SAMOA LEADER UNDERSTATES COUNTRY’S DEBT RISK

Editorial

Samoa Observer

APIA, Samoa (June 21, 2010) – Without debt, the world would grind to a halt. Most businesses, for example, like to see some debt on their balance sheets - but not too much.

It means they are growing and investing in the future without having to empty the till each week waiting for the new project, expansion or whatever to deliver returns. That’s what the commercial banks do. They look at the ability of a borrower to repay over the term of the loan. The banks want to see a return on their money and to achieve that the best way is to make sure the borrower can repay – in effect that the borrower can also make a return on their money..

But they are also well aware that circumstances can and do change and that the best-crafted business plan can be blown out of the water by unforeseen events. It’s why the commercial banks also look at how they can get their money back should such events take place.

It’s a last resort, but that’s when they send in the receivers’ shock troops to claw back whatever they can.

Now whether we like it or not and whether we asked for it or not, we’re all in debt.

Samoa’s external debt alone stands at $680 million. That’s roughly $3,750 for every Samoan – man, woman and child.

That may sound scary – but stand by for more to come.

The present debt, we are told, represents 43 per cent of gross domestic product, or the total value of all goods and services produced and delivered in the country over a year.

That’s well over the target set by no less than the Ministry of Finance, which for the sake of fiscal prudence, would like to see the debt capped at 40 per cent of GDP – a number generally accepted internationally as reasonable.

However, the same ministry’s forecasts as outlined in the latest budget papers indicate that debt will increase to 49 per cent of GDP this year, 51 per cent in 2012 and 52 per cent in 2013.

The average Samoan couple can expect their grandchildren will still be repaying this debt when those who signed the loan agreements are long gone to their reward.

If, heaven forbid, Samoa reaches a stage where it cannot make its debt payments on time (and it should be stressed the country is nowhere remotely close to that stage), what then?

Well, the lenders can’t put a country into receivership and probably wouldn’t even if they could. But they might send in the International Monetary Fund’s fiscal doctors whose cures will be far from painless.

Debt worries us, then, and so it should. Most of us instinctively shrink away from over-borrowing, though we accept a degree of debt is probably necessary and even beneficial.

Consider if Samoa had to conscientiously save every tala and sene it could to fund some of the major infrastructural projects the nation has seen in recent years. They would probably never happen as the price of such projects would almost certainly escalate at a faster rate than the nation could save.

So we do need debt. The question is, how much? How much debt is too much debt?

There seems to be no simple answer.

What is acceptable debt today might prove economically life threatening should circumstances radically alter. Just ask the Electric Power Corporation which has taken a hammering at the hands of the seemingly inexorable increase in the world price of crude oil – an event over which it has absolutely no control.

The counter argument, as put by Prime Minister Tuilaepa Sai’lele Maleilegaoi, that concern over Samoa’s debt is some nonsense pulled out of the air by a few headline seekers in the body politic while in reality the country’s debt is eminently manageable will no doubt reassure many.

The Prime Minister makes the point that the Government pays $34 million a year in debt repayment while the total tax take is $400 million.

"So why be scared of such weak issues when the government has more money to pay than the amount owed?" he asks. And it’s a fair question.

Why indeed should anybody worry?

Well, let’s look at that $400 million in revenue. Out of that comes civil service wages, government personnel costs, maintenance and so on. Once that all is taken into consideration the resulting revenue figure is considerably less than $400 million - just how much less is hard to tell.

But it would be well worthwhile trying to find out. And that’s what your newspaper plans to do.

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