Prof. Mansour Ali Albutani Mohammed A. Saeed Al_bawraji

Problems and Obstacles of Foreign Debt ManagementIn the Republic of Yemen

(Field Study)

Study content: Introduction Chapter (1):

It was related to The study theoretical framework which includes two studies:(Study 1) :Concept of Foreign Debt Management

(Study 2) :Foreign Debt Size in Yemen during (1997- 2006)Chapter (2):

This chapter includes the following studies:(Study 1):Discussion of Study Sample Results about Foreign Public Debt

objectives and policies(Study 2): Discussion of Study Sample Results about Foreign Public Debt

Management (Study 3):Discussion of Study Sample Results about Problems related to

Foreign Public Debt Management :

Based on that we are so pleased to briefly explain all what have been mentioned above:

The Introduction: The Introduction focused on International cooperation in its different aspects

as follows: -Foreign Trade

-Direct Investment -Loans and Grants…etc

In this Concern the Introduction section considered that Foreign loans are as one of the important aspects of the above mentioned cooperation in the field of international economic relationships , those loans reached in 1990 (the year of reunification of the two parts of Yemen) about 11 billion USD.

In addition, the Introduction section included the following:-Study Objectives -Study Importance -Study Problem

Chapter (1)Study Theoretical Framework

(Study 1) :It was included in this study the Concept of Foreign Debt Management and managing it effectively and efficiently.

It was also explained that the Foreign Debt aspects are:1-To enhance the organizational capabilities of public debt management

(local/ foreign) with qualified cadre and required experiences in foreign debt and financial analysis and financial risks management….etc.

2-To enable the management to access the financial tools such as: exchange currencies and interest rate of risk management.

3-To enable the management to access to market information (study of international and financial markets, having the progress in capital's aspects, investments and loans costs).

4-Necessity of having a strategic frame work to manage the foreign debt and précising the objectives of debt management .

5-To establish data base to follow up the foreign debt development.6-To develop an appropriate organizational structure of the foreign debt

management mandate.7-Finally, the management should be given the necessary flexibility in

practicing its mandates and avoiding the centralization and bureaucracy.

Foreign debt Management includes:Administrative Management:

It includes the following phases:-Negotiation in all types and analysis of the financial conditions of debts.-Validity of the process and completing the required procedures of loans

-Withdraw and liquidity money. -Repaying phase in which preparation of debts tables are done and handling

required records to follow up all commitments.

-Regular statistical reports preparations.

Economic and Financial Management: It is committed to:

-Develop debt management policies -Reduce debt's burden.

-Increase the benefit of debt for the national economy. -Coordinate between the entities concerned with foreign debt

management.

)Study 2:( In this study was focused on the Foreign Debt Size in Yemen during (1997- 2006).Therefore, it was explained the following:

-The reasons behind foreign loans in Yemen are:1 -Increased social and economic development needs in comparison

with what Yemen suffers of the insufficient local resources.2 -continuous deficiency in:

Payment scale Commercial scale

Deficiency in public budget

3 -weakness in private sector to play its economic and developing role4 -weakness in the size of direct foreign invested flows .etc

Foreign Debt Balance: It can be noticed that the Foreign Debt Balance of Yemen has

-Decreased from (9.8) $ billion in 1997 to (5.5) $ billion, a rate almost (28.7%) of Gross Domestic Production , this balance is also reached in 2006 to (70%) of the services and products exports.

-Foreign debt balance witnessed during the period between (1997-2005) a fluctuation with a clear rise and decline we grasp the reasons for this to Yemen efforts in the frame work of the Reform Program of Financial and Administrative to reduce the size of foreign debts balance through an agreement with member countries in Paris Club in years (1996- 1997) which concluded the following

*Yemen has been exempted from (67%) from its total foreign debts, The Russian debt written-off represented (80%) of this figure, The amount of the exempted Yemeni foreign debt for year (2005) was (5,7billion) USD (Central Bank Report p.38).

*Donor countries granted Yemen number of loans during (1997- 2002) to support the Financial and Administrative Reform Program.

*Rescheduling another part of those loans during (1997- 2005) which reached (2,2billion) USD (Central Bank Report p.34)-The rate of overdue interest decreased from (1.3) billion dollars

in 1997 to hit (99.9) million in 2006. The rate of installment arrears decreased from(4.9) billion dollars in 1997 to hit (92.7) million in 2006.

