June 17, 2016 BY: FRANCIS BEN KAIFALA ESQ. (A Renaissance Leader)*
Adam Smith in his work ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ wrote: “When it becomes necessary for a state to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open and avowed bankruptcy is always the measure which is both least dishonourable to the debtor and least hurtful to the debtor.”
The above statement laid the foundation that stirred the thinking among economists that countries can become bankrupt, even though opinions remain divergent on the issue to date. What is undisputable however is that countries like natural or juristic persons need money to finance their governmental projects and commitments. To do so, countries use several means to raise money including borrowing from banks, other countries, International Financial Institutions, and from private individuals and investors. Countries also raise funds from various sources of revenue-generation within the economy, mostly through taxes.
Where a particular government relies on borrowing, it may take various forms including syndicated loans, inter-governmental loans, government-issued bonds, or such other facilities that may be made available by multinational/International Financial Institutions like the IMF, the World Bank, AfDB, etc. It is these monies raised, together with various other sources of revenues like taxation, fines and duties that are used to run the governments, service existing debts (including those owed to employees of the state like teachers, soldiers, the police, the civil and public service, various contractors, etc.) finance various projects (like the construction of roads, education, water supply, electricity supply, healthcare provision and various other infrastructural undertakings) and run the day-to-day activities and commitments of government.
However, just as a State can borrow, so too is the reality that it can go insolvent (Insolvency being the condition where the state is unable to pay all of its debts when they fall due). Whilst it is difficult to apply a typical “balance sheet” test to States to determine whether their debts exceed their liabilities at any given time (owing to the fact that it owns all the lands including the natural resources and can always expropriate businesses or even sell part of its territory – Banana Island could fetch a handsome sum even though there are reports that it is sinking), it is easy to apply a liquidity test instead to know whether there is enough money available to the government to settle the debts of the State. Sierra Leone’s corporate law adopts the liquidity test for companies incorporated in Sierra Leone. Based on that test, Sierra Leone now appears to be running on a low liquidity and cash flow – which is usually a good indicator of insolvency. This can be mended by borrowing more (panic borrowing) which will be at high cost (interest rates) with immense disadvantages.
Recently, there are worrying signs of an economic meltdown in Sierra Leone: Salaries are reported to have gone unpaid; several government agencies have either not been paid what it takes to run them or they have been delayed, the foreign reserve is mostly believed to be drying up, the Leones is on a free fall when compared to the US Dollar and other strong currencies of the World, the country is squeezed of liquidity, inflation is galloping out of control, the country’s external debt is believed to be growing exponentially, there is an increased number of failing enterprises and businesses, and generally, there is a terribly gloomy economic atmosphere looming.
The sad reality remains the lack of opened sourced data and transparency. In a panic mode, the government has introduced subtle austerity measures (a good move if applied properly) like the unilateral cut on workers’ benefits to their disadvantage (a clearly illegal move considering that there was no legal basis for it), increased taxes on income (as high as 35%), and various other planned actions to salvage the embarrassing state of the economy. Even more embarrassing is the content of recent text message received by citizens – purportedly a quotation by the President, put forward for publication by the Governor of the Bank of Sierra Leone, in the following terms: “I call on fellow Sierra Leoneans to buy, sell, lease, rent, hire, transact all businesses in LEONE. Together we can save our Currency. H.E Dr. Ernest Bai Koroma”. That message does not only contain a subtle admission by no less a person than the President of Sierra Leone that the currency needs saving and is spiraling out of control, it perhaps also worryingly shows that our policy makers are not as in charge of planning Sierra Leone’s economy and its fiscal policies as we would expect them to be doing. In fact, it exudes a shocking weakness in the administration. It is certainly perplexing that the government whose business should be to formulate and enforce policies and make prudential regulations for the good of all is “pleading” with its citizens to use the country’s legal tender in order to save it. It confirms the belief that those we have elected to look after our affairs are not as in charge of doing so as we would expect them to be, or perhaps they do not fully understand what it would take to save the economy.
We are on a similar path as failed economies in recent past like Greece and Cyprus – who had to be bailed out by their peers with huge consequences to their citizens. Those familiar with monetary economics or macroeconomic policy can see the seeming ignorance that underlies that text message – the strength of the local currency against foreign currencies does not really rest with what the locals do among themselves (“to buy, sell, lease, rent, hire, transact all businesses in Leones”). On the contrary, it has everything to do with what the locals and their government do with other countries within the context of trade. We need to export more to other countries as we import goods from them so as to reverse the trade deficit that is weakening our currency. In other words, what we need is more export by Sierra Leoneans to receive US Dollars in return, which will cushion the supply of FOREX and not have its price continue to rise to catch up with the demand for it. Clearly, that is not going to happen soon.
The other alternative we have is to reduce export and consume more of what we produce. That too is almost impossible as we currently lack policies that encourage or likely lead to self-sufficiency. What the government should be doing is trying to address these two policy considerations and move the country towards a favourable balance of trade or self-sufficiency.
