83941 Debt Management Performance Assessment (DeMPA) Ethiopia June 2013 E THE WORLD BANK Economic Policy and Debt Department (PRMED) Poverty Reduction and Economic Management Network (PREM) The DeMPA is a methodology for assessing public debt management performance through a comprehensive set of indicators spanning the full range of government debt management functions. It is adapted from the Public Expenditure and Financial Accountability (PEFA) framework. The DeMPA tool presents the 15 debt performance indicators along with a scoring methodology. The DeMPA tool is complemented by a guide that provides supplemental information for the use of the indicators. For additional information on the World Bank's Debt Management Technical Assistance Program, including more on the DeMPA Tool, please visit our website at: http://www.worldbank.org/debt Abbreviations AfDB African Development Bank BPR Business Process Reengineering CBE Commercial Bank of Ethiopia CBP HIPC Capacity Building Program (DRI) DA Direct Advance DBE Development Bank of Ethiopia DeM Debt Management DeMPA Debt Management Performance Assessment DMD Debt Management Directorate DMFAS Debt Management and Financial Analysis System DRI Debt Relief International DSA Debt Sustainability Analysis EAL Ethiopian Airlines EEPCO Ethiopian Electric Power Corporation EFY Ethiopian Fiscal Year ERCA Ethiopian Revenue and Customs Authority ESL Ethiopian Shipping Lines ETB Ethiopian Birr FY Fiscal Year GDP Gross Domestic Product GOE Government of Ethiopia GTP Growth and Transformation Plan HIPC Heavily Indebted Poor Country IMF International Monetary Fund INTOSAI International Organization of Supreme Auditors MDRI Multilateral Debt Reduction Initiative MEFF Macroeconomic and Fiscal Framework MoFED Ministry of Finance and Economic Development MTDS Medium-term Debt Management Strategy MTDS Tool Medium Term Debt Management Strategy Analytic Tool NBE National Bank of Ethiopia OFAG Office of the Federal Auditor General OMO Open Market Operations PEFA Public Expenditure and Financial Accountability POSSA Private Organizations Social Security Agency PSSA Public Social Security Agency PPG Public and publicly guaranteed SOE State owned enterprises TA Technical assistance Tbills Treasury Bills UNCTAD United Nations Conference on Trade and Development 2 Table of Contents Abbreviations .............................................................................................................................2 Table of Contents .......................................................................................................................3 1. Executive Summary ...............................................................................................................4 2. Background ............................................................................................................................6 2.1 Country Background and Recent Developments ................................................................................ 6 2.2 Debt Management Performance Assessment...................................................................................... 8 2.3 Summary of performance assessment ............................................................................................... 11 3. Performance Indicator Assessment ......................................................................................12 3.1 Governance and Strategy Development ........................................................................................... 12 DPI-1 Legal Framework ........................................................................................................................................ 12 DPI-2 Managerial Structure .................................................................................................................................. 13 DPI-3 Debt Management Strategy ....................................................................................................................... 14 DPI-4 Evaluation of Debt Management Operations ............................................................................................. 15 DPI-5 Audit ........................................................................................................................................................... 16 3.2 Coordination with Macroeconomic Policies .................................................................................... 17 DPI-6 Coordination with Fiscal Policy ................................................................................................................... 17 DPI-7 Coordination with Monetary Policy ............................................................................................................ 18 3.3. Borrowing and Related Financing Activities .................................................................................. 19 DPI-8 Domestic Borrowing .................................................................................................................................... 19 DPI-9 External Borrowing ..................................................................................................................................... 20 DPI-10 Loan guarantees, On-lending and derivatives ........................................................................................ 21 3.4 Cash Flow Forecasting and Cash Balance Management ................................................................ 23 DPI-11 Cash Flow Forecasting and Cash Balance Management ........................................................................... 23 3.5 Operational Risk Management ......................................................................................................... 24 DPI-12 Data administration and data security ..................................................................................................... 24 DPI -13 - Segregation of Duties, Staff Capacity, and Business Continuity ............................................................. 26 3.6 Debt Records and Reporting ............................................................................................................ 28 DPI-14 Debt records.............................................................................................................................................. 28 DPI-15 Debt reporting........................................................................................................................................... 29 Annex 1: Meetings ...................................................................................................................31 3 1. Executive Summary A World Bank mission visited Addis Ababa from March 13–22, 2013. The team consisted of Abha Prasad (mission leader), Mizuho Kida, Elliot Riordan and Thin Thin Su (all from PRMED), Juan Carlos Vilanova (Debt Relief International), and Vanessa de Thorpe (UNCTAD). The objective was to undertake a comprehensive assessment of debt management operations using the Debt Management Performance Assessment tool (DeMPA). The mission met with government officials from various departments of the Ministry of Finance and Economic Development (MoFED), the National Bank of Ethiopia (NBE), the Office of the Federal Auditor General (OFAG), the Development Bank of Ethiopia (DBE), the Treasurer and the Legal adviser, Pension Authorities and Wogagen Bank (find detailed list at Annex1). This DeMPA report, through its scores from “A” to “D”, provides an overview of strengths and weaknesses in government debt management in Ethiopia, as evaluated during March 2013. The scores demonstrate that there are several areas of strength but also certain areas where policies and practices fall short of minimum standards for effective debt management. The latter could be considered a priority for reform. The main findings of the mission on the six core debt management functions of the DeMPA framework for Ethiopia reveal that: 1. Governance and Strategy—The legal framework is detailed and thorough, with mandates defined in the clearly written Federal Government of Ethiopia Financial Administration Proclamation No.648/2009 and related regulations and directives. The Minister of Finance is authorized to undertake debt related activities, and the purposes for borrowings are specified. There is a requirement to develop a debt management strategy and a report to Parliament, and the objectives for debt management are defined. There is however no formal debt management strategy in place, although significant progress has been made over time. The debt management strategy currently being developed should be approved by the Minister of Finance and made publicly available. Although financial audits are undertaken, performance audits of all debt management operations are yet to be completed. 2. Coordination with Macro Policy—There is good coordination and information sharing between the fiscal and monetary authorities and the debt managers. A key strength is the preparation of the debt sustainability analysis (DSA) without external assistance. However, monetary policy operations are not clearly separated from debt management operations. Moreover, the central government’s access to financing from the central bank is not limited by law. 3. Borrowings and Related Activities—There are documented procedures for external and domestic borrowings as well as for on-lending and loan guarantees. MoFED prepares feasibility studies prior to on-lending funds and issuing loan guarantees, and the legal adviser is involved in all loan negotiations. However, market based borrowings are not used for all domestic borrowings, and a monthly auction calendar with amounts and dates is not published (although it is internally prepared). 4 4. Cash Flow Forecasting and Cash Balance Management—There is a partial zero balance account in place and annual/monthly forecasts of the aggregate cash balances are prepared. However, an efficient single treasury account is not yet in place, and surplus cash is invested at low rates. 5. Operational Risk Management—There is an understanding of operational risk but not yet a formal framework for operational risk management. There are documented procedures for debt servicing, disbursements and reporting at the Debt Management Directorate (DMD) and the “four-eye principle” is practiced for data entry into the Debt Management and Financial Analysis System (DMFAS). There is adequate staff with detailed job descriptions. The registry of holders of Treasury bills at the NBE is not maintained in electronic form, and there are no fireproof cabinets for storing the loan documents. 