Implicit Debt: a Consideration for Debt Sustainability Analysis
By Martin Anthony Nsubuga
Whereas the Debt sustainability Framework (DSF) has a provision for contingent liability recognition, Implicit Public Debt (IPD) is not a core consideration in carrying out a country’s a Debt Sustainability Analysis (DSA). Furthermore, the DSF does not provide guidelines on the measurement or the treatment of the contingent liability / IPD as to whether it should be disclosed as part of the Public and Publicly Guaranteed debt. The DSF however, provides some results that depict the implications of recognising a contingent liability or an IPD.
This paper attempts to provide a contribution to the MEFMI regional debt management practices by advocating for the consideration of IPD in any country’s DSA by addressing some important questions; i.e. does our debt valuation in a country’s DSA provide realistic countries’ debt exposure? In the event that IPD is recognized, what would be its right treatment in debt management context? And finally, what are the implications of the IPD to a country’s debt sustainability?
From the definition of public and publically guaranteed debt, it is evident that the definition is limited to the conventional explicit public debt. Implicit debt is isolated and therefore rarely considered in the current debt valuation. However in the analysis of a country’s fiscal sustainability, the focus on only explicit debt understates the impact of implicit debt yet in making good decisions about revenue and expenditure policy, it requires information about the current and future scope of the IPD. Secondly, it’s evident that implicit public debt meets the requirements to be considered a liability since IPD is a present legal obligation arising from the past event; it is probable that an outflow of resources may be required to settle the obligation; and that a reliable estimate can be made of the amount of the obligation. IPD therefore requires its full disclosure. Finally, the implications of a large and ever increasing implicit debt, to a country’s debt sustainability are significant once the IPD is incorporated into the Public debt valuation. This is evidenced by an ever increasing debt to GDP, which is an indication of an unsustainable debt. With reference to Uganda, the debt (Incl IPD) to GDP ratio continues to increase significantly throughout the 20-years projection period making Uganda’s debt fiscally unsustainable.
The sections of the paper are sequenced as follows; Section 1 introduces the paper with some background information, the scope and objectives of the paper. Section 2 looks at the implicit debt; definition and measurement while Section 3 provides specifics to Uganda’s IPD. Finally, Section 4 presents the results analysis while sections 5 and 6 provide the conclusions and also some policy recommendations.