'Bad deals raise Govt liabilities'

Individuals with the right skills should be involved in the negotiations for deals or loans as badly negotiated deals are giving Treasury long-term accounting problems, Finance and Economic Development permanent secretary George Guvamatanga has said.

"A critical problem is inadequate legal coverage of contingent liabilities. In most cases it is limited to some aspects of explicit contingent liabilities for example loan guarantees.

"I will tell you why we always have inadequate legal coverage because these transactions and deals are sometimes negotiated by people without the necessary skills.

"You actually find instances where delegations of very high level, Government officials, including Ministers travelling on various reasons and come back with transactions poorly negotiated," said Mr Guvamatanga.

"At the debt resource you are now placed in a situation where you can see that this transaction does not work, but it has already been negotiated and agreed at senior levels and you have no choice but to try and work with it. In most instances, we all know what follows, the contingency liabilities always materialise."

He was officially opening a Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI) Debt Managers Seminar in Harare yesterday.

Contingent liability essentially refers to a potential liability that may occur, depending on the outcome of an uncertain future event. It is recorded in the accounting records if the contingency is likely and the amount of the liability can be reasonably estimated. MEFMI is a regionally owned institute currently with 14 member countries, including: Angola, Botswana, Burundi, Kenya, Lesotho, Malawi, Mozambique, Namibia, Rwanda, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe.

In view of the dynamic debt management landscape, experts say it is important for debt managers, especially in the public sector, to stay abreast with pertinent developments in macroeconomic and financial management, including public debt management. Mr Guvamatanga added that contingent liabilities posed a risk for the effective implementation of national fiscal policies.

"The materialisation of contingent liabilities risks has direct adverse consequences on Government's fiscal position.

"The fiscal cost is invisible until they are triggered, thus they represent a hidden subsidy, blur fiscal analysis and can drain Government financing by increasing debt service obligations," he said.

"Given the low fiscal space in most developing countries, including the MEFMI region, this situation results in re-allocation of resources from capital and social projects towards debt service.

"In addition, contingent liabilities could also crowd out social expenditures on health and education, hence affecting Government's inclusion programmes."