6. Debt Records and Reporting—There are complete and timely debt records for all central government debt and guarantees, with appropriate evaluation and disclosure of information on total central government debt management operations. A consolidated Debt Statistical Bulletin for total central government debt (external, domestic and loan guarantees) is prepared and published. Furthermore, the Annual Public Debt Portfolio Analysis includes basic risk measures of the central government debt portfolio. 5 2. Background 2.1 Country Background and Recent Developments Ethiopia’s medium-term development program, the Growth and Transformation Plan (2010/2015) or GTP, sets the overall agenda for directing public investment, selecting various industries for special attention, and sustaining growth for the medium-term. The GTP effectively continues a major infrastructural investment agenda, especially focused on transport links (road and rail) and electricity (production and distribution). According to the recent World Bank Country Partnership Strategy for Ethiopia (August 2012), however, several challenges will need to be overcome in order to achieve the objectives of the GTP: • Rapid job creation through increased productivity and competitiveness of the industrial and services sectors, • Transformation to modern and productive agriculture, • Strengthened systems to better respond to shocks and increased resilience; and • Improved government effectiveness. In the latter area, the GOE has recognized that a medium-term Debt Management Strategy has become increasingly important for the funding of the GOE’s fiscal shortfall in domestic markets, as well as building the structures required for increased efficiency in external borrowing to support the GTP investment program. Ethiopia’s growth strategy since the 1990s has featured a “developmental state” model with a strong role for the government in many structural aspects of the economy. A focus on public investment spending to improve infrastructure has led to several years of real GDP growth well above the average of sub-Saharan Africa: GDP growth averaged 9.9 percent per year over 2004– 2011while the country has made good progress in diversifying processed exports. Going forward, the hydropower sector holds great promise for Ethiopia as a source of export revenues and hydrocarbons output add another layer of prospective optimism for the longer-term outlook. Economic growth is expected to register less than 8.0 percent in 2012-13 1 compared with the 8.5 per cent gain of 2011-12, with continued strength of output reflecting largely the dominant forces of services and agriculture. The country was among the top 10 fastest growing sub-Saharan African economies in 2011 and in the top 12 worldwide in 2012 (figure 1) and is expected to benefit from improved electrical power availability domestically and a pickup in export markets as global conditions improve. Inflation is a challenge, but the GOE has made good progress lately. The CPI is currently in a decelerating mode, tied in part to tighter monetary policy and lower inflation expectations. From peak annual rates of 33 percent in 2011, headline inflation had declined substantially to 6.1 percent in April 2013. 1 Forecasts by the World Bank country team indicate less than 8.0 per cent. 6 Ethiopia (the central government) is expected to continue to run moderate fiscal deficits over the near term. With spending higher than revenue growth, the overall fiscal deficit is expected to be higher from 1.2 to 3 percent of GDP in 2012–2013. It is expected to move lower if additional revenues from new investment projects come online in the short to medium run. Deficits in the balance of trade are expected to run for a more extended period of time, but also expected to narrow after a few years as a share of GDP, as electricity exports to neighbors weigh in; and increased domestic gold production and recovery in global demand help to boost export growth. Still, rapid imports of capital goods to sustain underlying investment projects of the GTP will continue to pressure the trade balance. Figure 1. Real GDP and real GDP per-capita growth, 2004-2012 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% 2004 2005 2006 2007 2008 2009 2010 2011 2012 Ethiopia real GDP growth (annual %) Ethiopia real GDP per capita growth (annual %) SSA real GDP growth (annual %) SSA real GDP per capita growth (annual %) Source: World Bank Ethiopia’s total outstanding external debt amounted to US$8.87 billion as of end-2012 (21.1 percent of GDP), up from $2.78 billion in 2008 (18 percent of GDP). Three-quarters of debt is either held or guaranteed by the central government. 2 Figure 2 highlights recent developments in public debt, both external and domestic as a proportion to GDP, showing an increase in foreign debt since 2009, and easing in domestic debt. 2 There are renaissance bonds issued at the retail level by DBE. These are part of public sector debt but not central government debt. 7 Figure 2. Public sector external and domestic debt as a share of GDP (%) Public Debt ratio of GDP, % 80.0 60.0 30.9 40.0 20.9 15.4 15.7 32.0 28.1 22.0 20.0 39.6 19.1 24.7 21.1 11.9 10.3 13.6 0.0 2006 2007 2008 2009 2010 2011 2012 est External debt Domestic debt) Source: World Bank 2.2 Debt Management Performance Assessment The DeMPA comprises a set of 15 debt performance indicators (DPIs), which aim to encompass the complete spectrum of government debt management operations, as well as the overall environment in which these operations are conducted. While the DeMPA does not specify recommendations on reforms and/or capacity and institution building, the performance indicators do stipulate a minimum level that should be met. Consequently, if the assessment shows that the minimum requirements are not met, this clearly indicates an area requiring attention and a priority for reform activities. The DeMPA focuses on central government debt management activities and closely-related functions, such as the issuance of loan guarantees, on-lending, cash flow forecasting, and cash balance management. Thus, the DeMPA does not assess the ability to manage the wider public debt portfolio, including implicit contingent liabilities (such as liabilities of the pension system) or the debt of State Owned Enterprises (SOEs), if these are not guaranteed by the central government. Each DPI has one or more dimensions linked to the subject of the DPI, and each dimension is assessed separately. The scoring methodology assesses each dimension and assigns a score of either “A”, “B”, or “C” based on the criteria listed. The evaluation starts by checking whether the minimum requirement for that dimension has been met, corresponding to a score of “C”. Meeting the minimum requirements is the necessary condition for effective performance under the dimension being assessed. If the minimum requirements set out in “C” are not met, then a score of “D” is assigned. In the cases where a dimension cannot be assessed, a score of “N/R” (not rated or assessed) is assigned. The “A” score reflects sound practice for that particular dimension of the indicator. The “B” score is an intermediate score, falling between the minimum requirements and sound practices. The performance assessment in this report is based on the DeMPA Tool, December 2009, World Bank. 8 Links with PEFA A Public Expenditure and Financial Accountability (PEFA) report for the Federal Government of Ethiopia was finalized in September 2010. The PEFA assessed Public Financial Management systems and processes for the overall execution of expenditures during the three Ethiopian Fiscal years (EFY) 1999-2000-2001 (2006/07, 2007/08 and 2008/09). The PEFA assessment goes well beyond debt management operations, which is the focus of DeMPA, but a certain overlap exists. On the legal issues covered also by the DeMPA, the PEFA highlighted that in August 2009, Parliament had passed a new proclamation on the Financial Administration of the Federal Government (648/2009) which focused, among other issues, on the maintenance of government accounts, on internal auditing and on debt. It also mentions that the Constitution is the document which lays out the role of the Auditor General, and his/her autonomy, selection and duties. The PEFA report also explains that low external audit coverage is a result of human resources problems. The DeMPA evaluation has also highlighted the sound legal framework in which debt management takes place The PEFA evaluation indicated that the overall performance of internal audits had improved between 2007 and 2010. The report indicated, however, that there were still delays (8 months) in submitting the annual financial statements to the Office of the Federal Auditor General (OFAG). It also reported that the scope of the audits performed by the OFAG remained at about 50 percent of total government expenditures, but that these audits generally adhered to international (INTOSAI) auditing standards and focused on a variety of significant issues. Assessment of this indicator is higher than that of the DeMPA because the DeMPA analysis focuses exclusively on whether performance auditing of Debt Management (DeM) operations has taken place, and the commitment of decision makers to address the auditor’s recommendations. External debt sustainability analysis (DSA) has been carried out by the GOE without direct technical assistance, in addition to the DSAs undertaken jointly with the World Bank and the IMF. At the time of the PEFA report, domestic debt was not included in the DSA. The DeMPA assessment has verified that annual DSAs without external assistance were undertaken in 2011 and 2012 and that they do include domestic debt data. In terms of reporting, PEFA points out that disbursements from donors and agencies are reflected in the Federal Budget, and that funds channeled directly to the implementing agencies are reported in the budget. Borrowing activities of SOEs are subjected to strict monitoring to evaluate their macroeconomic impact, via an inter-agency Committee with monthly reviews of enterprise borrowing. The evaluation is done on a case-by-case basis and there is no consolidation of risk issues into a single report. The DeMPA assessment has found the reporting of central government and of nonfinancial public sector debt to comply with best practices both in contents and frequency. Further comparisons of the assessments put forward by the PEFA and DeMPA may be found in the sections related to the respective indicators. 