Governments Have Been Borrowing Secretly. That’s a Problem 

You probably have no clue that governments borrow whenever they want and whatever they want, and some even borrow secretly depending on national interests or the priorities the country has within a specific period. 

The International Monetary Fund (IMF) and other studies estimate that such kind of hidden borrowing has reached $1 trillion globally. Although still a tiny portion of total public debt stocks – currently standing at $91 trillion globally – there is anything or everything wrong about this secrecy. 

“The problem is even more pressing amid higher interest rates and weaker economic growth. Accountability, too, is imperiled without accurate information about the extent of borrowing, which heightens the risk of corruption,” IMF said in a recent paper. 

This kind of hidden borrowing poses a growing threat particularly to low-income countries, some of which are already highly indebted. Low-income countries need to refinance $60 billion of external debt each year, three times the average in the decade through 2020. 

Countries such as Ghana have defaulted on their debt, while others like Zambia, Zimbabwe, and Ethiopia are struggling to repay, requiring the mercy of creditors to step in to restructure their ballooning debts. 

Other countries such as Benin, Kenya, Ivory Coast, and Rwanda have returned to the international markets to borrow for more money to meet their growing financing demands.

A government usually borrows when there is a need. It might want to finance a road, build a school, renovate a dam, fund a poverty reduction scheme, or even buy luxury cars for public employees. 

Such decisions are made by committees that have been given power to do so, and usually cabinets or even the president or the prime minister of a country will have a last say on whether it makes sense to borrow.

With governments facing growing priorities, there is a greater need for transparency and accountability. 

Transparency in Question 

The latest paper written by authors at the IMF paints a grim picture, showing that countries are ignoring key legal features that otherwise would have facilitated transparency in how governments borrow.

For example, fewer than half of the 60 countries surveyed by authors have laws that require debt management and fiscal reports, while less than a quarter require disclosure of loan-level information.

The paper identifies four vulnerabilities in domestic laws that enable debt to be hidden: a narrow definition of public debt, inadequate legal requirements for disclosure, confidentiality clauses in public debt contracts, and ineffective oversight.

One-third of the countries surveyed do not clearly define whose debt should be monitored or reported, which means that many countries allow some forms of sovereign debt to escape oversight.

Only countries like Ecuador, Rwanda, Ghana, Jamaica, Thailand and Vietnam define public debt in their laws in a more broad and comprehensive way.

A case in point is Ecuador which pursued legal reform in 2020 to ensure that short-term financing instruments – such as securities or treasury paper with terms of less than one year – were included in debt calculations and statistics.

Debt disclosure is another major concern that characterizes countries. A handful of countries have laws that allow disclosure of public debt. Those countries – think of Kenya and Benin – define clearly both reporting requirements and timeframes of public debt reports. 

But confidentiality in public debt contracts is another big challenge that hinders transparency. Many countries will borrow and hide debts in the name of protecting the security of the nation, let’s say if the country is borrowing for military or intelligence purposes.

The problem with that is it is hard for the public to hold their governments accountable as to whether such borrowing was necessary, the conditions for repayment made sense, and whether the process was transparent or not. 

That is why there is currently less transparency around how much African countries have borrowed from the Chinese government and creditors from China. 

That has led to Chinese lenders taking advantage of such secrecy, pressuring countries to make unrealistic debt repayment obligations, failure of which could amount to seizing countries’ critical infrastructure such as ports or even airports. 

Lack of transparency into public borrowing compounds the ability of countries to set the right priorities. To start with, there is a big question around whether the current government priorities are in the right place. 

Earlier this year, experts at the UN Economic Commission for Africa (UNECA) indicated that despite limited resources, African countries in or at risk of debt distress on average spend about 6 per cent of their budgets on military, even when the vast majority of the continent enjoys relative peace.

They argued that although there has been a steady decline in military spending since 2000, a 6 per cent allocation is too high and is about the same as what they allocate to social security and almost the same as what is spent on the health sector. 

“This calls for reprioritization of expenditures,” they said.

However, in light of the current situation of less transparency in the way governments borrow, it would be hard to even have a healthy debate over what should governments prioritise or not, rendering accountability impossible.