Gov'ts sweats over external arrears default

Government incurred the displeasure of the International Monetary Fund (IMF) when it defaulted in its obligation to an unnamed Spanish creditor, contrary to the Fund’s condition of non-accumulation of external arrears.

In a letter addressed to Christine Largade, the Fund’s Managing Director, Finance Minister Mr. Seth Terkper explained that: “Small payments, not exceeding US$2million, were due to a Spanish creditor and not paid on time since the programme was approved on April 3, 2015”.

According to Mr. Terkper, government received a payment notice from the said creditor -- which is needed to initiate the payment order in compliance with Public Financial Management (PFM) procedures and regulations -- after the due dates.

“The creditor notified authorities of the overdue payments in early July, and all amounts due were paid by end-July. Other very small overdue payments were notified in mid-August and paid by August 25,” the letter said.

While Terkper had insisted that considering that payments to the creditor were made within the usual period following reception of the payment advice and that no arrears were accumulated, the Fund thought otherwise.

The Fund in its latest staff report said after further review of the loans documents, since neither the obligation of the lender to issue a payment notice nor a related grace period are specified in the loan agreements, the Fund clarified that: “Any delay in payment made beyond the due date gives rise to arrears and constitutes a non-observance of the continuous performance criteria (PC) as defined in the technical memorandum of understanding”.

The letter to the Fund, which was also signed by Governor of the central bank Dr. Kofi Wampah, later conceded government has breached the Fund’s condition on non-accumulation of external arrears and requested a waiver on the non-observance of the said conditionality.

“We now understand that the relevant loan agreements under consideration have no contractual requirement for a payment notice to be sent to initiate a payment. The government I thus obligated to make payments according to the repayment schedule established with the creditor.

“…All amounts due have since been paid and we wish to assure you we have implemented corrective actions to prevent such arrears from taking place in the future, and we request a waiver for the non-observance of this continuous Performance Criteria,” the letter said.

Government further told the Washington-based lender that to prevent future occurrences, it has taken steps to ensure that payments due are reviewed on a monthly basis and payment orders issued in accordance with the schedule of payments.

“Additional steps have been taken to strengthen the coordination between the Finance Ministry and Bank of Ghana for a weekly monitoring of payments awaiting funding andpayments transferred. In addition, we will instruct creditors to send payments notices at least fourweeks prior the due date to accommodate the length of our legal payment process.

“We believe that the corrective measures adopted in response to non-observance of the continuous performance criterion under the ECF on non-accumulation of external arrears will prevent accumulation of external arrears in the future,” the letter stated.

Granting government’s request for a waiver, the Fund said: “On the basis of the very minor and temporary nature of the non-observance of the PC and appropriate corrective actions, staff support the authorities’ request of a waiver for non-observance of the PC”.