9 Technical assistance (TA) Ethiopia benefited from the Heavily Indebted Poor Country (HIPC) Capacity Building Program (CBP), implemented by DRI, until the program ended in 2009. The focus of the CBP was to train government officials in HIPC debt relief issues, as well as in undertaking DSAs to determine debt sustainability in the medium and long term. After the country’s exit from the initiative, the focus of the program switched into training government officials to evaluate and mobilize existing and potential sources of financing to secure enough concessional funding for implementing the country’s development strategy (GTP). Staff at DMD also benefited from the Distance Learning program developed by the CBP. MoFED has benefited from UNCTAD technical assistance projects in debt management, through the Debt Management and Financial Analysis System (DMFAS) Program, since 1988. The last project (funded by the Netherlands) ended in 2008. It resulted in an upgrade to the most recent version of the DMFAS system at that time (DMFAS 5.3), new IT equipment, and related training in data entry, validation and reporting. It also led to the production and publication of the government's first public debt statistical bulletin (2008). Ethiopia also received an MTDS mission from the World Bank and the IMF in the fall of 2012. 10 2.3 Summary of performance assessment Performance Indicator Score Governance and Strategy Development DPI-1 1. Legal Framework C 1. Managerial Structure: Borrowing and Debt-Related Transactions C DPI-2 2. Managerial Structure: Loan Guarantees C 1. Debt Management Strategy: Quality of Content D DPI-3 2. Debt Management Strategy: Decision-Making Process N/R DPI-4 1. Evaluation of Debt Management Operations C 1. Audit: Frequency D DPI-5 1. Audit: Appropriate Response N/R Coordination with Macroeconomic Policies 1. Fiscal Policy: Provision and Quality of Debt-Service Forecasts B DPI-6 2. Fiscal Policy: Availability and Quality of Information on Key Macro Variables and DSA A 1. Monetary Policy: Clarity of Separation between DeM and Monetary Policy Operations D DPI-7 2. Monetary Policy: Regularity of Information Sharing D 3. Monetary Policy: Limited Access to Central Bank Financing D Borrowing and Related Financing Activities 1. Domestic Borrowing: Market-Based Mechanisms and Preparation of a Borrowing Plan D DPI-8 2. Domestic Borrowing: Availability and Quality of Documented Procedures B 1. External Borrowing: Borrowing Plan and Assessment of Costs and Terms A DPI-9 2. External Borrowing: Availability of Documented Procedures A 3. External Borrowing: Involvement of Legal Advisers A 1. Loan Guarantees: Availability and Quality of Documented Policies and Procedures B DPI-10 2. On-lending: Availability and Quality of Documented Policies and Procedures B 3. Derivatives: Availability and Quality of Documented Policies and Procedures N/R Cash Flow Forecasting and Cash Balance Management 1. Effective Cash Flow Forecasting D DPI-11 2. Effective Cash Balance Management C Operational Risk Management 1. Debt Administration: Availability and Quality of Documented Procedures for Debt Service C 2. Debt Administration: Availability and Quality of Documented Procedures for Data D Recording and Storage DPI-12 3. Data Security: Availability and Quality of Documented Procedures for Data Recording and B System and Access Control 4. Data Security: Frequency of Back-Ups and Security of Storage A 1. Segregation of Duties D DPI-13 2. Staff Capacity and Human Resource Management B 3. Operational Risk Management, Business Continuity, and Disaster Recovery Plans D Debt Records and Reporting 1. Debt Records: Completeness and Timeliness B DPI-14 2. Debt Records: Registry System D 1. Central Government Debt Data: Statutory and Mandatory Reporting Requirements B DPI-15 2. Public Sector Debt Data: Statutory and Mandatory Reporting Requirements A 3. Debt Statistical Bulletin: Quality and Timeliness C 11 3. Performance Indicator Assessment 3.1 Governance and Strategy Development DPI-1 Legal Framework Dimension Score 1. The existence, coverage and content of the legal framework C The Federal Government of Ethiopia Financial Administration Proclamation No.648/2009 is the primary legislation that defines the mandates for public debt and loans granted by the Government. Article 40 clearly states that “...the Minister is the only entity authorized to borrow money or issue a guarantee or securities on behalf of the GOE…”. Further, Article 41 states that the Minister may authorize other officials to sign loan agreements on behalf of the GOE, and there is a clear delegation process to be followed through a power of attorney signed from the Minister to the designated official. The Proclamation (Article 43-44) also specifies the purposes for borrowings as: the efficient management of the consolidated fund 3, loan repayments, pre-payments if required, consolidation or buybacks of loans, and payment of direct advances. GOE can only issue loan guarantees if it is in compliance with the regulation issued by the council of ministers (Article 49). The Proclamation also requires that consolidated accounts of the central treasury be audited along with statements of debt, guaranteed debt and contingent liabilities. It requires that OFAG examine these, and that the results be reported to the Parliament before the end of the following fiscal year. The requirement to develop a debt management strategy and the objectives for debt management are given in the Financial Administration Council of Ministers Regulation 190/2010. The GOE has to develop a debt management strategy to meet the appropriate borrowing amounts at appropriate times, while balancing “minimization of cost with cost stability and taking into consideration the level of debt and the ability to re-pay”. The OFAG is the supreme audit institution of Ethiopia. Its responsibility is defined under primary legislation 4 and mention is made of it in secondary legislation. 5 Financial audits have to be prepared annually and submitted to the Parliament. For this indicator, Ethiopia meets the minimum requirements for score C. The higher score requires that primary legislation includes the objectives for debt management. 3 The consolidated fund is the part of the budget where all voted expenditures are charged and all revenues received. 4 Office of the Federal Auditor General Establishment (Amendment) Proclamation No. 669/2010. It refers to performance audits. 5 Financial Administration Council of Ministers Regulation No. 190/2010, para 57 refers to the external auditing of financial transactions with state governments. It does not mention ‘’performance’’ audits. 12 DPI-2 Managerial Structure Dimension Score 1. The managerial structure for central government borrowings and debt-related C transactions 2. The managerial structure for preparation and issuance of central government C loan guarantees There are several directorates within MoFED that are involved in debt management activities. For external borrowing, the International Financial Institution Corporation Directorate; Bilateral Corporation Directorate, and Ethio-China Development Corporation Office are the “front office” for mobilizing funding for public investment projects and budget support. They are involved in all external loan negotiations. The DMD is responsible for middle office and back office functions—including debt recording and reporting, providing debt service forecasts for budget preparation, carrying out quarterly debt portfolio analysis, and acting as the leading directorate among those represented on the committees carrying out debt sustainability assessment and (the new) medium-term debt management strategy (MTDS). For domestic borrowing, the Treasury Directorate of MoFED is responsible for developing the government’s monthly cash flow plan. The Auction Committee, a weekly meeting held at the NBE—with a representative from the DMD—is the driving force for developing the weekly issuance plan, i.e., deciding on the amount of T-bill maturities to be issued to meet the government’s funding needs, as well as managing the liquidity in the market (see DPI-8). Since the formal decision for government borrowing lies with MoFED, the representative of DMD will sign off the weekly auction results along with the other members of the Auction Committee. Both NBE and DMD record domestic debt. NBE acts as the paying agent of the government for debt service, domestic as well as external. There is no single entity responsible for preparing government loan guarantees. Until recently, an ad-hoc committee was formed to review each proposal for its eligibility and determine terms and conditions (see DPI-10). Since November 2012, however, a Standing Committee has been established and tasked to review all guarantee proposals. The Committee consists of representatives of the Legal Directorate of MoFED, NBE, Commercial Bank of Ethiopia (CBE), DBE, Ethiopia Metal and Engineering Corporation, the relevant ministry, and the front office concerned (multilateral, bilateral, or Ethio-China). DMD provides comments on the concessionality of the loan and its impact on debt sustainability. After the approval of a guarantee, the external debt team of the DMD is responsible for preparing a term sheet, and recording and updating data on the guarantee. The first dimension meets the minimum requirements for a score of C. While several entities are involved in debt management, they closely coordinate and their roles are well described and are working well in practice. Still, there is no formal debt management strategy guiding the debt management activities (requirement for a score of B). The second dimension also scores C. More than one government entity is involved in issuing loan guarantees, though they exchange information closely among themselves (before approval) and with the DMD (after approval). To achieve a higher score, a single entity must be responsible for the approval and issuance of loan guarantees, which closely coordinates its activities with the DMD from the beginning of the process. 