Table No1:Showing the balance of foreign debt for the period (1997 - 2006) in billions, compared to some of the indicators:

1997199819992000200120022003200420052006

IndicatorsTotal of foreign debt including arrears in billions

9.80%10.10%

5.30%5%4.80%5%5.30%

5.30%

5.20%

5.50%

The ratio of foreign debt compared to GDP

162%72.5%69%52%51%49%45%39%31%28.70%

The ratio of foreign debt to total exports (goods)

170% 304.8%

 207.3%

131.50%

143%126.4%124%

106%

76%70%

The proportion of foreign debt service payments to GDP

5.30%4.90%4.20%1.40%1.80%1.40%1.50%

1.90%

1.30%

0.90%

The proportion of foreign debt service payments to total exports

14.20%

11.70%

12.70%

6.80%7.10%5.10%4.15%

5.04%

3.09%

2.10%

Years

The distribution of foreign loans as Donor States: According to the data in the study that shows the distribution of

loans by states and agencies and donor institutions, as the following:

-Member States in the Paris Club (1.73) billion dollars or (31.6%), Russian debts ranked first loans under the group rate (72%) of the volume of loans from the block.

-Non-members of the Paris Club (.960) billion dollars or (17.5%) and Saudi Fund comes in ranked first rate (32%) of the volume of loans from the block .

-International financing institutions by (2.8) billion dollars or (51.1%).

It is noticed that the International financing institutions is ranked first among creditors in Yemen in this block. The International Development Authority is in the first rank of (1.9) billion dollars, representing a rate of (67.9%) from the total loans provided to Yemen by international financing institutions or rate of (34.5%) of The volume of loans provided to Yemen in 2006 in generall.

It can be also remarked that the offered loans for Yemen are directed to the following:

Table No2:

Support public administration44.40%

Works Sector11.10%

Water and Electricity Sector10.40%

Agriculture Sector8.10%

Financial Sector3.40%

Bank Sector7.24%

Education Sector4.10%

Health Sector1.84%

Defense 1.48%

Civil Service (Administrative Reforms)1.68%

Telecommunication Sector1.20%

Oil Sector0.90%

A proportion of the remaining sectors 

Chapter (2)

This chapter focused on Discussion of Study Sample Results which consists of 50 sample units distributed to three entities, that are related to Foreign Public Debt( Central Bank, Ministry of Planning and Ministry of Finance).

The study Variables were:-Foreign Public Debt objectives and policies:-Foreign Public Debt Management: - Problems related to Public Debt Management

Foreign Public Debt objectives and policiesIn this regard the study analysis shows the following

No.VariantsMeansStandard

deviation

1The policies related to foreign debt are define under a law organizes those policies.4.40.93

2The foreign loans policies are done according to the economic development needs of the country 4.10.8

3The foreign loans objectives and policies focus on how to get foreign resources with less cost and best conditions.

4.50.62

4The foreign loans are made under an objective evaluation to enable the Yemeni economy to pay off debts burdens.

40.98

5The foreign loan policies use those resources in a best way forwarding them into production.3.41.43

6The expansion policy in investment expenditure obliges the government to return to the foreign loans in order to fill the gap between the revenues and expenditure.

3.31.29

7The foreign debt burden is considered as one of the biggest problems from which the Yemeni economy suffer

3.21.29

8The analysis of the relation between the foreign loans, economic growth and financial inflation is made continuously.

3.31.18

9The loans policies relate to the position of loans policies and the average of the foreign exports of the country

3.41.16

10The foreign public debt leads to economic troubles due to the misuse of that debt.40.94

11The objective of foreign loans policies is to increase the difference between the capital and the loan's returns.

3.31.18

12The consistency and integration of foreign loans policies with the overall government policy.4.30.86

13The foreign debt plays an important role to increase the available resources of the country and then to increase the average of growth respectively.

3.41.28

14The foreign loans policies relate to the average of interests prices and the average of gross domestic production (GDP).

3.24.28

15The source of the foreign debt will be controlled when it moves to undesirable direction.3.80.89

No. Variants MeansStandard deviation

1 Existence of general department assigned for public debt in the Republic of Yemen and followed by Ministry of Finance .

4.2 0.83

2 The Central Bank should manage all transaction related to foreign debt . 4.4 0.933 Coordination among Ministries of Finance , Planning and the Central Bank to manage the

public debt in Yemen.4.6 0.49

4 There is atop management of public debt directed by the three entities, the law organizes to coordinate to among those entities .

4 0.96

5 The foreign loons law defines the responsibilities of the three entities in the public debt management clearly .

3.7 0.51

6 The public debt management is concerned to collect all data and information related to foreign loans agreements issuance.

4.3 0.79

7 The public debt management is concerned to build up information system of the loans size with its types, interests and services .

4.3 0.66

8 The foreign public debt management depends on an accounting system registering all are transactions related to public debt.

3.7 1.17

9 The concerned department of public debt is responsible to prepare all reports related to the foreign loans movement and development .

4.3 0.69

10 The loans management is responsible to define the foreign commitments and to syudy the international markets, as well as to cope with the developments.

