entire foreign State debt may become due for payment within a matter of days. The State must also take into account the possibility that these sanctions will be used for political reasons.”
The document adds that: “In the final analysis, national sovereignty, and the limitation of it that the State is prepared to accept, are at stake.” Paper prepared for the UNCTAD, UNDP, and UNITAR workshop on Management of a Debt Office in Tbilisi 19-22 April 1999
Other international research by the World Bank and others identified some of the risks of Sovereign Guarantee relating to trade and exchange rate risks. In Liberia, there is yet to be a sound economic way out of the country’s dual currency regime. The exchange rate appears to be spiraling out of control in recent times, with the exchanging rate climbing to 140 Liberian dollar to one US dollar, prompting hike in prices of goods and services.
In his first State of the Nation address shortly after taking office in January this year, President Weah said he met the coffers virtually depleted—the government was broke and the Liberian economy was broken.
Experts also Sovereign Guarantees also pose risks for private investments and State insurance schemes (deposit insurance, private pension funds, crop insurance, flood insurance, war-risk insurance).
Every well-meaning Liberian will certainly want to see the roads in the southeast and other parts of the country paved sooner rather than later.
But they at the same time will no doubt want to hear the pros and cons of the over half a billion US dollars Eton and explanation of the potential risk of the Sovereign Guarantee, just in case.