13 DPI-3 Debt Management Strategy Dimension Score 1. Quality of the debt strategy document D 2. The decision making process, updating, and publication of the DeM strategy N/R The technical capacity at DMD to develop a sound debt management strategy has been improving over time. Over the last decade, the GOE’s approach has been first to maximize debt relief under HIPC and Multilateral Debt Reduction Initiative (MDRI), and then to provide an explicit development plan to secure enough concessional financing to implement its longer-term development objectives (GTP). The existing approach embedded in the DSA and GTP has been to make plans based on projected availability of funding and adjust spending continuously through the year as financing actually becomes available. Moreover, its implicit borrowing strategy has been to maximize external concessional loans from multilateral and bilateral sources with a minimum grant element of 35 percent, limit semi-concessional borrowing only to finance investments by the SOEs in the priority sectors, and use domestic borrowing to cover residual financing needs. In order to accomplish this, Ethiopia has diversified its sources of financing, expanding its external financing sources to include non-traditional development partners. As a result, among bilateral creditors, China (including both the People’s Republic of China and the Export-Import Bank of China) has become the largest bilateral lender (accounting for 5 percent of total GOE external debt outstanding as of end-June 2012). The Export-Import Bank of India has also been an important source of financing (4 percent of the total GOE external debt outstanding). The financing terms negotiated with these creditors have mostly conformed to the country’s borrowing policy, with a grant element averaging 35 percent. 6 Domestically, up to 2012, the GOE relied at times on central bank financing, with the balance of domestic financing in short- term T bills. During 2012, MoFED introduced longer maturity (364 days) instruments in efforts to extend the tenor of domestic instruments. Ethiopia has taken concrete steps toward developing and implementing a formal debt management strategy. As a first step, Government passed legislation mandating MoFED to develop a debt management strategy with the objective of minimizing cost and ensuring debt sustainability. 7 Furthermore, in 2012, based on the technical assistance received from the World Bank and the IMF, GOE has independently drafted an initial report on the MTDS for the next five years. The exercise was undertaken by staff at MoFED (DMD, Front Offices, Macro, Treasury, and Planning) and with participation of the NBE. The report includes an analysis of the cost and risk of the existing debt portfolio, and scenario analyses to evaluate the cost and risks trade-off of alternative financing strategies. In addition, it has an assessment of the sustainability of public debt in the medium and long term. The draft report places importance on the need for domestic market development. Additionally, the strategy includes a section describing improvements in the institutional arrangements in debt management and the legal framework in 6 Some loans from Exim Bank of China do not conform to the grant element of 35%. 7 The Federal Government of Ethiopia Financial Administration Proclamation No. 648/2009, and Regulation No.190/2010. The scope of the legislation is debt contracted by the Federal government. 14 which debt management takes place. It does not, however, include a recommendation for selected strategy, specific targets and ranges for key risk indicators, or the projected financing program over the five year period. The report is in the process of being finalized and DMD expects that it will be presented to the Management of the MoFED for discussion and approval within the next few months. 8 The existing approach, as it currently stands, cannot be considered a formal strategy and therefore does not fulfill the minimum requirement for this dimension (score D). Consequently, dimension 2 is not rated. DPI-4 Evaluation of Debt Management Operations Dimension Score 1. Level of disclosure—in an annual report or its equivalent—of C government DeM activities, central government debt, evaluation of outcomes against stated objectives, and compliance with the government’s debt management strategy. In Ethiopia, there is extensive reporting on government debt management activities to Parliament. This reporting takes place in three different ways: 1. Quarterly, semi-annual and annual reports that report on all debt operations during the period and with debt data that are within two months of the reporting period. The reports include complete information on domestic debt by instrument. They also contain detailed information on external debt (by creditors, currency and type), HIPC debt relief, DSA ratios, and debt management activity that has taken place during the period such as seminars, training events or plans to upgrade the debt recording system. The reports also include information on guaranteed and non-guaranteed SOE debt as well as on-lending activities. The reports are prepared by DMD and sent to the Strategy and Reform Office at MoFED, which is in charge of consolidating the information, and are submitted to Parliament. 2. The Government Accounts Directorate also prepares an annual report on actual debt payments during the fiscal year. During the second semester of every year, the Directorate prepares an annual report on actual Government expenditures, including debt service payments, up to the end of the previous fiscal year. 9 By December, the report is submitted to the OFAG with the rest of the accounts, which are consolidated and presented to Parliament two months later. 3. The NBE includes complete statistics on debt service payments in its annual report to Parliament. Because of the comprehensive coverage of government debt management activities and outstanding central government debt in the reports submitted annually to Parliament, the score for this dimension is a C. The score cannot yet be a B, because Ethiopia does not have a formal medium term debt management strategy, therefore the government does not publish any annual report covering debt management activities and evaluating outcomes against stated objectives. 8 At the time of submission to the Management of the MoFED it will be appropriate if the preferred strategy is identified. 9 The fiscal year in Ethiopia runs from July to June of the following year. 15 DPI-5 Audit Dimension Score 1. Frequency of internal and external audit of central government debt D management activities, policies, and operations, as well as publication of external audit reports. 2. Degree of commitment to address the outcomes from internal and N/R external audits. The OFAG is the supreme audit institution of Ethiopia. Its staff has participated in DeMPA training conducted by the World Bank in both December 2008 and in November 2012. It also received training in debt management, including use of UNCTAD’s DMFAS under the INTOSAI International Development Initiative in 2010. Following the latter training, an external ‘performance 10’ audit on the reliability of the debt data recorded and reported using the DMFAS system and on related security controls was undertaken in 2011. This pilot ‘performance’ audit did not cover the loan negotiation or securities issuance process. It was the first time a ‘performance’ audit of the processes for managing debt had taken place. Previously, external audits had essentially been financial audits. Results of external audit reports are submitted to Parliament. The legislative role of the internal audit function is defined under both primary and secondary legislation. 11 MoFED’s Internal Audit Services Directorate has responsibility to carry out financial as well as performance audits. Internal audit findings are reported directly to the Minister. Internal audit’s work plans and reports are communicated in a timely manner. The Internal Audit Services Directorate conducted its own audit on MoFED's response to the external audit, which was submitted to the Minister six months after receipt of the latter. No other internal audit on debt management procedures has yet been performed 12. The OFAG is very satisfied with MoFED’s response to its audit findings (financial/ performance) over the past 5-6 years. Concerning follow up action to external and internal audits on debt management performance, MoFED has so far shown strong and immediate commitment to address the findings. The first dimension of this indicator scores D. Although an external audit on debt management performance was conducted within the past 5 years, the audit was partial. For a higher score, a more comprehensive performance audit on debt management activities, including operational procedures and policies, needs to be undertaken. The second dimension, while recognizing that there is strong and immediate commitment in addressing the most recent external performance audit, as well as the internal audits, is not rated because at present there was no complete external performance audit of debt management functions, policies and procedures undertaken. 10 Refers to the audits of government debt management activities, policies, and operations. 11 Proclamation No. 648/2009: page 4803 Section 7, paras 1a, 1b, 1c, 1d and 2. and Regulation No. 190/2010: paras 60 and 61 12 Internal staffing resources for conducting more pro-active, efficient and comprehensive internal performance audits, however, are currently insufficient. 16 3.2 Coordination with Macroeconomic Policies DPI-6 Coordination with Fiscal Policy Dimension Score 1. Coordination with fiscal policy through the provision of accurate and B timely forecasts on total debt and debt service under different scenarios. 2. Availability of key fiscal variables and/or an analysis of debt A sustainability, and the frequency with which debt sustainability analysis is undertaken. The annual projections of total government debt service are provided by DMD to the Macroeconomic Directorate as part of the overall budgeting process. The data and projections are considered by the Macroeconomic Directorate to be timely and realistic in the context of current circumstances in Ethiopia. The debt service projections are based on forecasts of the Birr/USD exchange rate and Tbill interest rates. A sensitivity analysis is conducted of the expected impact of changes in the exchange rate and interest rates on the debt service forecast, and these are incorporated in the analysis underlying the budget. The mission team assessed the data and analysis (for the last 3 years budget data) and found this information to be reasonably reliable and provided in a timely manner for the budget-making exercise. The DMD takes a lead in the Committee responsible for preparation of DSAs. The Committee has prepared DSAs without external assistance since 2011 (see box1). The DSA is based on the World Bank-IMF LIC template and uses the same methodology and assessment with thresholds. The first dimension scores B. DMD undertakes a sensitivity analysis of the expected impact of changes in exchange rates and interest rates on the debt service forecast. In order to score A, a scenario analysis should also be undertaken. 