3 1.03

In the variants related to foreign debt management:The results of analysis show the following :

No. Variant MeansStandard deviation

1 Lack of law and regulations to organize foreign loans process. 2.9 1.162 Multi responsible entities of foreign public debt management and the absence of

organization among it .2.6 1.24

3 Absence of clear long -term general policies of the foreign public debt . 4 0.864 Unqualified cadre assigned in the foreign debt management . 3.4 1.255 No linkage among loans policies with economic growth indicators and exports growth

averages. 4.1 0.8

6 Inefficient systems related to foreign debt recording to support foreign debt analysis . 3 1.317 Weak follow up and evaluation processes for the foreign debt use . 3 1.238 Obstacles face the research in the filed of public debt service which leads to accumulate the

public debt commitments .4 1.91

9 Problems in negotiation ability to get long term loans . 2.8 1.310 Insufficient date foreign delot agreements and execulid projects . 2.7 1.2611 Incompetent internal contral systemon loansaccountsand foreignpublicdebtmanagement

. 3.1 1.31

Third : In the variants related to public debt management problems : The results of analysis show the following:

Chapter (3)Results and Recommendations

The Results:According to the filed and theoretical study, it can be inferred that:

1-In the framework of the Financial and Administrative Reform Program, Yemen exerts great efforts to overcome the foreign debt problem. In this concern, a lot of procedures were taken:

● Releasing foreign trade and enhancing the private sector in the economy life.

● Preparing investment atmosphere to attract the international and Arab capitals for direct investment in different aspects of economy

● Reduce and rationalize government spending ● Rescheduling the foreign debts in agreement with the donors in Paris

Club.2-The debts of the regional and international institutions on Yemen has

a big part of percentage which is (51%) then the debts of the member countries in Paris Club including Russia (31,5%) from the total of debts in Yemen.

3-The big part of foreign debts was directed for infrastructure, health, education, electricity, communication…etc.

4-Foreign loans represented (92,5%) in 2006 of the general size of debts, Yemen will be in a bad need for foreign loans in order to meet its need in economic and social developments in this phase of development.

5-No difference in the questionnaire's opinion in the three entities (Ministry of Planning, Ministry of Finance, Central Bank) about the variants of the field study, which means:

There was consensus among the sample on variables related to policy and objectives of external borrowing, namely :

●Foreign debt policies are précised according to a law which organizes those policies

●Foreign debt policies in light of the needs of the country's economic development.

●The foreign loan is done according to objective assessment of the capability of Yemeni economy to repay those debts

● The inefficient use of loans leads to obstacles in National Economy

● The policies of loans integrate and connect with the public policies of the country ● The foreign public debt center is controlled whenever it goes in undesired directionAll that means those variants represent the foreign debts policies and objectives in the Republic of Yemen. Opinions of questionnaire of the other variants were different although its importance, therefore its rejection by the questionnaire. 6. there was consensus among the study on variables relating to the management of external debt following: ● There is a management concerns with public debt under the supervision of Ministry of Finance ● The Central Bank manages all the transactions related to foreign debt ● There is a Coordination between Ministry of Finance, Ministry of Planning and Central Bank to manage the foreign debt in Yemen. ● There is a management concerns with public debt which follows up each party and organizes a regulation confirmed by council of ministers, which coordinates between those entities. ● The management of public debts is concerned in collecting data and information related to all loans according to the signed agreements. ● There is a précised information system in the concerned departments in the three entities for measuring the size of loans, its installments, interests and its services…etc

- Those departments (in the three entities) are in charge to prepare the reports related to the foreign debt development movement.The opinions of the sample is not compatible with the rest of variants which means there is a weakness in laws and regulations organize the policies, objectives and mandates of the foreign debt management in the three entities that are responsible of the foreign debt management, these departments also lack to the accounting system guarantees the registry of the transactions related to loans transparently.

7 .The opinions of the sample is compatible with the rest variants related to the problems and obstacles in the foreign debt management as below:The absence of a clear strategy in field of foreign loansThere is no link between foreign loans transactions and indicators of economy growth and the range of export growthThere are obstacles, in the field of the foreign public debt service, which lead to the accumulation of the public debt delays in the last years.the researchers noticed that the opinions of the sample are not in agreement with the rest of variants related to problems and obstacles of foreign debt which means, they rejected them.

RecommendationsAccording to the study results, we recommend the following:

1 .the necessity to issue a decree in public debt (local and foreign) very quickly, since this decree will play a role to enhance the institutional work, organize all its aspects related to debts and specify the mandates of the parties related to local and foreign public debt management and specify the rules and measurements of foreign debts.

2 .Necessity of preparation the public strategy of foreign loans and put on the plans and policies which will help in the following:

● Linkage the loans policies with the economy development for achieving the economic and financial stability and with the ability of the Yemeni Economy to yield its commitments as a major indicator to keep the credit worthiness of Yemen

3-The study recommends to establish a central unit followed structurally the President of the Government .

4-The necessity to develop the IT systems and documentation in different departments of the foreign debt management.

5-The necessity to provide with administrative skills, qualifications and experience in the field of foreign loans (risks analysis, system of financial analysis…etc)

6-Necessity of strengthening and developing the internal Control systems in the account of loans and enhancing the transparency towards its work.