On a recent visit to Jamaica, a country similar to Sierra Leone in everything especially topography, I met a group of Jamaicans lamenting the sad state of their economy. They were particularly concerned that their currency is worthless as 1 US Dollar is equivalent to about 600 Jamaican Dollars. I took out a 5000 Leones note from my pocket and showed them, they were thrilled to see an African currency. However, they could not believe, when I told them that Le5000 note was not even equivalent to a dollar and it would take about 6300 Leones-and-counting to get 1 US Dollar in exchange! There they were thinking they were worse off. One of the Jamaicans exclaimed at me “Man Youth! What kinda bloodklaat contri yuh ah from?”. I looked at him with a subtle smile and tears in my eyes and said gently “yah man. . .mi ah come from Sierra Leone, West Africa!”. I will never forget the look of disappointment on the faces of those Jamaicans who adore everything about Africa but realized from my revelation that emancipation has not led to real freedom.
Sierra Leone may be on an economic path to doomsday because those in charge of planning the economy and determining policies have failed to properly or efficiently manage the resources they have been put in charge of in order to keep the country solvent or financially liquid. Poor or rather misguided economic decisions and policies may have made the limited resources available to this small country insufficient to service its debts whilst still carrying on other commitments, liabilities or interests: The government contains a huge duplicated workforce in every department and sector (the Finance Ministry alone has four Ministers), the hemorrhaging of money to idle workers and projects, the proliferation of unnecessary white elephant projects just to score political points (see the street lights), perverted corruption and maladministration abound, and reckless government spending is going unchecked by our Parliament. Worse still, there is no debt cap or limit on government borrowing. Faced with this situation, those of us who expect much from the government as the businessmen running the affairs of the state are hands-tied as, it is the state – it cannot be liquidated and we cannot sell our shares!
The economic morass that surrounds us is not new. We just have not learnt how to deal with it well to send a message and make our leaders more responsible counterparty social contractors. Historically, the relationship between debtors who defaulted on repayments as agreed with their creditors was governed by the application of prescribed criminal punishments. In medieval European states, a merchant who was not able to settle his indebtedness as they fell due was treated very severely – His creditors were allowed by law to visit him at the market place where he carried on business and break the bench he uses to trade on his head. This is how the Latin phrase “banca rota”- which in English means “broken bench” – was borne, and it later developed as the linguistic source of the word “bankruptcy”. The result of the ‘broken bench’ was that it prevented the debtor from continuing his trade and eliminated from society the burden of bad businessmen. What we have are similarly bad businessmen running our economic affairs. We have to learn to deal with their failures so they know they are our agents and there are consequences for non-performance.
Municipal bankruptcy laws are well established and developed, but the International financial system has not provided a similarly organized bankruptcy regime for sovereigns (States). As a result, there is no established legal and regulatory system to deal with governments’ failure to pay their debts or run a sound economy. Dealing with the insolvency of Sovereigns can become complicated as, the usual debt recovery mechanisms that are available to normal debtors against corporate entities or individuals do not apply to States. There is no effective Insolvency regime to enforce Creditors’ rights (including those employees whose salaries may go unpaid) and it is almost impossible to liquidate the Sovereign’s assets to repay its debts. The effect is that citizens around the world have therefore used ad hoc measures to deal with the situation including literally “breaking benches” on their governments’ heads. In recent times, there were protests in Spain, Portugal, Cyprus, and Greece that resulted in death tolls, civil unrests and sometimes the toppling or change of governments. We do not want that in Sierra Leone, but we cannot rule it out considering the continued breach of social contract by successive governments and the resultant growing frustration and distrust among the citizenry.
The absence of an Insolvency regime for countries does not however mean that our government should not take steps to resolve the embarrassing economic situation or take conscientious action to create a sound economy. We have more to lose beyond governments being voted out or even violently overthrown: In International Finance, poor economic policies lead to damage to a country’s reputation; which may lead to the increase in its borrowing costs or its exclusion from the financial market, or limit its access to the financial markets. Sierra Leone may suffer a reduction in its international trade, or have this situation create a bad trade credit.
All these could be averted if we put in place customized and stylized economic and financial policies that will enhance our country’s reputation and reduce our many post-independence woes.
Above all, a government that wishes to avoid the application of the “broken bench” to it should get its act together and take conscientious steps to better the people’s lives in terms of economic planning and regulation other than literally beg for help from its citizens who expect it to have the answers. If they do not do so, and fast, like the US in the 1930’s, we are heading for economic Depression – and the bench upon which the bad businessmen sit may not be hard to locate by a depressed citizenry.
*Francis Ben Kaifala Esq. is a Managing Partner in the Law Firm Kaifala, Kanneh & Co., Top Floor, 81 Pademba Road, Freetown;
He holds the joint LLM (Master of Laws) in Law & Economics from the School of Law and the School of Economics and Finance at Queen Mary University of London.