13 The second dimension scores A. There is frequent and regular sharing of information on macro variables and debt data, and the annual DSA is prepared without external assistance. Box 1: DSA prepared by Ethiopia MoFED 2011 DSA The DSA was prepared in 2011 without any external assistance. The focus of the report was to assess the sustainability of the total financing needed for implementing the Growth and Transformation Plan (GTP) 14. The analysis included domestic as well external financing data and assumptions, a complete 20- year macroeconomic set of projections and a section dealing with results and findings. The report includes 13 DeMPA stipulates that not only should timely and accurate projections of central government debt service be provided, but that potential risks in the forecasts be illustrated through the use of both sensitivity analysis (requirement for “B”) and scenario analysis (requirement for “A”). The former tests for sensitivity of debt service projections by examining the impact of changing assumptions about a single variable at a time—say the exchange rate or interest rate separately. A scenario analysis tests forecasts by setting alternate values for a set of variables— providing a potential “best case”, or a “worst case” scenarios. Such scenarios can help provide a range of forecasts for debt service on which to evaluate risk to base budget calculations and other related views of the Ethiopian economy. 14 GTP Is the development strategy of the country 17 another section on conclusions and recommendations determining that the debt sustainability thresholds would not be breached in the medium and long term. 2012 DSA The 2012 DSA exercise was undertaken to accompany the preparations for the 2012 budget year. It included MEFF and the GTP agenda which assumes GDP growth of 11.2 percent. New financing assumptions included continued access to concessional borrowing for the central government as well as non-concessional financing being channeled to the main SOEs. The results of the analysis indicated that Ethiopia remained at a low risk of debt distress and that the debt burden indicators would not trespass the sustainability thresholds in the medium and long term. DPI-7 Coordination with Monetary Policy Dimension Score 1. Clarity of separation between monetary policy operations and DeM D transactions. 2. Coordination through regular information sharing on current and future D debt transactions and the central government’s cash flows with the central bank. 3. Extent of a limit to direct access of resources from the Central Bank. D Based on the Proclamation No. 591/2008, NBE is responsible for formulating and implementing monetary policy, and acts as the banker and fiscal agent of the GOE. In its latter capacity, NBE, on behalf of the DMD, conducts weekly auctions of Treasury bills (28-, 91-, 182- and 364-days). The Auction Committee, comprised of members from NBE and DMD, decides the amount and tenor of the securities to be issued, taking into account both the government’s cash requirements and what is required for monetary policy purposes (OMO). Market participants are not explicitly informed by NBE or by DMD as to whether securities are issued for monetary policy or debt management purposes. The cost of all Tbills is borne by the GOE without reimbursement by the NBE. As noted above in DPI-2, 3 and 6, there is regular and frequent sharing of information between the various Directorates within MoFED including the Budget, Macro units, Treasury and others; and between MoFED units and the NBE. Between the DMD and the NBE, there is a weekly reporting and information sharing on the current and future domestic debt transactions in the context of the Auction Committee held at the NBE. At present the cash forecasts have wide error margins. Efforts are being undertaken to improve this. In addition data on external debt service are also shared with the NBE on monthly basis. On the issue of the Government’s access to the resources of the central bank, the GOE has taken advances from the NBE in 2011 and previous years and has agreed with the NBE for possible advances in 2013. According to the law, 15 “the amount of credits and advances to be extended by the National Bank to the Government for each fiscal year, shall be determined in consultation with the Bank, and shall be consistent with the maintenance of price and exchange rate stability.” 15 “A Proclamation to Amend the National Bank of Ethiopia Establishment” #591/2008, approved August 11, 2008, Part 3, article 13/1. 18 The first dimension does not meet the minimum requirements (score D). The market is not fully informed whether NBE transactions in government securities are for meeting the government’s borrowing needs or for monetary policy purposes. The second dimension does not meet the minimum requirements (scores D). Although, there is weekly information sharing between the MoFED and the NBE on current and future domestic debt transactions and central government cash flows in the context of Auction Committee, the quality of the forecasts is weak. The third dimension does not meet the minimum requirements (score D). The primary legislation does not impose a limit on the quantity and duration of advances from the NBE to the GOE. 3.3. Borrowing and Related Financing Activities DPI-8 Domestic Borrowing Dimension Score 1. The extent to which market-based mechanisms are used to issue debt, the D publication of a borrowing plan for T-bills and T-bonds, and the preparation of an annual plan for aggregate amount of local currency borrowing in the domestic market, divided between the wholesale and retail markets. 2. The availability and quality of documented procedures for local currency B borrowing in the domestic market. The GOE accesses domestic financing through two major sources: (i) direct advances from the NBE (almost 59 percent of total outstanding domestic debt, at end-2012) and (ii) Tbills (at 25 percent). Non-marketable government bonds, with over 10 years of original maturity, were issued for recapitalization or securitization of public enterprises in the past (at 16 percent of total debt outstanding). Tbills are issued by the NBE on a weekly basis through auctions for 28-day, 91-day, 182-day and 364-day bills (the latter a new addition since 2011). Tbills are issued in minimum lots of Ethiopian Birr (ETB) 5,000 and multiples thereof. NBE conducts auctions on behalf of the GOE in its capacity as fiscal agent. The entire auction process is driven by the Auction Committee that comprises NBE’s Payment and Settlement Directorate, Research and Monetary Policy Directorate, and the DMD. The division into buckets for 28-day, 91-day, 182-day and 364-days is determined by the Auction Committee with the aim of extending the tenors, taking into account cash flow forecasts and market demand. Auction amounts are decided on the basis of the government’s cash requirements plus the rollover amount and what is required for monetary policy (OMO). The announcement for the auctions is available on the NBE website by Friday and if not then at least two days prior to the auction. 16 It is also announced in newspapers and on radio. Bidders have to place their physical bids in a sealed box at the NBE premises before Tuesday 2:00 PM—the auction closing time. The sealed bid-box is opened on Wednesday morning and bids are categorized by maturity dates, reviewed by the Auction Committee, and 16 http://www.nbe.gov.et/pdf/Tbill/tbillamharic.pdf 19 results are announced on the same day. Physical certificates signed by the Minister are issued to the winners, and records maintained with both NBE and DMD. For one and a half years, from July 2011 to March 2013, access to direct advances from the NBE was blocked, and all residual financing had been through Tbill issuance. However, in mid-March 2013, direct advances of ETB 2 billion were taken. Other than this, there were no other special non-market bonds issued. The first dimension scores D. The GOE does not (i) access the domestic market using market based instruments to meet 90 per cent of its projected borrowing needs; 17 nor does it (ii) publish the borrowing plan for Tbills/ bonds one month in advance with issue dates and instruments. Although, a monthly borrowing plan is prepared internally with maturities and issue dates for each week of the month, it is not published. The second dimension scores B. The terms and conditions, borrowing procedures and criteria for accessing Tbills are given in the Directive No. NBE/TRE/001/2011, which is available on NBE’s website. The NBE also provides information on how to obtain application forms for Tbill bids, which carries the detailed procedures for the application, on its website. The bid tender form is available in print at the Treasury Bills Office, NBE. It does not meet the requirements for A because the information is not available on MoFED’s website. DPI-9 External Borrowing Dimension Score 1. Degree of assessment of the most beneficial/cost-effective borrowing A terms and conditions (lender or source of funds, currency, interest rate, and maturity). 2. Availability and quality of documented procedures for external A borrowings. 3. Availability and degree of involvement of legal advisers before signing of A the loan contract. The International Financial Institution Corporation Directorate; Bilateral Corporation Directorate, and Ethio-China Development Corporation Office of the MoFED act as the “front office” for mobilizing funding for public investment projects and budget support. The DMD is responsible for most middle office and all back office functions—including debt recording and reporting. All external loans are contracted between external creditors and the “front office”. An annual borrowing plan—published as an annex to the Budget—is prepared based on GTP and the multi- year partnership agreements developed with main creditors. Each of the front offices also prepares information on the most cost-effective terms and conditions for external borrowing available within its sphere (e.g., multilateral, bilateral) and proactively searches for additional sources of finance—both from the traditional sources (under different funds or additional 17 MoFED’s annual domestic borrowing plan does not indicate the break-up into treasury bills or direct advances. It is indicated that all the borrowings will be from Treasury bills and this practice was followed prudently until 2012. 