The sharp rise in corporate cross-border lending is a “recipe for possible crises in the future”, according to Walton Gilpin (pictured), Debt Management Adviser at the Secretariat. (Credit: Colin Patterson)
Central bankers take aim at surge in private sector external debt
22 September 2009
Commonwealth conference boosts developing countries’ ability to monitor foreign debt liabilities
Central bankers and economists from Africa, Asia, Europe and Latin America gathered in London last week to help avert financial crises caused by rampant private sector borrowing.
The conference examined the sharp increase in the amount of foreign loans, securities and other liabilities incurred by private companies and financial institutions between 2002 and 2007 - the ‘boom period’ - and looked at how policy-makers can better monitor corporate cross-border lending.
“Private sector external debt, especially in developing countries like Zambia, has significantly grown over the past few years,” said Alice Konga, a senior economist at the Bank of Zambia, during the conference.
“For our country, the short-term debt capturing and monitoring has not been sufficiently recorded, and I am hoping I can [learn from] other countries which are doing it more consistently.”
Total debt flows to corporations in developing countries rose from US$81 billion in 2002 to US$423 billion in 2008, while the proportion of private debt out of total external debt rose from 12 per cent in 1991 to approximately 50 per cent in 2008.
The sharp rise in corporate cross-border lending is a “recipe for possible crises in the future”, according to Walton Gilpin, Debt Management Adviser at the Commonwealth Secretariat. “This needs to be closely monitored with appropriate macroeconomic policies and monitoring frameworks,” he said.
“The fact that the private sector has acquired so much more debt in the past five or six years brings to the fore the need to monitor such flows.”
Over the course of the two-day programme, participants from 17 countries looked at the institutional arrangements, policy issues and regulatory frameworks required to manage and monitor private sector external debt. Sessions covered the need for more robust information management systems to assist countries in recording data.
Did you know?
- Short-term liabilities make up a growing proportion of total private sector external debt - doubling from 12 per cent in the late 1980s to 25 per cent by 2008.
- The bulk of debt flows to developing countries emanates from cross-border bank lending.
The conference, which was attended by officials from the World Bank, the International Monetary Fund, the Bank of International Settlements, and the United Nations Conference on Trade and Development, involved presentations from countries as diverse as India and Botswana as well as non-Commonwealth states such as Thailand and Mexico.
A set of practical guidelines for countries dealing with the issue of external private sector debt is set to be produced and distributed by the Secretariat following the conference, which was held at Marlborough House in London, UK, on 17–18 September 2009.
Wasswa Kajubi, Director of Statistics at the Bank of Uganda, speaking after one of the sessions, acknowledged that private companies’ ability to access foreign debt has presented “challenges” for developing countries such as Uganda.
“As a central bank we are concerned about private sector debt becoming [unsustainable] in the long run,” he said. “The increased connectivity of the Uganda economic market exposes the economy to shocks from the international markets.”
Hannatu Suleiman, External Debt Team Leader at the Debt Management Office in Nigeria, agreed that it is important to “keep a tab” on private sector debt, adding that the conference had been “very useful”.
Ms Suleiman said she was glad to learn from the experiences of countries such as Zambia, Mexico and Thailand. “I hope that when we go back we will be able to try to do it the way they have done it,” she commented.
Ransford Smith, Deputy Secretary-General of the Commonwealth, addressing the participants on the opening day, said: “[The Secretariat] considers this seminar very timely not only because it will address an issue of growing importance, but also because it addresses the need for a comprehensive and robust computerised system to comprehensively record such debt liabilities.
“Countries need to put in place appropriate institutional arrangements to capture debt flows contracted by the private sector and also to record and monitor trends in short-term external debt.”
Capturing, recording and monitoring the private sector external debt has become as important as public external debt it like a time bomb and its already ticking, the earlier the better.
Keep up the good work
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