Ahead of this year’s BoC-BoE Sovereign Default Database: Some Thoughts about Domestic Arrears
My co-authors and I first looked at domestic arrears – also known as fiscal or expenditure arrears – back in 2019. Our reasoning was, and still is, that such arrears, essentially late government payments, are another form of sovereign default, and one little studied in the literature. Yet they are often sizable, both at the country level and globally. We currently estimate that such arrears amounted to @ US$157 billion in 2021, involving at least 58 sovereigns. And the numbers may go even higher as we sift through more data ahead of publication.
Typically, domestic arrears are distinguished from conventional sovereign defaults because, in most instances, they are not defaults on conventional sovereign debt. They usually involve overdue payments to local suppliers, civil servants and pensioners. But after sifting through much of the IMF country data, it turns out that we have spotted instances where Fund staff have noted that the arrears data does include defaults on local law debt instruments. Examples include some CFA franc zone Sub-Saharan African sovereigns in the 1990s.
Ideally, in updating the database, we would show such cases in the “foreign currency” bonds category – we already do this in other cases where we know that sovereigns in monetary unions have defaulted on local law bonds denominated in the common currency. However, in this instance we have not yet found a breakdown backing out amounts of late debt service and/or of the face value of the local law debt from other types of domestic arrears.
A bigger challenge with domestic arrears is that the data is often revised. This reflects two issues: weaknesses in ministry of finance bookkeeping and disputes with claimants over the legitimacy of the amounts claimed. Often arrears amounts are revised upwards after audits by special commissions appointed by debtor governments after a time lag. As a result, what we usually see in IMF country reports is amounts (in terms of both flows and stocks) which the government thinks are owed at the time the report is compiled.
A further issue is that the IMF typically reports the net flow of estimate arrears in the fiscal year: positive flows show that net arrears are growing, flows that are negative show that net arrears are declining. For a brief period prior to the global onset of COVID-19, Fund staff started to publish estimates of estimated stocks of arrears – our preferred measure because they can be usefully compared with the value of conventional sovereign defaults. However, this practice has largely ceased in the past two years.
In compiling domestic arrears in this year’s database, we have decided to compute our own provisional stock data for each country, ideally for the 2000-2021 period, and earlier if the data exists. Our basic approach is: first, we look at current (and historical) IMF projections for future years, which show the Fund’s contemporary view of when and by what amounts arrears might be repaid. (In most cases repayments become zero by the end of the projected period.) By adding up the forecast future repayments, we can estimate a stock value for the year the Fund publishes its report. Then, using historical flow data, we work backwards to compute the historical arrears stock values. A limitation of this approach is that, because of time lags in the availability of IMF country reports, we do not always pick up years when stock/flow revisions have occurred. Still, we think it’s the best we can do with the data now available, and we’ll make such a disclaimer for each sovereign we report on.
Stay tuned, and meantime, any comments and/or suggestions from our readers would be welcome!
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