20 “windows”) and non-traditional sources. The information is regularly shared, updated and reported to the Minister. Internal documented procedures exist for all external borrowings—including for front and back- office functions. The latter contains a requirement for preparation of the term sheet. DMD staff who participate in loan negotiations prepare a term sheet no later than one week after the conclusion of the loan agreement. The legal advisors at MoFED are involved from the first stage of the negotiation process to the conclusion of the loan agreement. 18 The negotiation team typically consists of the following members: the legal advisor, the relevant front office, DMD, the borrower (Ethiopian government agencies) and the relevant line ministry. The first dimension scores A. There is an annual borrowing plan for external borrowing, prepared on the basis of the multi-year strategy document of the government and the multi-year partnership agreements developed with the donors. Most cost-effective terms and conditions for external borrowing are regularly updated and pro-actively researched by the “front office” and the information is used by the negotiation team. The second dimension scores an A. There are internal documented procedures for external borrowing, which include a requirement for preparation of a term sheet. The DMD staff is part of the loan negotiation team and prepares the term sheet within one week of the conclusion of the loan agreement. The third dimension scores an A. A legal adviser is always a part of a negotiation team and is a key player in the loan negotiation process from the proposal stage to the signing of the loan agreement. DPI-10 Loan guarantees, On-lending and derivatives Dimension Score 1. Availability and quality of documented policies and procedures for B approval and issuance of central government loan guarantees 2. Availability and quality of documented policies and procedures for on- B lending of borrowed funds 3. Availability of a DeM system with functionalities for handling N/R derivatives and availability and quality of documented procedures for the use of derivatives Guarantees Financial Administration Proclamation No. 648/2009 (“the Proclamation”) 19 and Council of Ministers Regulation No. 190/2010 (“the Regulation”) 20 provide the legal and policy frameworks 18 The Legal Directorate also chairs the Standing Committee for loan guarantees—see DPI-10. 19 Federal Government of Ethiopia Financial Administration Proclamation No. 648/2009 (http://www.ethiopian- law.com/federal-laws/regulatory-legislation/financial-regulation/356-financial-administration-proclamaiton-no-648- 2009.html). 20 Financial Administration Council of Ministers Regulation No. 190/2010 (http://www.goalgoole.com/index.php?option=com_content&view=article&id=573&catid=121&lang=en). 21 for issuing loan guarantees by the government. 21 In particular, the Regulation establishes the following criteria for issuing a guarantee: • The Minister of Finance may issue a loan guarantee “provided that the proceeds of the loan in respect of which guarantee is sought are used to finance the implementation of projects to which priority is given in the development plan of the government approved by the House of Peoples’ Representatives” (Part Eight, Section 45 Subsection 2). • The Minister of Finance may issue a loan guarantee “with due consideration being given… before issuing the guarantee that: (a) the reason why the guarantee is necessary and the benefits to be gained from it are established [and] (b) the probability and consequences of the guarantee being exercised are understood” (Part Eight, Section 45, Subsection 1). Thus, the policy regulating loan guarantees requires that credit risk to the government of issuing a guarantee must be assessed before the approval of such guarantee. A borrower seeking a government guarantee—usually an SOE—must follow the same procedure as every other project seeking public funding. Specifically, the borrower must submit to the Planning Directorate of MoFED a written request accompanied by economic and financial documentations on the proposed project, including detailed financial and economic risk assessment in accordance with the operational guideline developed by MoFED. 22 The guideline also describes the methodology to be used for the finical and economic risk assessment. The Planning Directorate checks that all required documentation is in place and that the project corresponds to the priorities identified in the national development plan (i.e., GTP). 23 The documents are then forwarded to the Standing Committee which is tasked to review all guarantee proposals. 24 The Standing Committee—which consists of representatives of the Legal Directorate of MoFED, NBE, CBE, Ethiopian Metal and Engineering Corporation, the relevant ministry, and the front office concerned (multilateral, bilateral, or Ethio-China)—studies the proposal and makes a recommendation to the Minister. The Minister then issues the guarantee. There is no requirement (or practice) to charge a risk fee for a guarantee. DMD provides comments to the Standing Committee regarding the concessionality of the loan and the impact of the loan on the country’s debt sustainability. Once the guarantee is approved, the Legal Directorate of MoFED drafts the guarantee agreement and forwards it to DMD. DMD prepares the term sheet based on the agreement, records it in the debt recording system, and updates the records (disbursements, repayments, amount outstanding) throughout the life of the guaranteed loan. 25 Neither DMD nor the Standing Committee, or any 21 The Proclamation states that “the federal government may guarantee the performance of an obligation provided such guarantee is in compliance with the regulation to be issued by the Council of Ministers.” (Part Eight, Section 49). 22 Appraisal Guidelines for Public Sector Projects. Ministry of Finance and Economic Development, October 2004, Addis Ababa. 23 Growth and Transformation Plan, 2010/11-2015/15. Planning Directorate is responsible for developing the GTP. 24 The Standing Committee was established in November 2012. See DPI-2. 25 DMD obtains required information through the quarterly surveys of SOE financial activities (“Form B”), submitted by all SOEs irrespective of whether it has received guarantees from the government. 22 other divisions within MoFED, is responsible for monitoring the credit risk during the course of the guarantee. It is the responsibility of the Minister of the relevant ministry (who is also a member of the SOE’s Board of Directors) and the creditor. On-lending The Proclamation Part Eight, Article 42 establishes that the Minister of Finance, on behalf of the government, may “on-lend all or a portion of a borrowing subject to terms and conditions satisfactory to the Minister” (Section 42, subsection 2-(d)). In addition, there is a policy guideline and an operational manual that governs the approval and issuance of external borrowings which include on-lending (see DPI-9). 26 As in the case of the guarantee, borrowers seeking on-lending will follow the same procedure as every other project seeking public funding, including the preparation of detailed financial and economic risk assessment in accordance with the operational guideline. 27 The first dimension scores B. There is documented policy for approving and issuing loan guarantees, which requires that the credit risk must be assessed before the decision is made. There is also a guideline on how this assessment must be conducted. For a higher score, the policy should include a requirement to calculate a guarantee fee to cover the credit risk to the government, as well as a requirement for the guarantee-granting entity (that is, the Standing Committee or its designated entity in MoFED) to monitor the risks during the life of the loan guarantee. The second dimension scores B. There are policy guidelines for on-lending and the operational manual for all external borrowing covering on-lending which requires that the credit risk must be assessed before the decision is made to provide on-lending. For a score of “A”, the policy should include a requirement to calculate an on-lending fee covering the credit risk, as well as a requirement for the designated debt management entities to monitor the risks during the life of the on-lending. The third dimension is not rated since the government of Ethiopia does not use derivatives. 3.4 Cash Flow Forecasting and Cash Balance Management DPI-11 Cash Flow Forecasting and Cash Balance Management Dimension Score 1. Effectiveness of forecasting the aggregate level of cash balances in D government bank accounts. 2. Effectiveness of managing the aggregate cash balance in government C bank account(s), including the integration with the domestic debt borrowing program. 26 The operational manual for DMD provides guidelines for back-office functions for processing on-lending and guarantees once they have been approved. See DPI-12 for detail. 27 That is, Appraisal Guidelines for Public Sector Projects. Ministry of Finance and Economic Development, October 2004, Addis Ababa. 23 There is an annual forecast of the cash balance generated at the start of the fiscal year. This is revised with quarterly data, and then broken down to monthly forecasts. Treasury prepares these forecasts based on revenue data received from the Ethiopian Revenue and Customs Authority (ERCA) and expenditure data consolidated from the budget spending units. The data are received on an annual, quarterly and monthly basis from ECRA and the budget spending units, and based on these, the Treasury prepares the forecasts. The ECRA projections are generally within + 15 percent of the actuals (even for the monthly), and Treasury adjusts these in line with historical trends and seasonal patterns. On the expenditure side, each budget head sends expenditure commitments for the next month to Treasury before the 15th of the current month. Treasury consolidates the expenditures and revenue forecasts and prepares the aggregate cash-balances for the next month, before the end of the current month. The monthly forecasts of the aggregate level of cash balances in central government bank accounts are prepared at the beginning of the next month. The quality of the forecasts could be improved. Forecasts for the months of January, February and March 2012, compared with the actual, revealed wide margins of error ranging from 65 to over 200 percent. The first dimension scores D. The forecasts are not provided for weekly cash balances, and further, the forecasts provided are not of sufficient quality. 28 The second dimension scores C, because the surplus funds in the Government treasury account are paid 3 percent interest by the NBE. The rate was fixed in line with the prevailing deposit rate at that time. At the time of the mission, the prevailing 1-year Tbill rate was also 3 percent, thus this was the closest to a “market rate” available. To score higher the Government should consider weekly transactions (such as issuance or buyback of Tbills) to maintain the cash balance at target levels. 3.5 Operational Risk Management DPI-12 Data administration and data security Dimension Score 1. Availability and quality of documented procedures for the processing of C debt service 2. Availability and quality of documented procedures for debt data D recording and validation, as well as storage of agreements and debt administration records 3. Availability and quality of documented procedures for controlling access B to the central government’s debt data recording and management system 4. Frequency and off-site, secure storage of debt recording and management A system backups 28 The forecasts for revenue are often updated only when they have a special event or a revised budget. 24 DMD has developed a complete set of detailed procedures manuals that date from 2008/09. These manuals have not been reviewed or updated. Processing debt service payments In line with the existing procedures manual, all payment notifications from creditors are checked against the debt records. Staff prepares internal payment orders which are validated by a senior officer and signed by the director of DMD. The payment order is sent to the Treasury Directorate which reconciles it with the projections it received during the budget preparation. One officer at Treasury validates the payment order which is then signed by the director. Treasury forwards the order to the NBE which makes the payments. Once payment is effected, NBE sends a payment voucher to Treasury and DMD. The whole process is carried out using a paper form. DMD follows the same basic procedures when issuing payment orders for Tbills—i.e., a staff member of DMD prepares the internal payment orders which are then validated by a senior office and signed by the director, etc.—but the payment orders are not issued to the NBE as there is a standing order for the NBE to make payments as these become due. Payment of Tbills is made upon presentation of the physical certificate on the maturity date. The identity and the instrument of the claimant are checked against Form TRB-4 prepared and approved by the Auction Committee which includes all relevant information. Finally, payment is effected electronically to the claimant’s bank account registered with the NBE. Debt recording Staff of DMD is responsible for recording external debt data into the DMFAS system. All staff in the DMD holds access to DMFAS, and has benefited from training provided by UNCTAD in using the system. In line with the existing procedures manual, a senior officer checks and validates each data entry. The manual also states that as the payment date for any loan approaches, if a payment notification has not been received, staff is required to contact the appropriate creditor and request one. Any discrepancy between the payment advice and the data records is raised with the respective creditor. This process also allows staff to reconcile regularly with creditors the accuracy of the internal recording system. Debt administration records All debt administration records for domestic and external debt are kept in secure filing cabinets at DMD, NBE, and the Treasury. External debt records are kept in four different locations: at Legal Directorate, Archives, DMD, and the Treasury. Domestic debt records are kept at DMD, two departments within NBE, and the Treasury. Although debt administration records for domestic and external debt are kept at multiple locations, all four locations in the MoFED are in the same compound and not all filing cabinets are protected from fire, flood, or other natural (or man-made) disasters. 29 29 Neither MoFED nor NBE has a formal business-continuity and disaster recovery plan (see DPI-13). 25 Controlling access to debt recording system There are documented procedures for controlling access to the debt recording system. Any new staff joining the DMD are given access to the system based on the request provided by the Director, DMD in writing to the IT department. 30 Backup and storage of debt recording system External and domestic debt data are stored in the DMFAS system, which is kept in the central computer system area at MoFED. Staff at DMD can access the system through an internal LAN connection. Back-ups for the debt recording system as well as MoFED’s other systems are carried out on a daily basis. At the end of the week, all the data in the central computer system are backed up and transferred to another location outside the Ministry. The first dimension scores C. While all the required control procedures are in place, for a higher score, electronic payment orders would need to be in place and the procedures manuals must be reviewed and updated at least every second year. The second dimension scores D. Copies of loan agreements and debt administration records are not stored in a secure location where the documents are protected from incidents such as theft, fire, flood and other incidents that may damage or destroy any of the records. The third dimension scores B, since the procedures for controlling access to the debt recording system are in place and updated when staff changes occur. The fourth dimension scores A, since the data backup of the debt recording system is made daily and stored in a separate secure location at the end of the week. DPI -13 - Segregation of Duties, Staff Capacity, and Business Continuity Dimension Score 1. Segregation of duties for some key factors as well as the presence of a risk D monitoring and compliance function 2. Staff capacity and human resource management B 3. Presence of an operational risk management plan, including business- D continuity and disaster-recovery arrangements For external debt, there is a clear separation of duties between those negotiating and contracting debt, those arranging debt payments, and those recording and accounting for debt-related transactions. The International Financial Institution Corporation Directorate, Bilateral Corporation Directorate, and Ethio-China Development Corporation Office act as the “front office” for mobilizing funding for public investment projects and budget support. The DMD takes the lead in most middle office functions and is responsible for all back office functions (see DPI-2). For domestic debt, the auction process for Tbills is managed by the Auction Committee consisting of staff from NBE and DMD. 31 The original Tbill certificate is prepared and co-signed 30 There is a memorandum of understanding (MoU) was signed between DMD, the IT department and the Internal Auditor in November 2012, to transfer the responsibility for assigning security access codes to the IT department. This is to be implemented. 26 on the back by a representative of DMD, two representatives from NBE’s Payments and Settlements, and a representative from the NBE’s Internal Audit, before it is finally signed by the Minister, or in his absence by an official delegated by the Minister—usually a State Minister. There is also a clear separation between those arranging payments and those recording the payments: the NBE has a standing order with MoFED to make payments on Tbills on receipt of the certificate from the holder on maturity, i.e., without the necessity of first receiving a payment order from MoFED. However, this payment is subject to strict internal NBE controls (including audit). MoFED is informed following the payment for recording and accounting (see DPI-12 for detail). Regarding risk monitoring and compliance, at NBE the Internal Audit department is responsible for risk monitoring of all operations, including debt Segregation of staff responsibilities for each transaction is also defined in NBE policy and monitored by the internal auditors for each operation. At MoFED, the Internal Audit directorate has the formal mandate for evaluating whether risk management/controls are undertaken but it does not proactively monitor risks or compliance for each operation. Some risk monitoring and compliance is inherent in the job description of the director of the DMD, but his formal risk management duties are not written in his job description, or in any other job description of the Directorate. The GOE has been implementing Business Process Reengineering (BPR) in its public institutions since 2004. This includes flat hierarchal structures, which are process-oriented and team-based. In line with BPR, job descriptions in MoFED are not based on a person’s specific function (e.g., in DMD whether a staff member is responsible for a back or middle office work, or deals with external or domestic debt), but rather based on whether the person is considered a junior expert, expert, senior expert, or Head/Director of the Directorate. Individuals are appointed or promoted against these levels. The Head is responsible for supervising all staff members and ensuring that the work of the Directorate is fulfilled. All staff members have semi- annual performance evaluations. Training needs are submitted at the Directorate level rather than the individual level. DMD has adequate staff, with limited staff turnover in recent years. The staff receives regular training in debt management from international technical assistance providers. 32 NBE has individualized job descriptions, training plans, and semi-annual performance evaluation. Currently the NBE workload for Tbill operations is too small to have staff members dedicated purely to these tasks. As such, most of the 25 staff members in the Payments and Settlements Directorate are able to perform the related auction activities, which are also documented in procedures. As such staff capacity for debt management operations at the NBE seems adequate. Regarding codes of conduct and conflict of interest, this is covered in primary legislation. 33 Each staff member also has possession of a Code of Conduct booklet. 34 The latter explicitly states that 31 The issuance process is transparent and outlined in NBE Directive NBE/TRV/001/2011. 32 Staff turnover, however, has been an issue for supporting IT functions in recent years. This issue is currently being addressed by IT management, by having two persons assigned to each task in order to ensure some business continuity in the case of the departure of one. 33 Federal Government of Ethiopia Financial Administration Proclamation No. 648/2009, page 4824, Part 13, Miscellaneous Provisions, paragraph 70. 34 Federal Democratic Republic of Ethiopia, Ministry of Finance and Economic Development, Code of Conduct of Employees, December-January 2010/11. 27 staff members cannot inappropriately exercise their functions or authorities for private benefit. It outlines disciplinary measures when breached and emphasizes employee adherence to the law. The Code of Conduct booklet is updated periodically. Monitoring of fraudulent behavior as well as the building of employee awareness to ethical behavior in the performance of their public duties is further reinforced by the Federal Ethics and Anti-Corruption Commission. 35 The first dimension scores D because no staff member is formally responsible for risk monitoring and compliance for debt management. The second dimension scores B. There are sufficient and adequately trained staff members for front, middle and back office. The staff has formal job descriptions which are updated regularly. There are also code-of-conduct and conflict-of-interest guidelines that are reviewed and updated periodically. For the higher score (A), there must be individual training and development plans for key debt management staff, which are currently prepared only at the Directorate level. The third dimension scores D. Neither MoFED nor NBE has a formal business-continuity and disaster recovery plan. 3.6 Debt Records and Reporting DPI-14 Debt records Dimension Score 1. Completeness and timeliness of central government debt records B 2. Complete and up-to-date records of all holders of government securities D in a secure registry system DMD is responsible for recording of central government debt. Procedures on when and how debt should be recorded are outlined in DMD’s procedures manual. Debt is recorded using UNCTAD’s DMFAS. A “four-eye” approach is taken for the recording of all transactions to ensure that recorded debt information is correct. DMD also has a Debt Validation Calendar, which lists what information should be checked with whom and when, in order to ensure timeliness, completeness and comprehensiveness. DMD takes a proactive approach to ensuring that records are up-to-date and complete. All upcoming payments are checked against the payments calendar on a daily basis. If a creditor advice is not received 15 days before the payment date, a note is sent to the creditor. Once the creditor advice is received, the details are reconciled with those in the DMFAS system. In case of differences, DMD follows up with the creditor. For disbursements, all creditor disbursement advices are checked with the relevant project implementing unit. If there is any difference in the information given by the creditor from the information given by the project implementing unit, or if the latter says that the disbursement has not been received, DMD will follow up with the creditor for clarification. Reconciling disbursement advices and disbursement receipts can take up to two months for certain bilateral 35 http://www.feac.gov.et 28 creditors, but for most the process takes less than a month. As for payment advices, disbursement advices received from SOEs can sometimes take up to two months. Although the current version of DMFAS (5.3) that is being used by DMD is not ideal for recording Tbills, 36 DMD is nevertheless diligent in using it to keep records of the government's domestic debt, bonds as well as bills. Each new Tbill issued is registered within one to two days of the issuance date. The DMFAS database is up to date regarding debt relief. In the system, Russian loans are currently in waiting status due to Paris Club negotiations not yet being complete. The NBE is responsible for registering all holders of Tbills. Participants in the auctions are required to fill in a tender form, consisting of the tenderer’s offer and giving authority to the NBE to debit its account on the issuance date (if bid is accepted). The same form is filled in by the NBE to advise on the allotment and payment of the accepted bid. This form is kept at NBE in a manual register, along with copies of other relevant documentation concerning details of the bid itself (including reference to the allotted Treasury serial number, which is provided by DMD). On redemption of the Tbill, payment is made against the manual register, in parallel to information recorded in the accounting system (the latter is electronic and backed up on a daily basis, and stored on a weekly basis in a fireproof space). NBE plans to have an electronic central securities depository. So far, this has not happened because there is no secondary market. The first dimension scores B. Debt records are complete and up to date within a two-month lag for all central government debt and debt-related transactions including past debt relief and debt restructuring. A higher score (A) is not possible due to some delays in receiving disbursement or payment information from certain creditors and SOEs. The second dimension scores D. The manual security registry system at the NBE is not secure and thus does not meet the minimum requirements for score C DPI-15 Debt reporting Dimension Score 1. Meeting statutory and contractual reporting requirements of central B government debt to all domestic and external entities 2. Meeting of statutory and contractual reporting requirements for total A non-financial public sector debt and loan guarantees to all domestic and external entities 3. Quality and timeliness of the publication of a debt statistical bulletin (or C its equivalent) covering central government debt The DMD prepares quarterly, semi-annual, and annual debt reports covering central government domestic and external debt. The Quarterly Plan Implementation Report and the Semi-Annual Public Sector Debt Statistical Bulletin are submitted to the Parliament. The Semi-Annual Debt Statistical Bulletin is published on MoFED's website. 36 DMFAS 5.3 does not separate bonds from bills.37 The Team received a hard copy of the Public Debt Portfolio Analysis and is available upon request. 29 The DMD is in charge of reporting to the World Bank and IMF’s Debtor Reporting System (DRS). According to the latest report, Ethiopia is a very good reporter with no issues and reports with 3-month lag as required. Regarding the non-financial public sector debt, guaranteed and non-guaranteed external debts of SOEs are reported in the quarterly and annual reports mentioned above, within two months of the reporting period. The Debt Statistical Bulletin provides information on the central government’s external debt broken down by maturity, currency, types of creditors, and types of interest rates, and domestic debt broken down by types of instrument. The Public Debt Portfolio Analysis provides risk indicators of the government’s debt portfolio, covering all basic risk measures. 37 The latter is distributed to policy makers and officials of MoFED but is not published on MoFED's website. The first dimension scores B. The government meets its statutory debt reporting requirements, as well as its contractual obligations to the IMF and World Bank, within two month of the reporting period. The second dimension scores A. In addition to the central government debt, the quarterly and annual debt reports cover guaranteed and non-guaranteed external debt of SOEs. The third dimension scores C. Although the Public Debt Portfolio Analysis provides information on the basic risk indicators of the government’s debt portfolio, the report is prepared on an annual basis only and is not published. For a higher score, the report must be published (score B), and prepared and published at least semi-annually (score A). 37 The Team received a hard copy of the Public Debt Portfolio Analysis and is available upon request. 30 Annex 1: Meetings Date/time Organization Names Wednesday, March 13 MOFED, National Bank of Ethiopia, H.E. Ato Ahmed Shide, State Minister; Auditor General Dr. Tesfaye Alemu, Yohannes Hailu, Daniel Tilahun, Getu Getahun, Tekulutefera, Assefa Moges, Ephrem Afework, Debebe Habtewold, Yemane Legesse, Abebe Tadesse, Bekabtu Arwaga, Sharew Erkehun, Wendwesten Tsadiku, Assefa Moges Fanta Mulay Weldu, Elias Hiameskei, Amsaiu Daehito, Solomon Dessalegn, Abrham Mulugeta Thursday, March 14 Budget Directorate, MoFED Demelash Megersa, Mr. Fanos Habtewold, Mr. Sharew Erquinhun Macroeconomic Directorate, MoFED Mr. Wendwesten Tsadiku, Mr. Desta Lambebo, Mr. Mulay Woldu Planning Directorate, MoFED Mr. Temesgen Walelign Pension Authority Mr. Ato Teshune Megersa DMD Debt Dept., MoFED, Mr. Teclu, Mr. Asefan, Mr. Daniel Legal Dept,MoFED Mr. Wasyehun Abate Friday, March 15 National Bank of Ethiopia, Monetary Mr. Fitsum Tsehaye, Mr. Eyob Gebreyesus and Financial Analysis Directorate, Banking and Payment Directorate Office of the Federal Auditor General Mr. Assefa Deesta European Commission EuropeAid- Mr. Guy Jenkinson Cooperation Office Monday, March 18 Internal Audit, MoFED Mr. Ayalew Ayele Bilateral Corporation Directorate, Mr. Dekeje Girma, Mr. Bekabtu Arwaga, Mr. Zewdu MoFED Tamrat IT-Directorate, MoFED Mr. Mesfin wekeneh, Mr. Tagel Molla, Mr. Alemu Kifle, Mr.Tampat Amare Ethio-China Development Cooperation Mr. Tilahun Tadesse Office, MoFED Treasury Directorate, MoFED Mr. Getachew Negera HR Directorate, MoFED Mr. Atelabachew Taddesse IFC Corporation Dept., MoFED Mr. Fisseha, Aberra 31 Date/time Organization Names Macroeconomic Directorate (head) Mr. Mezegebu, Ameha Government Accounts Directorate Mr. Degu Lakew Eguale DMD Dr Tesfaye, Mr Teklu Tefera Tuesday, March 19 Development Bank of Ethiopia Mr. Tirfu Adhanom DMD Dr. Tesfaye Alemu, Yohannes Hailu, Daniel Tilahun, Getu Getahun, Tekulutefera, Assefa Moges, Ephrem Afework, Debebe Habtewold; Wednesday, March 20 Wogagen Bank Mr. Areaya Wrap up 32